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Math Help - Weighted Average Price Increase

  1. #1
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    Weighted Average Price Increase

    Hi All,

    I have been tasked to calculate a 3% weighted average price increase for a few of our products according to sales volume. I have been working through this over the morning and I am having a really hard time figuring this out. I am trying to calculate the weighted price increase by taking a % of total volume for each product and then distributing it to the 3% increase, but I know that is not correct. When I set the equation up in my head I am thinking that the combinations for the price increase are infinite because there are an infinite amount of combinations I could use to determine the price increase for each product to equal 3%. I was hoping coming on here would help me out. Please help if you have any idea. Thanks.
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  2. #2
    MHF Contributor ebaines's Avatar
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    Re: Weighted Average Price Increase

    Please explain what you mean by "weighted average price increase" it's not a term I've heard of before. Let's say you have two products, one of which has unit sales of 100 units/year at $10 each, and the other has sales of 50 at $5 each, the total revenue is 100 x $10 + 50 x $5 = $1250. Is the objective to increase revenue by 3%? Then why not simply raise prices 3% on both, so the new revenue calculation is 100 x $10.30 + 50 x $5.15 = $1287.50? Or are you looking to increase the price of low revenue products by more than 3% and the price of the big sellers by less than 3% and have it come out for an average price increase of 3%? For example you could raise the $100 item by 2% and the $50 item by 7% and get the same 3% increase in total revenue. If that's what you're looking for there is no single formula that will do it - it's best to devise a pricing strategy for a few big items then make up the difference with the small.
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  3. #3
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    Re: Weighted Average Price Increase

    I am trying to calculate a price increase according to unit sales volume. For instance, product x has unit sales of 140 and product y has unit sales of 94. The average price increase accross these two products need to be 3%, but I want the higher sales volume products to get a majority of the price increase. Does that make sense?
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  4. #4
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    Re: Weighted Average Price Increase

    The reason I am asking it in this manner is because we have a retailer that is limiting our price increase to a weighted average of 3%, so I am trying to determine the best way to increase the price on our high volume products.
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  5. #5
    MHF Contributor ebaines's Avatar
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    Re: Weighted Average Price Increase

    I suggest you pick a number for price increase on the high volume item, then calculate what the price chaneg has to be on the low price items so that the total revenue comes out 3% ahead. You may find that a strategy of 4% increase on a big seller and 1 % increase - or even no change - on the low seller will average out to 3% "weighted average" price increase. But it's still not clear whether the weighting farctor is (a) volume, in units, (b) existing price per unit, or (c) sales revenue. You need to define that.
    Last edited by ebaines; October 29th 2012 at 01:07 PM.
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  6. #6
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    Re: Weighted Average Price Increase

    Thanks ebaines. That is actually what I did. Hopefully others will approve I am an intern and people throw random projects at me sometimes. I will add to your rep.
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