The company I work for is interested in making the pricing for its products more quantitative. I researched the topic and I found some theory for calculating optimal pricing in Microeconomics texts and the "Pricing and Revenue Optimization" text by Phillips.
I have an engineering background and the theory makes sense to me, but I can't find any good material about how to implement these calculations in practice.
Here are some more specific questions
Calculating the optimal price requires a price-response function (seems very similar to a demand curve) associating price with demand. The material I've read assumes that this function is known, but I can't find any good material about how to fit a price-response function in practice. I've found some vague advice about using survey data, but it doesn't seem that practical or specific to me. Are there some more specific and established methods for fitting a price-response function? Maybe from historical transaction data?
Calculating the optimal price requires a cost function associating production quantity with cost. I can imagine calculating this by accounting for raw material and labor costs in the manufacturing plant, but would appreciate if there's a more formal way to do this. Maybe a complete tally of the costs I can sum up.
I imagine that any estimates of the price-response function and the cost function will have error. Is there an established way to quantify the error and its impact on my pricing calculations? This isn't addressed by the resources I've found. Pricing of my company's products will have a large impact on revenue and I don't want to just fly by the seat of my pants.
Are there established methods for simultaneously optimizing the prices of a portfolio of products given a manufacturing quantity constraint? The plants are constrained by the quantity of product they can produce. The Phillips text has some theory on constrained pricing for one product, but not a portfolio of products.
Any advice is greatly appreciated! Or even simply some insight as to whether optimal pricing theory is useful in practice, or sharing any war stories of actually implementing optimal pricing.