Price elasticity – an introduction to response-able pricing
“You can’t control the situation, but you can choose your response to the situation. You can be response-able”.
Recent currency and economic volatility mean that organisations need to be ready to respond rapidly. If you’ve been managing a brand that’s famous for being a ‘price champion’, but suddenly, your component or distribution costs have sky-rocketed – you can’t simply put your prices up and expect no effect on brand perception let alone sales volume. So how should you adjust prices in, say, the face of higher input prices or changes by competitors?
Profit and revenue will almost certainly vary when price changes are implemented but the direction and scale of these effects is uncertain and dependent upon customers’ response to the new prices.
On the other hand, what if you were able to lower your prices without affecting profitability, grabbing price leadership for your brand in the process?
Price elasticity can seem like a dark art to marketers but it’s a powerful tool that your competitors often fail to master. Here are a few pointers to whet your appetite.
THE FUTURE IS NOT A RE-RUN OF THE PAST
Historical data is likely to contain important clues about price sensitivity, but isolating the effect of price changes from multiple other factors requires a considered approach e.g. using econometric modelling or A/B testing. This is usually handed to internal or external analysts, but the subsequent challenge is in interpreting their findings and informing real-world decision making. The future is not a simple re-run of the past and there may be complex trade-offs between profit, revenue, volume, brand image and inventory objectives. Delegate pricing decisions to a black-box process at your peril!
TO FULLY UNDERSTAND THE IMPACT, LOOK-UP!
What may superficially appear to be a standalone analytical exercise actually needs to be properly integrated into the organisation’s decision-making with the relevant case studies and measures of price sensitivity and commercial impacts. All participants need to emerge with an understanding of the framework, how differing levels of price elasticity affect revenue, profitability, brand perception and other metrics. We’ve found it useful to provide a head-up display tool so that decision makers can examine the impact of different price elasticity and different starting levels of profitability.
It's also handy to establish common terminology and at most a handful of key metrics summarising the dynamic between price-sensitivity and commercial impact.
RESPONSE-ABLE PRICING IN 5 BULLETS
The future is not a re-run of the past
Don’t delegate pricing decisions to a black box!
Examine options via a head-up display tool
Establish common terminology & limit your key metrics