The market is a fickle mistress. She comes by and looks at your wares, examining them closely. One day she likes your prices, the next day she won’t even come to your store. Finding the perfect price to sell the most of your products can be tricky. Experimentation is key when it comes to maximizing your conversions and revenue. You cannot pick a number out of thin air, and catch the market’s attention. You need to find out exactly what your price should be. Price elasticity is the relationship between prices and conversion rates. In order to be able to effectively utilize this idea, you need to know exactly what it is, how it varies, and what can influence it. The market will always be fickle, but she doesn’t need to be mysterious.
What is Price Elasticity?
When a price is calculated, there are a number of factors that need to go into that number. Labor costs, overhead, materials, and a dozen other numbers need to be processed. If the final price is too high, no one will buy it. If it’s too low, the company will go out of business. The ideal price isn’t one number, but rather a range of numbers. In this range of prices, you are guaranteed to sell enough product to support your business. However, if you sell it for 10% less, you’ll sell more units. If you sell for 10% more, you’ll make more money, but sell fewer units. That is price elasticity.
In certain circumstances, it is possible to sell few units and make a higher profit. This is not a case you can stumble on by accident. You will need to experiment with products and sales. Raising a price 10% or 20% might lower your sales, but it is possible to increase your overall revenue. What you need to understand is which category of price elasticity your product falls into. Not all products are the same, and not all elastics stretch as far.
Elasticity is All About Change
Not all products have the same elasticity. There are actually 5 classes of elasticity, each with its own types of products. These range from Perfectly elastic to Perfectly inelastic. To figure out which class your product is in, use the following guidelines.
Perfectly Elastic: These products are ready to change in demand as soon as the wind changes. Even a slight drop in price will influence how many sales you will make. The opposite is also true, so a slight increase will cause sales to plummet. Items such as these are commodities, with very little difference between competing products.
Relatively elastic: Not quite as elastic as above, but still very responsive to price changes. These are things that are staples to modern life. There are a few differences between these products and Perfectly elastic ones. Food stuff such as beef and vegetables can fall under this category. Everything is essentially the same, but there are distinguishing differences in substance and quality.
Unit Elasticity: This is an interesting exchange. No matter what happens to the price, the demand will fluctuate accordingly. If the price goes up 15%, the demand will fall 15%.
Relatively Inelastic: These products can have a large change in price, either an increase, or decrease, but demand will remain largely unchanged. A great example of this is gasoline. No matter how much the price fluctuates, people will continue to buy it.
Perfectly Inelastic: This is unlikely. This is a monopoly, where people have no other choice but to get the product from this source.
Price Isn’t Everything
There are several other factors that influence the elasticity of price. No one is alone in the market, that is a monopoly. However, if there are only a handful of competitors in your field, then your demand may not be as sensitive to changes. Likewise, if you are one of a few dozen sources for this type of product, your demand will be very sensitive to even the smallest increases in price. As with anything, information is key. Don’t be afraid to experiment with your products and your prices.