Prices, products and customers: elasticity of the price
In our last issue we noted that few companies, and very few among SMEs, consciously and rationally deal with the problem of "pricing policy".
No doubt that the price is the most significant factor influencing the profitability of the business, much more effective than long and "prickly" policies designed to reduce costs.
No doubt about it that defining a pricing strategy is always difficult and sometimes risky. But there is also no doubt about the fact that if a company does not undertake a conscious price policy... prices will be set by customers or distributors (to their own benefit and interests, of course). We previously identified two theoretical areas which need to be considered to consciously manage prices. The first concerns the theory of generation of value that we examined in some detail in the November-December 2011 issue of ItaliaImballaggio, the second the notion of price elasticity, which we will examine below.
Price elasticity - In a simplified but useful way, this is defined as the percentage change in sales volume obtained by varying the price by 1%. The variation is usually negative (decreasing the price, the sales volume increases), but this is not always the case. There are interesting cases of companies that, by increasing prices, communicate to the customers that their product is of high quality and at times this might lead to a retrieval of customers seeking that very quality.
Price elasticity may also be high or low. Suppose it is found that, for a certain product it is -20%. This means that by varying the price by 1%, the sales volume will vary by 20%. It is therefore a very high value, which goes to show how customers are ready to buy the product en masse, or to abandon the same at a very modest price change (1% that is). It is a typical case in which the management must proceed with great caution when adjusting prices, because the elasticity analysis indicates that the market is extremely reactive.
Conversely, an elasticity close to zero tells us that demand is "rigid", that customers are willing - or forced as in the case of fuel - to buy at gradually increasing prices. In this case, a shrewd management will practice a policy of increasing sales prices accompanied by measures of specific marketing (a careful segmentation and diversification of components, such as packaging and distribution), aimed at making customers aware of the quality of what they are buying.
Price elasticity is influenced by many factors. We cite two very important ones to understand how this is an effective tool for analysis, albeit one that is not easy to handle.
The first is constituted by the fact that the elasticity is not constant along the entire price curve; and the second is that the reactions of the competition, direct and functional, must always be carefully considered. We conclude with a note of optimism: in spite of "grim" language used to treat these issues, the practical realization of a project of analysis is often within reach of SMEs. Semi-empirical methods exist that, after appropriate training, can become part of the internal knowhow of many SMEs. Not easy by any means, but those that succeed learn to move on their markets with the ease and elegance of leopards in a forest.
