How to use Price Elasticity in your Pricing Strategy

Businesses often find themselves in a conundrum about setting prices for their products or services. Recognizing the unit price at which sales volume is maximum and has significant profit is critical for the business.

One of the concepts worth paying attention to is price elasticity– it refers to the change in demand or sales when the price changes. For example, if a fast-food restaurant that sells a burger for $5 changes its price to $9 (assuming all the other variables like the economy, the price for raw materials, consumer preference remains constant), the sales of the burger will drop. Consumers will choose different items from the menu or go to other businesses. Here the product is considered as elastic- change in price affects the change in sales volume.

Now consider a product like a Hermes bag; increasing the price of a tote might not affect the sales because the consumers are not sensitive to the price change. Goods that are not concerned with such price changes are considered inelastic. Luxury good use Value-based pricing which has more to do with how consumers perceive the value of a product

A business owner should understand how elastic his product is. If there are a lot of alternatives, then the product will be highly elastic as consumers will look for other options. A generic product also tends to be highly elastic, which is why a branding strategy for a product is essential. Branding makes a product unique, and as loyalty increases, the product becomes relatively less elastic.

Without understanding consumers’ reactions to the price change, a brand will have difficulty adjusting the prices. Many companies take past data or do a marketing experiment with a small sample of people to increase or decrease costs and observe consumer’s reactions and changes in sales. Marketers can also perform an A/B test, focus groups to determine the elasticity of their brands.

Price elasticity can change over time, so companies must understand what factors are responsible here and how they can affect as time passes. All in all, it gives the marketers a direction to distinguish their brands better and make future decisions while keeping in mind the implications of their product price elasticity.

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