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THE RIGHT PRICE CONSULTANTS
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INTRODUCTION
JJTisanestablishedmanufacturerofwidgets
Decidewhethertogofordynamicpricingornot
Hiredanexternalconsultantfordynamicpricingstrategies
ComparisonwithAmzon.comandDellforimplementationofdynamicpricingstrategies
Difficulttoimplementintraditionalmanufacturingsectorwithrestrictedfrequencyofpricechange
Focusisondynamicpricingonmanufacturingcoordinatedwithproductionplanningconsideringinventoryholdingcost,manufacturingcost,productioncapacityetc.
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FORMATION OF DYNAMICPRICING STRATEGIES
Identifythedistinctproducttypes
Identifythedistinctcustomersegments
Identifythedistincttimeperiods
Estimatethepriceresponsefunctionforeachcombinationofproducttype,customersegmentandtimeperiod
Identifythecostcomponentsinvolved,e.g.productioncost,inventoryholdingcostetc.
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CREATING PRICE RESPONSEFUNCTIONS
Developthepriceresponsefunctionordemandfunctionsofeachproducttypeforeachtimeperiodfromthehistoricaldata
Demandfunctioncanbedevelopedusingforecastingtechniquesconsideringseasonality,cyclicity
andotherexternalfactorsalongwithprice
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FORMATION OF DYNAMICPRICING STRATEGIES
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THE MODEL
MaximizeProfit: Constraints:
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PROFIT POTENTIAL
Profitpotentialiscalculatedas:
1
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FORMATION OF DYNAMICPRICING STRATEGIES
Revenuechangeduetosales:
(DynamicSales FixedSales) DynamicPrice
Revenuechangeduetoprice:
FixedSales (DynamicPrice FixedPrice)
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IMPACT OF DYNAMIC PRICINGSTRATEGIES
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IMPACT OF DYNAMIC PRICINGSTRATEGIES
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FORMATION OF DYNAMICPRICING STRATEGIES
Solveamultiperiodprofitmaximizationproblemtofindpriceineachofthosetimeperiods
Calculatetheprofitpotentialduetodynamicpricing:[(Profitunderdynamicpricing)/(Profitunderfixedpricing)]
1
Identifytheimpactofdynamicpricingintermschangeinrevenueduetosalesandchangeinrevenueduetoprice
Identifytheimpactofdynamicpricinginproductionscheduleandothercostcomponents.
Decideonthefrequencyofthepricechanges,e.g.halfyearly,yearlyetc.
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FORMATION OF DYNAMIC PRICINGSTRATEGIES: CAUTIONS
Priceresponsefunctionforeachproducttype,timeperiodandcustomersegmentsareindependenttoeachother
Incaseofanydependence,reflectthesamewhileformingpriceresponsefunctions
Demandvariationmaybeduetosomeothercyclicalorseasonalvariations,notduetopricechanges
