Elasticity of Demand Analysis: What it is and Why it’s Important

Demand Elasticity is when factors like price have a significant impact on how much of a product a consumer wants to purchase. When developing pricing models, businesses have to think about how to price a product and how much of the product to produce. Responding to this strategic need, ROP provides businesses with insights that helps them set strategic, attractive prices that provide purchasing incentive.

Price setting factors:

• Estimated Cost Strategic pricing takes into account several estimated cost factors, like supplier and alternate supplier, packaging, production, and purchasing costs. Your business won’t make profits if prices are set for less than the incurred production costs.
• Consumer Demand Examine consumer demand so you can target pricing based on specific demographics or community demands, and on their expectations, preferences, and general feelings about your product.
• Alternative Product Availability Consumers might have access to similar competitor products and services, so it’s important to understand what additional value or quality your product might offer in comparison.
• Market and Economics Having a clear forecast for where the market is heading, and if demand is greater than supply, can help you optimize prices in case of economic decline or new regulations.

Price setting objectives:

• Sales Growth This objective means that a company has to set prices in a targeted way to directly improve profits and increase sales volume. This might be done by altering prices or changing pricing policies depending on factors that impact sales growth.
• Price Stabilization This goal is used to try and avoid pricing fluctuations and is often adopted by companies who want to plan and establish regular production, or who have products that are sensitive to price wars within the market.
• Achieve Targeted Rate of ROI Your company’s objective might be to set prices that will yield a desired Return on Investment (ROI), which is often the goal of industry leading companies or businesses who sell in protected markets.

Price setting strategies:

• Penetration Pricing A new product can be introduced to customers at an appealing low price point to help establish a loyal customer base. After which, the price can be raised to improve profits.
• Cost-Plus Pricing This sets product price based on the amount your company wants to gain in profits and is usually best for physical products rather than services. For example, a toolkit that cost $45 to produce could be priced at $90, which is a 100% markup and a $45 profit.
• Loss Leader Pricing Products or services are priced at loss-inducing costs because although your business won’t make a profit on that particular item, your customers might be incentivized to buy other, more profitable, products from you.

How ROP Helps with Pricing Strategies

ROP uses analytics and modeling to help businesses establish the best possible prices for their products or services, ensuring we address end-game objectives: maximizing profits, market and customer demand, and alignment with shareholder values.

• Client Objectives ROP evaluates the client’s overall business objectives, such as market penetration, or new product introduction. This informs how we establish a custom analysis process that will yield useful data for pricing models.
• Metrics and KPIs We then establish metrics and KPIs to guide market, economic, customer, and competitor analysis within the umbrella of pricing strategies. For example, customer Lifetime Value (LTV) or Customer Acquisition Cost (CAC) might be important metrics that help ensure we can obtain relevant data.
• Questionnaire Next, our analysts design an applicable questionnaire to aid in custom research, applying in the defined metrics and KPI filters to target the right questions during surveying and other quantitative research.
• Customer and Competitor Analysis We then perform analysis to discover the what, how, and why of customers purchasing and using the client’s offerings depending on the urgency and specifics of their particular needs. We also analyze competitor pricing scenarios and range.
• Pricing Analysis Report With all of the analysis findings, we’re able to prepare an easily digested report that conveys the type of pricing strategy that best suits our client’s interests, whether it’s Cost-Plus, Penetration, or Value-Based Pricing.

How ROP Helps in Demand Elasticity Analysis

ROP institutes a diverse combination of research, survey, and analysis techniques to perform outcome-driven Demand Elasticity Analysis so that price setting can be confidently based on economic principles, market context, and accurate formula calculations.

• Client Objectives To create meaningful valuations that target client pricing objectives, we integrate pricing analysis findings, as described above, with a custom price elasticity of demand analysis and calculation, as described below.
• Elastic vs Inelastic To accurately model demand, ROP first establishes if the client’s product is elastic (readily replaceable) or inelastic (essentials) using PED variations depending on a 1% change in price. The product is Elastic if “E” is greater than 1, and Inelastic of “E” is less than 1.

• Demand Forecasting Then to obtain elasticity value, we create a demand model that allows us to forecast product demand depending on high or low pricing value ranges.
• Price Elasticity of Demand Calculation Our analysts then measure price elasticity via a specific formula: % in Quantity Change / % Price Change. This formula allows us to communicate to our client if their product or service is sensitive to price oscillations, which helps set context for pricing parameters.
• Demand Elasticity Report Considering different scenarios, including promotions, marketing, and sales, we assemble our findings into a custom report that displays potential profitability of price points.

Price to Succeed in the Competitive Market

There’s a lot of risk associated with pricing. ROP’s decisive approach to demand elasticity analysis and price setting survey provides businesses with the strategic resources. Such insights in the form of analytical assets help businesses to mitigate the risk, increase profitability, reach more consumers, and create pricing strategies. For market research and conducting market research surveys, contact the specialists at Research Optimus.