How to measure price elasticity and maximise profit

Stock, stock, stock – sometimes it can feel never-ending!

Whether you have a physical retail space with plenty of room to store items out back or you’re trading exclusively on the digital shelf, managing stock levels – and how much you sell them for – is essential.

Price elasticity of demand plays an important role in helping companies make important gains as they retail their goods/services. But what exactly does this mean? And more crucially, how can you use price elasticity to your competitive business advantage?

In this article, we explore price elasticity and discover ways it could benefit your brand on- and offline.

What is price elasticity?

Theoretically speaking, price elasticity revolves around the idea that there are certain products we simply can’t live without. And those we can. 

Basically, it’s all about how changes in price affect demand.

For instance, inelastic products have consistent demand because people need them and use them regularly. Food, fuel, even household toiletries are examples of inelastic products.

However, if you think of package holidays, concert tickets or experience days, these are just some examples of products with high price elasticity, as quantity demand changes significantly when their prices increase or decrease.

Can you calculate price elasticity?

Absolutely! In fact, we’ve crafted this formula to help you calculate the price elasticity of demand across your stock successfully:

Price elasticity = percentage change in quantity demanded / percentage change in price

Imagine you own a sweet shop that sells pick ‘n’ mix boxes for £10, and that according to your calculations, customers buy around 500 boxes each week. 

Now, imagine that you decrease your base price to £8 per box, as well as buying enough stock to cater for roughly 1,000 boxes each week. This is what the price elasticity of demand would be for your goods:

Price elasticity = (1,000 – 500) / (1,000 + 500) ÷ / (8 – 10) / (8 + 10)

Price elasticity = (1/3) ÷ (-1/9)

Price elasticity = -3

Why is price elasticity so important?

They say everyone has their price, and when it comes to customers looking for a bargain, that maxim couldn’t be truer!

Pricing is arguably the most important factor shoppers use to decide whether they will buy something – either online or in-person. Price your products too low and customers will think it’s cheap; too high and they’ll walk away.

To minimise checkout abandonment, shoppers need a deal they can get behind more than any other currently on the market. Understanding price elasticity will help you discover that sweet spot and keep customers coming back for more!

Measuring price elasticity of demand

Price elasticity of demand may seem like a complex thing, but don’t panic. There are a few simple steps you can take to start pricing your stock more efficiently, such as:

1) Look for the “why” among your customers

There’s a reason people shop with your brand above all others; so, go looking for it! If you can cultivate that all-important brand credibility, customers will most likely stick with you even if you increase your prices every now and again.

2) Conduct quantitative research

A/B testing different price points across your inventory is the best way to understand how customers perceive your brand in relation to any pricing changes.

Just don’t change the pricing willy-nilly and without thought, otherwise shoppers could be put off and buy their items elsewhere.

3) Differentiate yourselves from your competitors

What is the competitive advantage of other brands? Do you have something better you can offer? Monitor competitors to gain a better understanding of how people perceive your target market. Then you can begin to formulate a pricing strategy that takes into account different aspects of buyer behaviour – maybe even factors you’ve overlooked!

4) Always be on-demand

Imagine that your prices are floating, like balloons: one minute you’ll have to push them up, the next minute you’re dealing with them as they come down. But you mustn’t ever let them fall!

Make sure your price alterations are done according to carefully calculated market shifts, not flights of fancy. Hasty decision-making is a fast way to lose business, especially if shoppers think they’re being undercut.

5) Use comprehensive digital shelf analytics (DSA)

It’s so much easier to check the price elasticity of demand across your inventory if you have the support of good digital shelf analytics (DSA) software.

Choose a platform that caters for all your organisational KPIs, supplying the necessary data and collating it in the correct format. We think Magpie DBX can help you there!

Understanding price elasticity with Magpie DBX

At Magpie, our price tracker is specifically designed to help your business get its pricing just right. Reporting price points across the market on a 24/7 basis, you can look through over 45 fields’ worth of data – enough to empower your decision-making process going forward.

Similarly, our stock and delivery monitoring system keeps track of your entire reseller network, ensuring you can continue to deliver products on time and make your customers very happy indeed.

Think you’d like to give Magpie DBX a go? Contact us today and we’ll arrange a demo!

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