Price Elasticity… Wrong Question
It is a bit of a common theme… about a third of new clients come to us and ask us to measure their price elasticity of demand… the amount their volume would drop or increase if they changed their price.
Bless them, they don’t know any better. It is the only thing they remember about price from their economics GCSE. But it is the wrong question to ask. Sure, if you put your price up some customers would probably (but not always) go away. The right question is ‘which would stay?’
I am afraid I struggle with neo-classical economics. Our experience of customer behaviour is never as simple as they would make out. Decisions are seldom based on all available information; seldom logical, rational or driven by utility value. If they were, vast swathes of the economy would have to shut down overnight.
Nobody would buy a Dolce and Gabana handbag, you would see the womenfolk of Knightsbridge carrying their belongings in 5p Tesco carrier bags.
Households would switch their electricity and gas suppliers every four to six weeks and British Gas would be on its knees.
Everyone employed in marketing or sales would find themselves on the dole and Apple would not be the most successful brand in the world.
The other problem with this request is that it requires at least three data points to plot from empirical data in order to draw a curve (two would be a straight line). Although some high volume online businesses can flex their price on a daily basis, for most firms this is simply not possible…. the number transactions is too small or you would simply annoy customers by moving the price all the time.
Our advice is to start from the other end of the thought process and ask the question how far can we move price without losing any customers. Then look at the type of customers you think would be first to go and price them separately…. and keep doing this until you have segmented you customer base.
Keep in mind our motto at Burgin Associates:
Some of your customers would have been perfectly happy to pay higher prices… the trick is to know which ones!
We will offer a modest reward and some online kudos to anyone who can accurately translate this into Latin for our coat of arms.