Introduction to Elasticity Pricing
Using Elasticity Pricing on relevant products helps you optimise revenue and profit margin. You set prices based on the nature of your products using a price elasticity tool instead of gut feeling. Whether your product is price elastic or inelastic, you can use the insight to set an optimal price. But how do you identify the elasticity score of each item?
In a price elasticity tool, you can identify how each product demand reacts to price changes. The tool uses the elasticity formula to calculate the score and share insights. In this blog, we share the process of executing the elasticity pricing strategy on your products.
What is the Elasticity Pricing Strategy?
Price elasticity measures the change in product demand upon price changes. Products sensitive to price changes may have a lower price. Whereas those whose demand remains the same with price changes have higher prices. You can identify the price elasticity of a product using a pricing tool. It allows you to set a price that is a sweet spot between customer willingness to pay and profitability.
Also Read: Price Elasticity of Supply and Its Impact on Production Decisions
What your Current Pricing Process could be Missing
Many businesses develop suboptimal prices as they ignore customer's willingness to pay (WTP). They also do not incorporate price elasticity insights into their pricing policies. This oversight can result in losing a large amount of revenue or profit margin.
Willingness to pay (WTP) is the highest price a customer is willing to spend in exchange for your product. Often customers are okay with paying more than the market price for a product with perceived value. So, you must consider the WTP for a product to set prices that bring revenue and profit.
But, businesses face some common challenges when starting to use price elasticity.
What are some Common Challenges in Using Price Elasticity?
The concept of price elasticity is powerful. But, its practical application can be complex. Most companies face technical issues when starting to apply price elasticity to products. Here are some common challenges and how to handle them:
- Data Quality Issues:
Maintaining high data quality is compulsory for accurate price elasticity analysis. Businesses need to collect enough datasets to apply an elasticity pricing strategy.
This process is easier when using a price elasticity tool. But what exact data would you need? Check out the next section in this blog where we discussed this in detail.
- Economic Instability:
Businesses must consider Price Elasticity in the broader economic context. It is more effective in stable economic periods when competitors are active. During economic turmoil, you need to consider economic fluctuations and other external factors.
Considering all relevant micro and macro factors can get complex. In this case, using a price elasticity tool is imperative to not lose profits during such times.
- Variations Across Segments:
Price elasticity varies across customer segments and product portfolios. Different customer groups reveal different levels of price sensitivity. Enterprises must consider such variations in their pricing strategies.
Maintaining such variations makes the elasticity pricing strategy more accurate. Although complicated, you can automate such factors in price elasticity software. You can then develop a pricing strategy with elasticity in no time.
- Non-Linear Elasticity:
Price elasticity is rarely linear. Prices can drop so low that customers doubt the product's credibility. Or, they rise so high that customers do not believe the benefits justify the cost.
Understanding such non-linear patterns is crucial. Most businesses don't understand these roadblocks leading to suboptimal prices. But this complex nature of the price elasticity strategy makes your pricing profitable. The ideal solution is to execute the strategy using a price elasticity tool that eliminates such issues. Also, you can better understand the elasticity level of your items.
A Checklist of Datasets for Applying Elasticity Pricing Strategy
Before you get started with price elasticity, you need relevant data to build the strategy on. Without the correct and high-quality dataset, your pricing will remain suboptimal. Here is a detailed checklist about what kind of data you need to apply elasticity pricing.
Basic Rule 1: You Need Enough Transactions
To calculate price elasticity, you need enough data points for each SKU. You can draw them from historical order lines for a specific country or customer group. Retailers or wholesalers with large inventories typically have ample data. Likewise, manufacturers who gather B2C transaction data through online scraping or partnerships with retailers usually have enough information. But, targeting too specific groups or producing custom-made products may not provide the necessary data points for accurate analysis.
Basic Rule 2: You Need Variation in Your Prices
There must be enough variation in your pricing data. Static prices lead to untrustworthy outcomes. Static prices lead to untrustworthy outcomes. You can get variation from:
- SKU cost changes,
- promotional activities,
- different price lists for diverse customer groups, or
- regular price adjustments.
