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Per Sjofors

Per Sjofors

Cross price elasticity.

Per Sjofors

April 25, 2016
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  1. Cross-price elasticity Definition: How your price affects your competition and/or

    your other products/ services Use to: Minimize internal cannibalization Maximize external cannibalization Predicted Market share Price of my product $400 $600 $800 $1000 $1200 My Product Company X Company Y Current price of my product Company Y’s product is not much affected by price changes of my product. Means it is not seen as a viable alternative by the market Company X’s product is affected by price changes of my product, but only strongly so if price is close to $1000 or higher. Means I can increase my price to $950 without significant loss of market share.
  2. Case Study Strategic use of pricing Internet Security Services Sells

    enterprise SaaS software Wanted to launch a SMB SasS software product Competition in the SMB marketplace consisted of internet security appliances Market leader Charter: Find optimal price for a new SMB offering Minimize internal cannibalization Maximize external cannibalization
  3. Case Study Strategic use of pricing Market share of three

    competitors at different prices of the new SMB offering When SMB offering has lower price, Competitor 1 will lose substantial revenues Change in market share -50% -40% -30% -20% -10% 0% Price of new SMB offering $10 $15 $20 $25 $30 $35 $40 $45 $50 Competitor 1 Competitor 3 Competitor 3
  4. Case Study: Internet Service Company Strategic Use of Pricing $-20k

    $0k $20k $40k $60k $80k $100k $10 $15 $20 $25 $30 $35 $40 $45 $50 Revenue Delta (including cannibalization) Overall Revenues New SMB Offering Price Project Monthly Revenue x 10000 Revenue Max = $35 Price Revenue Neutral - Hurt Competition = $15 Price Company has two choices: Price the new SMB product for max revenues at $35/month/user. Or, Price at $15/month/user. To be revenue neutral, but hurt Competitor One. Company decided to price at $15/month/user. Already financially weak Competitor One filed for Ch.11 bankruptcy after approximately nine months. Client acquired Competitor One. Increased pice to $35/month/ user by launching new version.