What we are going to do is set up three new spreadsheets. The first one will list all of the averages and standard deviations that we found from our historical analysis in part 1, and will look like this:

The upper portion of the second sheet will contain the number of specific services according to provider you are going to offer in the contract. In the lower portion, it will contain a formula to calculate standard deviation according to the number you input in the upper sheet. It will look like the following:
 

 
The final sheet, where we get our pricing, will have formulas mapped back to the first and second sheets.
 

(Click to Enlarge)

This means, from the example above, you are 95% sure your cost will be between $2,428 and $2,564. That knowledge will help you price accordingly. Granted, this measure is not exact, and there are other more advanced statistical measures that could be employed to improve this number. However, this measure is sufficient to give us a good idea about pricing.

What’s more, you can reuse or change this model whenever you need to. Just go back in and change the number of services needed per each provider (spreadsheet 2) and the formulas will instantly calculate a new total contract cost and standard deviation for you.

We’ll take a generic example to describe the process. Let’s say you own a network of service providers, each that are able to perform a few different types of services to your clients. When getting a new client, you need to know how much to charge for a yearly contract of these services. The problem is that each of the service providers are independent and will charge you a different amount for each service, and each of these prices may change with time. This makes it a logistical nightmare to know your costs so you can set an appropriate price.

Marketing Analytics in Excel

Here is where marketing analytics can help us. First, we can perform a historical analysis to set up a method for discovering how much a specific client contract might cost us. To do this, let’s go to Excel. What we’ll need to do is set up a spread sheet with the specific services across the top, and the various service providers down the rows. Then we need to input past data, showing how much specific services have cost for specific providers in the past. It will look something like this.

pricing model in excel

As can be seen, the historical prices that each service cost according to provider are input into the body of the sheet. Now we need to break this data down into something that we can use. What we want to know is how much, on average, each service costs according to the provider. If you have many rows of data, it’s easiest to use excel’s new ‘averageif’ function, as shown:

averageif in excel

This will average the data only for the provider specified, so you can get the averages for each service according to provider. As the formula is written, all you’ll need to do is drag it down, change the provider name according to the row, and then drag them all across.

The final thing we must do in setting up our historical analysis is to find out if the averages we’ve calculated are a good measure of what our actual cost will be. For this, we calculate the standard deviation. Again, we are going to use an ‘if’ function to make it easier to deal with large spreadsheets. The formula should look like the following:

stdev if statement in excel

Remember two important things about this formula: One, after typing it in you must hit ctrl+shift+enter to turn it into an array or it won’t work. Two, make sure any blank cells in the range to be calculated by the formula are not blank (you can fill them in with a negative sign, as shown, and it will work just fine).

Now that we have found averages and standard deviations using historical data, we are ready to begin our analysis. This will be covered in tomorrow’s post.