A GUIDE FOR PRICING STRATEGIES

Price Elasticity Pricing

What is it?

Price elasticity of demand is a crucial component of dynamic pricing and indicates to what extent the demand for a certain product changes when the price of that product changes. Let’s imagine that you increase the price of your product with 20%, how much would the demand for this product change then? That is the question that the price elasticity of demand answers.

How to use it?

You can use price elasticity pricing in several ways. This really depends on your use case. Let's give you some examples of how you could use price elasticity pricing.

Determine the most optimal price for your products
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Automate the price changes according to demand
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Gain more insights into your market landscape
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THE GAINS

Benefits of Price-Elasticity Pricing

1

Optimize your prices

If you take historical prices and sales into account and calculate the price elasticity of your product, you will be able to calculate the optimal price for your product. This will lead to higher margins and more profit.
2

Based on data instead of gut feeling

Instead of relying on gut feeling for optimal prices, you will be able to calculate optimal prices for products and explain why your price is the right price for your product.
3

Increase profitability per product

If you sell goods with an economy of scale, decreasing prices for price elastic products, average costs per product will decrease which leads to more profit.
INDUSTRY TRENDS

Who is using it?

Basic Food Products

There is almost always a negative relationship between price and demand. If a product becomes more expensive, this will almost always result in less demand. But the change in demand is not the same for every product. When the prices of food increase, most of the time little happens. Basic food sources are considered to be primary products that will always have a certain demand. These essential products are typically priced inelastic.

Petrol

When petrol prices rise, demand for it may drop. When petrol prices surge for a longer period of time, alternatives become more attractive. People may decide to buy an electric vehicle or even switch to public transport instead. Here you could argue that this product is price elastic.

Uber

This company uses price elasticity formulas to manage demand on one hand and to increase profit margins on the other hand. Uber’s surge pricing, the rapid rising of prices when demand is high, to make sure that their taxi drivers go to the location where prices and demand are high. This is beneficial to the taxi drivers and Uber because they are able to get more income, while it is beneficial for Uber and users because more Ubers become available in areas with high demand.

HOW TO HANDLE THE PAINS OF PRICE ELASTICITY PRICING STRATEGY

The most common challenges pricing managers face today

  • A price optimisation project is a major undertaking in a company. Often the gut feeling is used to apply quick wins. However, with large assortments, many customer groups and ambitious business goals, management needs to be supported with data to get optimised price recommendations based on historical data. With SYMSON this process can be automated for each price cycle and your prices can be optimised for margin or revenue.
  • Analysing the price elasticity for each product can be a time-consuming task if you do not use a smart price management tool. However, doing so can have substantial effects on your profit and revenue. SYMSON can run an analysis of your product portfolio using AI and Machine learning software to bring you the highest revenue or margin for every time frame.
  • The sales data for each product can give you insights into its performance in the market.  If you are not using a smart price management tool such as SYMSON you cannot utilise the valuable insights that this data can bring you. However, SYMSON makes this process more manageable by collecting all the data for you and performing an analysis to determine the most optimal prices.
THE DISADVANTAGES

Disadvantages and how to handle them

Data needs to be constant

When you do not have the right data on sales or prices, or when the data changes, your calculations will be outdated. You, therefore, need to constantly monitor how people respond to your prices.

Price elasticity doesn’t take competitors into account

The price elasticity of demand function doesn’t take competitors into account, while their price changes affect the demand for your product as well. It is, therefore, best to also monitor the price changes of your competitors.

Not useful immediately for new products

When you want to sell a new product, you do not have the right data yet to calculate the price elasticity formula yet. However, you can first use a cost-based strategy to launch this product and then test it with different price points, to obtain the required data quickly.
HOW TO SET IT UP

How to implement Price Elasticity Pricing

In your organisation

Pricing your products according to their price elasticity of demand can be beneficial in increasing your revenue and/or margin. However, if you would want to do that efficiently firstly you have to have well-organized and accurate historical sales data. We recommend the following steps in order to effectively implement price elasticity pricing in your organisation:

Collect and organize your historical sales data
Import that historical sales data in a smart price optimisation software such as SYMSON
Run an analysis on all your products
Analyse the results from your first analysis
Implement the updated prices into your pricing software
Analyse the results, adjust prices if needed and repeat the process

In SYMSON

SYMSON can help businesses by automatically calculating optimal prices with price elasticity of demand formulas when historic sales and prices are known. The benefit of SYMSON is that it not only optimises the price for you but it lets you add organization-specific parameters. In order to set this up you need to complete the following steps in the SYMSON smart AI pricing management software:

Make a secure data connection with your chosen systems to continuously update prices
Select the product groups which you wish to analyse
Add business rules such as minimum margin and price change cap adjustment
Choose between the highest margin or highest revenue possible

Analyse the first results and implement your new prices
After a price cycle has been completed analyse the results from your new prices
Adjust your parameters if needed and run the next price elasticity analysis
THE KEY IS A COMBINATION OF STRATEGIES

Why combine with other pricing strategies?

Calculating price elasticities manually over and over again and checking the prices of competitors is manually repetitive work. This can be very tedious and cost a lot of time, energy and creativity. Therefore, price elasticity should ideally be part of a dynamic pricing strategy, so that price elasticities are automatically calculated and adjusted. Next to dynamic pricing, a competitive pricing strategy component should be used in combination with price elasticity, to monitor price changes and how these may influence the demand for your product. While automating your prices may seem ideal and efficient, one should also think about adding rule-based pricing strategies, to complement the data with industry or product insights.
GET A DEMO

How to use Price Elasticity Pricing in SYMSON

How it works
How to combine different pricing strategies
How to get recommendations for the perfect pricing
How to track competitors

Summary

  • Price elasticity of demand is a crucial component of dynamic pricing and indicates to what extent the demand for a certain product changes when the price of that product changes.
  • Price elasticity is used to optimize prices, increase profitability per product and make pricing decisions based on data instead of gut feeling.
  • Price elasticity performs best when it is part of a dynamic pricing strategy in combination with competitor-based pricing and rule-based pricing.

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