Static vs. Dynamic
The Market Simulation nodes have three types of Product Prices:
- Static Prices
- Price Adjustment Fixed (PAF)
- Price Adjustment Variable (PAV)
Static Prices are per-unit Product Prices that remain unchanged regardless of which Customers purchase the Products. Static Prices are defined in the ‘Price’ column within the ‘Input Product Array’ table connected to many downstream Market Simulation nodes, including the Simulate Market node and the Profit Engine node. Their total contribution to Revenue = Static Price x Quantity Sold.
But this Static Price can be adjusted by the personalized Dynamic Prices for each Customer found in the Input WTP Matrix. Personalized Price = Static Price x PAV + PAF. For example, some Customers may be entitled to the percentage Discount found in the ‘Price Adjustment Variable’ (PAV) column, and other Customers may need to pay the personalized delivery charges found in the ‘Price Adjustment Fixed’ (PAF) column.
Price Adjustment Fixed (PAF) is a type of Dynamic Price. It changes the Product’s Price by a fixed amount and is personalized for each Customer. For example, if Customers pay different amounts for shipping the Product then this could be modeled using the ‘PAF’ column found within the WTP Matrix.
Price Adjustment Variable (PAV) is another type of Dynamic Price. It is the percentage adjustment to the Price (typically a Discount) a particular Customer would receive when they Purchase the Product. For example, if the Customer is entitled to a 10% Discount then the ‘PAV’ would be set to 0.90. If the WTP Matrix contains both ‘PAV’ and ‘PAF’ columns, then the Static Price is first multiplied by the variable ‘PAV’ before adding the fixed ‘PAF’.
Spacely Sprockets and Cogswell Cogs both offer Gold, Silver, and Bronze membership to their customers. Higher-level membership means higher discounts to those customers. If a customer is a Gold members of one competitor, then they are likely to also be a Gold member of the other competitor.
Both competitors ship to all over the country. Spacely Sprockets is located on the West Coast so the shipping fees charged to their West Coast customers is cheaper. Cogswell Cogs, on the other hand, is located on the East Coast and charges a smaller shipping fee to East Coast customers.
There are two competitors in the market:
- Spacely Sprockets, and
- Cogswell Cogs.
Spacely Sprocket customers are randomly assigned a membership level:
- 10% of customers are allocated Gold membership
- 20% of customers are Silver
- 30% of customers are Bronze
- 40% of customers receive no membership
Next Cogswell Cogs customers are also assigned memberships. But membership levels are correlated across both competitors. Customers who are Gold members of Spacely Sprockets are more likely to also be Gold members of Cogswell Cogs.
Gold members are typically good customers who highly value the products and purchase in large quantities. Hence the Willingness To Pay (WTP) of customers correlates with their membership level:
- Gold members have an average WTP of $700
- Silver members have an average WTP of $600
- Bronze members have an average WTP of $500
- Customers with no membership have an average WTP of $400
The price discount enjoyed by customers also depend upon their membership level. The price discount is captured in the ‘Price Adjustment Variable’ (PAV) columns.
- Gold members pay 70% of list price
- Silver members pay 80% of list price
- Bronze members pay 90% of list price
- Customers with no membership enjoy no discount and pay the full list price
The shipping fees paid by customers depend upon their location. All customers are randomly located at either:
- West Coast
- Middle Town
- East Coast
West Coast customers are located near to Spacely Sprockets so enjoy cheaper shipping fees for their products. Similarly, East Coast customers enjoy cheaper shipping fees from the nearby Cogswell Cogs. The shipping fee is captured in the ‘Price Adjustment Fixed’ (PAF) columns. Shipping fees vary as such:
- Shipping fee to same coast is $50
- Shipping fee to Middle Town is $100
- Shipping fee to opposite coast is $150
If a customer is a Spacely Gold Member then there is a 40% chance they are also a Cogswell Gold Member.
Dynamic Prices change the competitive dynamics of the market. With no personalized PAV discounts and PAF shipping fees, customers are very sensitive to price. A small change in the price of one competitor will trigger a large change to the quantity sold of the other. But when customers receive personalized Dynamic Prices, the degree of competitive rivalry and price sensitivity is reduced, and profitability becomes more steady.
Before Dynamic Prices
Plotting a Demand Curve of the market before Dynamic Prices are introduced illustrates the high degree of competitive rivalry and sensitive profitability.