Without these variations, the data lacks the necessary points for a thorough analysis. Such varied pricing data helps the elasticity model to bring optimal results.
Basic Rule 3: Establishing a Correlation Between Price Changes and Demand
It's essential to observe how price changes affect order volumes. This correlation is critical for understanding the true elasticity of your products. Observing how product demand reacts to price changes allows the analysis to reflect market behaviour.
Checking the Data Quality Score
Using a price elasticity tool allows you to assess the quality of the data you're using. Identifying the data quality sets the foundation of your elasticity pricing strategy. When using spreadsheets, you may have to check the data with experts. It's because you have to rely on gut feeling and human errors.
In SYMSON, you can get a data quality score based on three criteria:
- Overall data quality
- Individual measures
- Model Accuracy
Combining them into a "Data Quality Score" helps judge the reliability of your data. A high-quality score means your data has the necessary variation and correlation to generate trustworthy insights. You can expect accurate Price Elasticity analysis and optimise your margins.
Also Read: Elasticity vs Inelasticity of Demand: 5 Main Differences that Brands should know
Practical Use Cases of Price Elasticity
Implementing price elasticity can enhance various aspects of your pricing strategy. Here are some practical use cases:
- Enhance Your B2B/B2C Cost-Based Markup Price Logic by 2%:
Use detailed product data like categories and branding to improve current cost-price-plus strategy. Use price elasticity insights to recalculate the new cost price plus markup for your products.
- Improve Price Logic on Category/Brand Level by 2%:
Group products based on similar behaviour, such as sizes, colours, or product families. Filter out low-quality data and compare price elasticity insights. This helps you make informed pricing decisions.
- Understand the Optimal Price of Brands, Private-Labeled, or Commodity Products:
Assess how price adjustments impact demand for different product categories. Use this analysis to establish optimal pricing strategies that maximise revenue and profitability.
- Define Optimal Price for Promotions:
Use data analytics to determine optimal promotional pricing. You can also balance inventory clearance with profit maximisation.
- Impact Analysis of New Prices:
Conduct impact analysis using scenario builders in SYMSON. This helps you simulate the effects of new pricing strategies. It also helps forecast outcomes and refine pricing strategies based on data-driven insights.
- Define the Right Price for Selling Inventory:
Set optimal promotional prices for inventory sales using predictive analytics. This allows you to balance demand stimulation with revenue optimisation.
- Demand Forecasting by Examining the Impact of a 15% Price Reduction:
Use predictive analytics to estimate how price changes will influence customer demand. This aids in inventory and supply chain management.
- Understanding Your Customers Through Data-Driven Insights:
Assess customer behaviour, preferences, and feedback. You can then tailor your products, services, and marketing strategies.
- Identify Price Sensitivity for Each Channel and Marketplace:
Understand how different customer segments react to price changes across various platforms. This helps you understand and fine-tune pricing strategies on other marketplaces.
Download Now: A Complete Guide to Implementing Price Elasticity in your Pricing Process
Implementing Price Elasticity for Your Situation
Implementing price elasticity involves several steps, tailored to your specific business context. Here's a practical plan to get you started:
Implementing price elasticity involves several steps, tailored to your specific business context. Here's a practical plan to get you started:
Step 1: Data Collection and Analysis
Collect historical sales data and ensure it meets the criteria for sufficient transactions, price variation, and correlation between price changes and demand. Assess the data quality and filter out unreliable data points.
Step 2: Use of Price Elasticity Tools
Use price elasticity tools and algorithms to analyze the collected data. These tools help calculate the price elasticity score and generate insights into the optimal pricing for different products and segments.
Step 3: Scenario Building and Simulation
Use scenario builders to simulate various pricing strategies and their potential impact on sales and profitability. This step helps visualize the outcomes of different pricing scenarios and make informed decisions.
Step 4: Implementation and Monitoring
Activate the chosen pricing strategy and continue to track its performance. Adjust the strategy based on new data and evolving market conditions to ensure optimal pricing.
