Decoding Price Elasticity: Customer Insights

Price sensitivity, often referred to as price elasticity, measures the extent to which changes in price influence the demand for a product. It is quantified by dividing the percentage change in quantity by the percentage change in price.

For instance, when a retailer reduces the price of a chocolate bar by 10%, and its price elasticity stands at -1.2, the retailer can anticipate a 12% increase in demand.

The price elasticity of demand varies across product types and brands. A consumer might willingly opt for a lower-priced T-shirt, compromising on the brand (Elastic). In contrast, the situation may differ entirely when a consumer purchases furniture, as they may not compromise on quality even with a higher price tag (Inelastic).

Understanding price elasticity is pivotal for crafting enticing offers, optimising inventory, and making well-informed pricing decisions in the retail sector.

Identifying Price Elasticity Clusters -

TrueGradient’s approach, akin to the BCG matrix, delineates various clusters where price elasticity can be strategically harnessed:

• Pets: These represent combinations with low price sensitivity and low sales, typically comprising products with modest profit margins.
• Markdown: These encompass combinations with high price sensitivity and low sales. Retailers can apply markdowns to stimulate demand and boost profitability for these items.
• Star: These denote combinations characterised by low price sensitivity and high sales, signifying products with a dedicated and loyal customer base.
• Investment: These include combinations marked by high price sensitivity and high sales. With minimal investments, further sales growth can be unlocked for these products.

Leveraging Price Elasticity in Retail -

Retailers can leverage the concept of price elasticity in various ways:

• Optimal Pricing Strategies: Price elasticity aids retailers in pinpointing the ideal price point for their products. Lowering prices for products with elastic demand can significantly bolster sales and revenue, while inelastic demand products can potentially bear price hikes to augment profitability.
• Promotional Campaigns: Retailers can strategically plan promotions and discounts based on price elasticity. Understanding customer sensitivity to price changes enables the creation of promotions that maximize customer response and revenue.
• Product Bundling: Price elasticity guides decisions concerning product bundling. Combining products with differing price elasticities can result in higher overall sales and profitability.
• Inventory Management: Price elasticity influences inventory management by impacting demand forecasting. Products with elastic demand may experience more significant demand fluctuations due to price changes, necessitating agile inventory adjustments. Conversely, inelastic-demand products may require more stable inventory management.

In summary, price elasticity empowers retailers to optimize pricing, promotions, and inventory, aligning them with customer demand for enhanced revenue and profitability. An insightful analysis of price sensitivity leads to data-driven decisions, bolstering competitiveness in the market.