Anyone who has done Economics 101 will have seen a demand curve with price on the one axis and demand on the other. The principle is to demonstrate that demand declines as price increases, except in some unusual circumstances. Along the way you will have learned that price elasticity is an indicator of exactly how price changes affect the volume sold.
In practice I’m asked about the price elasticity of a particular product or service, and how it impacts on pricing and brand strategy. The reality is that there is no specific price elasticity which applies in all cases. Although this creates more complexity, it also provides you with more opportunity to grow your profitability. Furthermore, in certain smaller markets, such as B2B markets, circumstances may be such that it may sometimes be difficult to get the data to calculate price elasticity at a specific point in time.
The following principles are therefore worth considering under such circumstances.
The relationship between price charged and the quantity sold is often not linear. Therefore price elasticity is often not linear. Use this to your advantage.
When alternatives to switch to are increasingly costly, an increase in price won’t always necessarily have a specific decrease in quantity. Understand who your competitors are likely to be and how difficult it is for customers to switch to these alternatives.
The area of pricing indifference should never be ignored.
Pricing visibility, switching costs and inconvenience – these are all issues that add friction when customers consider your price increase. For certain items, not everybody knows, or cares about knowing what your prices are at all points in time. Therefore, indifference can be advantageous to you as long as pricing changes are done within reason.
Segmentation can be your friend when pricing.
In addition to what you’ve read above, sensitivity to price can vary widely across customer segments. Clear strategic thinking should guide you regarding segments where you should compete – due to relative price insensitivity, and segments that you should avoid at all costs – due to price sensitivity.
It is also worth mentioning that our analytics have uncovered instances where ongoing price promotions in specific channels and segments have had the effect of seemingly converting price insensitive buyers to price sensitive buyers over relatively short periods of time. Always think carefully when running a sales promotion that is price-based. Although it may build your volumes on a short-term basis, it needs to be considered in conjunction with your brand strategy to avoid long-term brand damage and profit margin damage.
Don’t ignore your communication approach when promoting a price.
Humans are surprisingly inefficient when it comes to converting a price to a standard rate. Although legislation exists in certain markets and industries to force clear pricing (e.g. per kilo), it does not exist in many other industries. To this end, pricing on a daily, monthly or annual rate can be surprisingly effective at managing price sensitivity.
Time can change a lot.
Markets can change a lot over time. Needs and preferences change. Technology that affects who our competitors in a particular industry are can also change. To this end, it is worth reviewing how price sensitivity is changing over time. Equally importantly, understand which disruptive new technologies may change the competitive landscape so markedly, that discussing minor price changes becomes an irrelevant exercise when your business faces extinction! (Hint: Consider Uber vs. The taxi industry, or Newspaper advertising vs. Google.)
About the author
Competitive Strategy ♦ Integrated Pricing, Brand & Distribution Strategy ♦ Predictive Analytics ♦ Business Model Review. Assisting clients to Grow Market Segments, Grow Margins & Grow Market Share.
Alan Ohannessian started WisdomInc in 1999. He has broad-based experience in how competitive strategy, exploratory analytics and predictive analytics are practically integrated with other strategy disciplines for more effective outcomes. Prior to this, he started a Customer Relationship Management consultancy within the Ogilvy Group in the mid-1990s and worked within the Ogilvy Group over a 5-year period.
He has advised product and service organizations for more than 70 global and local B2C and B2B brands since 1995.
As a specialist across several disciplines, he is able to provide an integrated view of a solution when providing strategic insights. Areas of specialty include Pricing Strategy, Brand Strategy, Brand Experience Management and Distribution Channel strategy.
He holds a Master’s degree in Distribution Channel Strategy from the University of the Witwatersrand. He has also completed a postgraduate dissertation in the area of cost-competitive mass-customisation manufacturing strategies at Wits (where he taught Marketing Strategy, Consumer Behaviour, Marketing Research and Retail Marketing over a 2-year period.)