Is there an optimal price?

Visualize the range of prices a business can charge.

If profit is different at all prices, there is only one price that maximizes profit.

We call this price the optimal price. Pricing differently from the optimal price implies a loss.

At prices below the optimal price, the profit per customer drops too fast to increase total profit when prices are lowered. Above the optimal price, customers leave faster than profit rises for the existing customer base as the price is increased. At the optimal price, the change in volume and the change in profit from existing customers offset each other exactly for small price changes.

For this basic model, the only variable that needs to be forecast is the rate at which consumer demand changes with price. I call this the price-sensitivity of the market.

Want to know how big the loss can be under different conditions?


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