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Resource: Elasticity Worksheet

What’s the best price for your goods and services?

More importantly, how do you find that price?

Economics has a lot to say about supply curves and demand curves and the elasticity of these curves in relation to price. But the end result of all those fancy terms and pretty graphs is this:

There exists some price at which
– if you raise your prices, you lose money because you lose enough sales that the extra money-per-sale can’t make it up, and
– if you lower your prices, you lose money because you have less money-per-sale, and the increased number of sales can’t make it up.

Sales prices and numbers examples
For example, these are hypothetical sales numbers for a one-person computer repair service who currently charges $89/hour. On October 23, they decided to test their pricing, and so started tracking sales. Through November they had 30 sales. If they reliably had that number of sales per day, they’d make $2,108 each (30-day) month.

Starting in December they raise their prices to $96/hour. They have fewer sales – 23 instead of 30, and even taking into account the smaller number of days at this price, they have fewer sales per day. But that’s more than compensated for by the increased amount of money they make per sale — their monthly gross income at this level would be about $2,208, or $100 higher per month.

Encouraged, they try again, and raise their prices to $120/hour. At this level they again lose customers, but not nearly as many, and monthly income goes up again, to $2,731, or a $500/month raise over what they were making at $96/month.

So they raise prices again, to $150/hour. They still lose customers, but this time the price raise doesn’t make up for it; their monthly gross income is only $2,500 — more than they were making at $96/hour, and noticeably more than they were making at $89/hour, but less than when they were charging $120/hour.

The next step would be to try $130/hour, or $115/hour, and see what that does to the numbers.

Of course, they should be careful to keep an eye on other things that could be affecting sales: if a new virus was released January, it might be that that’s the reason for the number of sales, and that normally $120/hour would result in only 18 sales for the month, and $2,090 monthly income. If you see something that might be making your numbers weird, it’s safest to throw out that time period and run your test again.

You should also select your time period carefully: you want it to be long enough that normal fluctuations are balanced out. So if you have day-to-day fluctuations, but your weeks are usually about the same, then a week or two is long enough; if you normally have month-to-month fluctuations, you might need 3 or 6 months to get a useful test. If you sell something that makes a good present, you shouldn’t do any of your testing between Thanksgiving and Christmas; if you sell summer clothing, you should make sure that all your tests are comparing summer days to summer days, or winter days to winter days.

Download the Spreadsheet

Pricing Worksheet – MS Excel 2010

Ultimately, the only way to find your ideal price is to test it out. This spreadsheet does the calculations for you, and will highlight which price (out of the ones you’ve tried so far) will give you the best estimated monthly income.

It’s optimized for Excel 2010 and will work best there, but if you’re using an older version of Excel, or a different spreadsheet program, this sheet should work for you: Pricing Worksheet – old Excel