The benefit of understanding price elasticity…

This blog is the 3nd and final part of my series of 3 articles focusing on retail pricing. The first looked at price, promotions and positioning. The second featured why your retail business needs a price ladder. This final blog in the series will consider price elasticity, both at the item level and across the assortment.

What is Price Elasticity?

You probably understand the concept of price elasticity of demand – put simply this is a measure of the relationship between variations in price and the impact that has on demand. If you want the full scientific explanation have a look at this wikipedia article on elasticity.

To give an example, petrol has relatively high inelasticity – demand hardly varies with price rises / drops. Luxury items (things we can live without!) are much more elastic – price will directly influence demand. Higher the price, smaller the market etc. This is fairly simple as a concept even if the maths and stats that prove the theory are a little more complex!

How is price elasticity relevant to a retail assortment?

Price elasticity is not only relevant to the single item. Price elasticity can have an influence across an entire assortment. Assortment elasticity essentially describes the way that the price points within an assortment of similar items influences the behaviours of consumers. I’ll illustrate this concept with a cheese grater!

Assortment elasticity – an example

In a supermarket non-food section there was a choice of 4 cheese graters priced 99p, £1.79, £2.49 and £2.99 – basic, good, better, best as a proposition that offered a good choice and something for all of the customer segment they served.

Demand on all 4 was about the same and % margin on all items was also the same.

There are 2 ways to increase cash margin return on the range – price elasticity of an item – reduce price, increase volume so much as to cover the cost of the reduction to deliver a net increase in cash margin OR influence customers up the price ladder…

The first method was tried – reduce the entry price model to 79p. Well, this did increase volume, but due to the now more significant jump from basic to good (£1 difference) the item only took sales away from the next rung of the ladder – so although when looked at in isolation it did enough extra unit sales to pay back the lost cash margin, because those sales came from the higher priced item the overall assortment impact was to lose money. Not good. The reason customers traded down was because in the context of the range the 79p item posed such good value for money they couldn’t really justify the higher priced item. As people don’t typically “stock up” on cheese graters assuming that a reduced price would realise incremental sales was an error of judgement in this case…

The second method was tried – increase the entry price model to £1.29. This reduced volume, however as the lowest price item it still had a reasonable rate of sale and was now also delivering 30p more cash margin per unit as well. Interestingly however the sales lost were due to more people trading up. For only a 50p difference customers could have what seemed to be a really good upgrade in item – it was very compelling to step up the ladder – the step was narrow. Not only did the item with the price change achieve the same cash margin from less volume sales, the item above it on the ladder saw increased volume (taken from the entry price item) such that it delivered more cash margin than usual. The overall result was that the assortment produced more cash margin from the same unit volume. Excellent. The customer was not dissatisfied as the price ladder offered choice and still represented a competitive offering in the market place.

Price elasticity logic applied to the assortment is a great way to make more cash margin!

As a retailer you can also leverage your price positioning, your price ladder and then test your assortment elasticity to influence the way your customers behave.

This is a great way for you to make more cash margin from the same unit sales and to also increase average transaction value (ATV).

Advertisements

About Clare Bailey

Clare Bailey, The Retail Champion (formerly Clare Rayner), is one of the most well-known and respected retail experts in the UK. With unrivalled knowledge in retail, high streets and consumer matters, she offers unbiased, independent content – whether engaged as a professional speaker, for broadcast media, or for a written feature. Clare is a business woman, entrepreneur and founder of several small businesses. Having been born into a family of successful business owners, it was inevitable that she’d eventually jump off the corporate treadmill and step out on her own! Today her brand portfolio includes The Retail Champion, The Retail Conference, the Future High Street Summit and the Support for Independent Retail campaign. In addition, she is co-founder of Mobaro Retail UK and a non-exec director of Beed Virtual Assistant Services. Having started her career as a fast-track store management trainee for McDonalds, she went on to work with leading retailers such as M&S, Dixons and Argos. She moved swiftly into management roles before being headhunted into senior consulting roles with global software giant SAP, and international management consulting brand, Accenture. Her corporate background in senior retail, consulting and technology roles, coupled with her experience of creating and running her own business, has enabled her to be equally capable whether consulting to global brands or micro businesses. This unique blend has not only positioned her as a leading expert in all things retail, but has enabled her to add meaningful commentary and insight to the debate around the future of the high street, and, how technology is driving fundamental change in the way consumers, and businesses, interact. Clare has become an influential voice in her field, which has resulted in her becoming a regular media contributor and sought-after conference speaker. Often seen on Good Morning Britain, BBC Breakfast, Sky News, and Chanel 5 (to name a few), Clare speaks on a myriad of retail, high street and consumer issues – but is particular adept when it comes to explaining the context behind retail trading results, newly released data, and government stats, in a palatable and informative manner. In addition to broadcast and conference speaking, Clare is the proud author of two best-selling business books published by Kogan Page - The Retail Champion: 10 Steps to Retail Success, published July 2012 and How to Sell to Retail: The Secrets of Getting Your Product to Market, published February 2013. She has provided contributions to various academic texts, including Retail Marketing Management (published by Pearson). With an engaging, conversational yet informative style, Clare writes for press and content agencies, providing features, articles, blogs and opinion pieces as well as contributions to white papers and reports. However, when the situation demands a more serious style, Clare can deliver - In 2016 she wrote an extensive report for a major insurance and risk law firm, as a retail expert witness, to support a public liability suit. She found that project particularly enjoyable as it played well to her strengths – assimilating large amounts of data and information, identifying the key points and articulating that in an understandable manner. When not on TV or speaking at conferences, Clare’s “day job” sees her supporting consumer-facing businesses through her consultancy services. When asked to describe what she most loves about retail consulting it is typically the opportunity to “dig deep”, getting “under the bonnet”, in order to leverage the business data to uncover the insights that lead to “lightbulb moments”. She also loves working on business change programmes that centre on improving the processes and systems to increase profitability by supporting more rapid, better informed decision making, improving the customer experience, or simply by become more efficient and streamlined. In this respect she considers herself a “business engineer” with a brain that works like a relational database! Due to her years of experience, her logical, objective approach, her quick, rational thinking, she is known for being able to cut through complexity, seeing right through to the crux of issues, finding creative solutions that others may have overlooked. As if all that wasn’t enough, Clare is a working mum, juggling a home life in rural Lincolnshire with her partner, their 5 kids, 4 cats, and geriatric Labrador! For all enquiries, contact Clare directly on 01727 238890 or email champion@retailchampion.co.uk.
This entry was posted in Increasing Sales, Pricing and Promotions, Retail Strategy and tagged , , , , . Bookmark the permalink.

2 Responses to The benefit of understanding price elasticity…

  1. Pingback: Has the @SubwayUKIreland special lunch offer made them busy fools? | Clare Rayner: The Retail Champion

  2. Pingback: Price and positioning for greater profit | The Ultimate Guide

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s