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## Price elasticity is good, but it is not enough

## Price elasticity is good, but it is not enough

March 9, 2023

March 9, 2023

Asking the question of promotions is fundamentally related to **price elasticity**.

You want to plot the demand variation as the price increases and then observe the curve's inflection point, i.e., where demand stops increasing while the price increases.

It is more evident on a graph:

©Differs 2023

Looking at the variation of the demand, we observe from left to right a fast growth which slows down to finish by stagnating. So the same sneaker at 50% off will have a higher volume than at 10%. The discount at 30% is the closest to our inflection point, which means this price balanced high price with solid confidence that I could keep a high volume.

Nevertheless, you may move away from this point either to have i) a more aggressive price in logic to win more market share or to liquidate our stock or ii) to have a higher price to maximize your margin.

You model price sensitivity based on your past data to determine demand variation. It is a complex equation as the variation in demand for each product depends on many variables:

the product characteristics itself like size, color, or material;

the past performance, such as its sales volume;

its internal cannibalization;

the price chosen by competitors;

external data such as seasonality, events, and economic environment; for example, Coca-Cola sales skyrocket during Super Bowl;

or even the perception of the price itself by the consumer.

To this complex equation, you add legal constraints; for example, you have to respect a specific percentage of your catalog in promotion in connection with your advertising.

Differs can re-draw this variation of demand each time the environment changes.

Let's take the example of one variable: internal cannibalization. It means that the price elasticity of a product is linked to the price you will decide for your other products. Thus, as soon as you change the price of one of your products, all our price elasticities vary. You can easily imagine the infinity of scenarios. 🤯

To solve the seemingly impossible equation, you must build a sophisticated predictive model that selects the best price for each product regarding your strategy: optimize margin, clear inventory, or gain market share. Given this strategy, your model will calculate millions of possibilities to pick the one that optimizes your plan.

To conclude, price elasticity is ultimately a visual representation to validate that your model behaves well. Still, it is not in itself a tool for price decision-making. You need that your model performs all possibilities, as everything is interconnected.

Written by Alex

Asking the question of promotions is fundamentally related to **price elasticity**.

You want to plot the demand variation as the price increases and then observe the curve's inflection point, i.e., where demand stops increasing while the price increases.

It is more evident on a graph:

©Differs 2023

Looking at the variation of the demand, we observe from left to right a fast growth which slows down to finish by stagnating. So the same sneaker at 50% off will have a higher volume than at 10%. The discount at 30% is the closest to our inflection point, which means this price balanced high price with solid confidence that I could keep a high volume.

Nevertheless, you may move away from this point either to have i) a more aggressive price in logic to win more market share or to liquidate our stock or ii) to have a higher price to maximize your margin.

You model price sensitivity based on your past data to determine demand variation. It is a complex equation as the variation in demand for each product depends on many variables:

the product characteristics itself like size, color, or material;

the past performance, such as its sales volume;

its internal cannibalization;

the price chosen by competitors;

external data such as seasonality, events, and economic environment; for example, Coca-Cola sales skyrocket during Super Bowl;

or even the perception of the price itself by the consumer.

To this complex equation, you add legal constraints; for example, you have to respect a specific percentage of your catalog in promotion in connection with your advertising.

Differs can re-draw this variation of demand each time the environment changes.

Let's take the example of one variable: internal cannibalization. It means that the price elasticity of a product is linked to the price you will decide for your other products. Thus, as soon as you change the price of one of your products, all our price elasticities vary. You can easily imagine the infinity of scenarios. 🤯

To solve the seemingly impossible equation, you must build a sophisticated predictive model that selects the best price for each product regarding your strategy: optimize margin, clear inventory, or gain market share. Given this strategy, your model will calculate millions of possibilities to pick the one that optimizes your plan.

To conclude, price elasticity is ultimately a visual representation to validate that your model behaves well. Still, it is not in itself a tool for price decision-making. You need that your model performs all possibilities, as everything is interconnected.

Written by Alex