Process Value Analysis - PVA

and finance Allah shmoop How does differential analysis affect pricing

decisions How well nicely we hope Yeah here's the basic

gist of differential pricing analysis that whatever price we're currently

charging for our pine scented hemorrhoid cream well it's not

optimal right We want to set the ideal price so

we can reap the ideal or maximum level of profit

Underlying this whole discussion is the slope of the demand

curve for the product So think about some examples here

Let's step into a time machine and visit nineteen ninety

eight The Land of Steve Urkal Blockbuster Video when it's

so existed and peak market power for the Windows operating

system Well simple is it seemed to us now there

simply was no other purveyor of operating systems in that

era And without an OS well your computer didn't work

and you needed a computer to run your word processor

to dial up the Internet and check your air Well

email you know to play solitaire Well Microsoft could basically

charge whatever it likes for that operating system At the

peak Bill Gates and his pals charged about two hundred

bucks a unit for their Windows operating system to be

installed in your computer so you could use it well

The demand curve for Windows in this era Well it

was almost vertical like they could raise prices with impunity

and the volumes they sold would barely diminished So people

didn't have any other choices if they wanted a functional

computer and so they'd pay quote anything unquote for the

Microsoft OS The opposite is true for pure commodities right

Think copper or bananas or chalk or missile grade plutonium

We'LL Copper is the same copper no matter where it

comes from there are different purity ranges but inside those

standards it doesn't make a difference whether the copper came

from Chicago or Nairobi or Southeast Moscow Well it comes

in boxes and bins and it's the same everywhere It's

hard to have a brand name in copper you could

sell Maybe LeBron James endorsed copper and still not have

much pricing power There are too many choices and each

unit is essentially the same Nobody has any advantage in

their product over anyone else And because of this fact

if buyers can buy the same copper for a penny

less per pound net of shipping in taxes and whatever

other transport grief there is Well then they'LL buy it

cheaper so that demand curve is almost flat like tiny

moves in price mean a massive move in demand on

the supply side of things The corollary positive element here

comes from the leveraging of technology meaning that if you

can find a way for robots using solar power to

mind copper for ten percent less than the human labour

mining system well then you can keep the same profit

margins and sell the copper for way less than what

everyone else is selling it for In real life most

products fall somewhere between the nineteen nineties era windows example

and the situation with a pure commodity like copper Well

to find the optimal price you use differential analysis to

test all the possible points along the demand curves You

crunch the numbers to discover what each increase in price

will do to the amount of items you sell Raised

the price of dollar How many fewer units do you

sell Lower it a dollar How many more do you

sell Well once you have your data set you confined

the point where your revenue and or profit are maximized

it's basically your casino and you want to make sure

that every table and every slot machine does just enough

to keep everyone playing while bringing in max profits to

the house And well if you have to bribe people

with free cocktails to stay in their seats so be 00:03:30.9 --> [endTime] it booze or a commodity to