Step 5: Leveraging the SYMSON Platform
The SYMSON platform can be a valuable asset in your price elasticity process. It uses advanced algorithms to calculate price elasticity at the product level. Thereby, it provides a data quality score to ensure reliability. The platform also offers scenario builders and impact analysis tools to help you refine your pricing strategy.
Watch Now: Expert Webinar on the Best Practices of Applying Price Elasticity to your Pricing Strategy
Benefits of Leveraging Price Elasticity Insights and Uses
Using price elasticity insights help you set optimal prices considering the demand sensitivity of each product. This way, you are able to maintain an optimal balance between growing sales volume and profit margin.
1. Growing Margins and Revenue
Understanding and using price elasticity helps businesses adjust prices to boost revenue. For example, brands and private labels can use price elasticity to determine customer willingness to pay. This leads to significant price adjustments. You can assess added value and charge extra margins to price commodities better.
2. Optimising Promotions
Price elasticity insights can help predict the effect of promotions on sales volumes. You can combine these insights with pricing strategies using SYMSON's scenario builder. Then, you can set desired price levels and market positioning for promotional periods.
3. Strategic Decision-Making
Price elasticity data provides valuable insights for strategic decision-making. Businesses can use this data to optimise markup percentages, discounts and pricing strategies. Doing this leads to increased margins and profitability.
How Symson Helps You Implement Elasticity Pricing Strategy
SYMSON's platform offers a robust solution for utilising price elasticity in the right way. Here are some key features and benefits:
Configuration Options for Price Elasticity Model
- Set Business Goals: Optimize for revenue or margin.
- Choose Machine Learning Models: Select from models like linear regression to best fit your needs.
- Filter by Customer or Product Group: Tailor the analysis to specific segments for more precise insights.
- Set Economic Stability Periods: Configure the model to account for periods of economic stability.
- Run Different Scenarios: Test various assumptions and scenarios to see potential impacts.
- Calculate at SKU Level: Get detailed insights at the individual product level.
- Predict Optimal Prices: Use the recommendations to set prices that optimise revenue or margin.
Price Elasticity Recommendations
SYMSON provides clear, actionable recommendations:
- SKU-Level Analysis: Detailed price elasticity analysis at the SKU level.
- Optimal Price Recommendations: Tailored to regions or customer groups based on business goals.
- Comprehensive Results: Includes Price Elasticity Score, Data Quality Score, and impacts on margin, volume, and revenue.
SYMSON’s Guidance and Support to Help You Get Started with Price Elasticity
SYMSON is committed to guiding you through the process:
- Customer Success Management: A dedicated team to assist you.
- Pricing Consultants and Data Scientists: Experts available to provide insights and recommendations.
- Training and Resources: Access to workshops, playbooks, videos, and whitepapers to learn how to use price elasticity effectively.
Activation in 10 Days: Next Steps
Implementing SYMSON’s Price Elasticity tool is straightforward. Follow these steps:
- Schedule a Discovery Call: Discuss your specific case with SYMSON.
- Sign a Proposal: Agree on the terms and conditions after the discussion.
- Send Data: Provide historical order lines, invoice headers, and product feed with EAN, name, and cost price.
- Run ML Linear Regression: Use SYMSON’s machine learning model on your historical data.
- Review Results: Participate in a workshop meeting to review the 'Optimal Price Recommendations' with SYMSON.
SYMSON's price elasticity tool leverages machine learning regression models to analyze historical order lines and predict optimal prices for revenue or margin optimization. The tool also provides a data quality score, ensuring accurate predictions by filtering results according to their relevance.
Summary
Using price elasticity on your products can transform your pricing strategy. It leads to better pricing decisions, increased margins, and enhanced profitability. If you combine your understanding of price elasticity basics, use high-quality data and use advanced elasticity tools like SYMSON, you can bypass the complexities and achieve optimal prices.
This guide provides a roadmap to better pricing and greater profits, with practical steps that can be implemented today. Use the insights and tips provided here to protect your profits and confidently move forward in your pricing strategy. Let's journey together towards a brighter future in pricing.
Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!
