Price elasticity of demand is not a pricing strategy, it is an attribute that all product prices embody – only the level of elasticity (or inelasticity) changes. Understanding the price elasticity of demand for your products will help you make better e-commerce pricing decisions.
Quick Overview: What is Price Elasticity of Demand in E-Commerce?
Let’s start with a quick rundown of the basics. In short, price elasticity of demand measures how much
Let’s first look at some examples of both recent mobile phone number data categories to better understand the difference.
Products with extremely elastic prices tend to be luxury or nice-to-have products where the consumer has many choices and where there are many alternatives at the time of purchase, such as:
- Consumer Electronics : Most types of consumer electronics have multiple options at different price points. If you sell wireless headphones and raise your prices by 20%, you’ll likely see a significant drop in both demand and revenue.
- Clothing. If you sell plain white t-shirts, sweaters, or jeans, consumers have a huge number of substitution options, meaning that in many cases, demand for your white t-shirt is largely dependent on price. Conversely, content map as the initial step of a pillar page people tend to pay “extra” for luxury items with added perceived value.
Goods with highly inelastic prices are typically necessities for which there are no substitutes, monopolized goods, or goods with extremely intense competition or low availability, such as:
- Insulin. If a person needs a life-saving drug like insulin, they will have to buy it, regardless of the price. Changes in price will have little effect on demand (until it becomes available).
- Toothpaste. Most people agree that toothpaste is necessary to keep teeth clean. If the price fluctuated slightly, most consumers would still likely buy it because of its usefulness.
Price Monitoring for Retailers: Manual Price taiwan data Monitoring and Automatic Price Monitoring
The benefits of pricing based on price elasticity of demand and the risks of not understanding it
Given All of the. Above, It Is Clear. That Elastic and Inelastic Products Should Be Treated Differently When It Comes to Pricing. That Is. Why. Understanding the. Concept of. Price Elasticity of Demand Will Help You Make Better and More. Profitable. Pricing. Decisions – Regardless of. Whether. Your. Products Are Elastic or Inelastic.
Some of the advantages of pricing according to the price elasticity of demand of a product include:
- Understanding your customer behavior to inform your pricing strategy: Anticipating how consumers will respond to price changes can not only help reduce the risks associated with them, but also reduce the uncertainty in pricing decisions.
- More accurate sales forecasting : Knowing the optimal price for a product allows you to forecast your sales and even set prices for the future.
- Increased profit margins: If you sell inelastic products, you may have more flexibility when it comes to raising prices because raising prices will not discourage customers. If you sell elastic products, you can increase demand by offering discounts and see an increase in revenue.
In turn, failure to understand the impact of price elasticity of demand can cause great harm to your business.
Competitive Pricing Strategy, What Prices to Set for Products
Debunking 5 Common Myths About Price Elasticity
Myth #1: Taking into account the price elasticity of demand always leads to lower prices
Probably the most common misconception is that pricing according to the price elasticity of demand for your products will always result in lower prices.
The good news is that you don’t have to be the cheapest in the market to benefit from pricing based on price elasticity of demand.
Myth #2: The more you lower your prices
Lowering the price of a product often leads to increased demand, but not always. There are a few (surprisingly common) scenarios in which this logic fails miserably:
So what does it really mean to be in a “competitive” market?
Scenario 1: When most e-commerce companies say their market is competitive, they simply mean that there are other stores selling more or less similar products, and that shoppers have a variety of options to choose from.
Scenario 2: When we say the market is competitive, we mean you’re selling the latest iPhone and you’re competing for profits with everyone else who’s selling the exact same phone at the exact same price. In this case, you simply can’t change the price without immediately seeing a change in demand.
Myth #5: It’s not worth the time to optimize all prices based on price elasticity of demand
Having hundreds or thousands of products in your catalog can seem overwhelming to manage and price. In fact, it usually takes so much time to sort through that much data that it’s almost impossible.
Conclusion: Price elasticity-based pricing is the best choice for (almost) all e-commerce businesses.
Hopefully, by now you have a good understanding of why it is important to understand the price elasticity of demand (or inelasticity) of all your products and how this should impact your pricing strategy.