Drivers of Price Elasticity: Competitors' Prices

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From the course by University of Virginia

Cost and Economics in Pricing Strategy

156 оценки

University of Virginia

Cost and Economics in Pricing Strategy

156 оценки

Course 1 of 4 in the Specialization Pricing Strategy Optimization

How much should you charge for your products and services? Traditionally, businesses have answered this question based on the cost to produce or provide their goods and services. This course shows you the economic factors behind pricing based on cost and the pros and cons of a cost-based pricing approach. Led by Darden faculty and Boston Consulting Group global pricing experts, the course provides the practical and research-based models and methods you need to set prices that maximize your profits. By the end of this course, you’ll be able to: --Apply knowledge of basic economics to make better pricing decisions --Recognize opportunities for price discrimination—selling the same product at different prices to different buyers—and recommend strategies to maximize sales and profits --Calculate three types of price elasticities to determine the impact of price on demand --Analyze and apply different pricing models -Cost-plus pricing -Marginal cost-plus pricing -Peak-load pricing -Index-based pricing --Evaluate the impact of channel intermediaries and customer lifetime value on pricing

From the lesson

Common Pricing Metrics: Elasticities

This week we'll dive deep into the world of demand modeling. We'll start with a brief overview of regressions--what they are, why they're useful and how to calculate them using Excel. Then you'll get a chance to use regressions as you learn about three types of elasticities--relationships between demand and price or other factors--and the drivers of these elasticities. We'll finish with a price optimization based on demand models--a truly useful method for pricing based on economic factors. By the end of this week, you'll be able to impress your colleagues and friends with your knowledge of mathematical models and how to use them to inform your pricing strategy!

Price Elasticities8:33

Cross-Price Elasticity6:53

Income Elasticity4:32

Drivers of Price Elasticity3:16

Drivers of Price Elasticity: Market Share4:22

Drivers of Price Elasticity: Competitors' Prices4:48

Calculus: Taking a Derivative3:58

Price Optimization Considering Demand8:12

Price Optimization Example4:00

Meet the Instructors

Jean Manuel Izaret
Senior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Thomas Kohler
Associate Director, Pricing
Marketing, Sales & Pricing Practice
Ronald T. Wilcox
NewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Marketing

Step three.

Let's look at how your price elasticity will depends on how the prices

of your competitors are distributed in the marketplace.

We'll start with just one competitor, and

then we'll add more complexity to see how all things works.

Let's imagine that you have only one competitor in the market place.

Your elasticity will really depend and grow and

be the highest right around the price of that particular competitor.

It's actually quite natural.

If you are far above the price of that competitor, some customers prefer you.

They already buy your products.

But as you lower your price, not many will move,

because you are very far above your competitor.

And so, there is no big reason for them to switch to you.

The closer you get to your competitor, the more customers are saying,

wow, I could compare these two.

I might prefer your product versus your competitor's product.

As you switch back and you pass your price points that is the same as your

competitor, this will be when you have the highest elasticity.

And the more you price down, the more your elasticity will be

lowered again because you will have gained all the customers you can.

The customers that stay with your competitors will be the ones that really

prefer your competitor and therefore your elasticity is going to be lower.

This is why usually when you have one play in the market place, the second player

tends to price in a really close proximity to the existing price points.

That's usually the explanation about why the market price point is existing.

Now, let's think about what happens when you add two competitors.

Well, if the competitors are really far from each other,

you're going to have a curve like the one we described here which is.

You're going to have two humps.

You're going to have a first hump of elasticity right where the competitors is

at the highest price points.

As you go down, you're going to have slightly less elasticity,

then it's going to go again back up, then it's going to go again back down.

In such a market, you have to make a choice.

Which of these two competitors are you mostly competing against?

It is most likely that pricing in the middle

is not going to be a enough for you.

You need to pick, essentially which segment and

which competitor you want to compete with, with your particular product.

There are, here, two,

roughly market price points that correspond to two different segments.

Now, what happens when you drive even more complexity in the marketplace?

And you add a lot of different competitors at a range of different price points?

What you'll see there is, of course, when you're outside of the bands

from the different competitors, you will have very low elasticities.

But when you get right smack in the middle of all of the competitor's prices,

you will tend to have a plateau of elasticity that will be the same across.

That's the Constant Elasticity Hypothesis that many economists use.

But it's really helpful for you to understand where that is,

and where your elasticity is going to be lower and higher.

You will want to price right in between the ranges of all these prices.

You do not need to measure the elasticity very carefully.

You know that if you have prices for your competitors that range on a wide range,

it's going to roughly be the same elasticity across the range.

That can be really helpful when you try to determine you optimal price points,

you know you can trust one estimate of the elasticity to

be roughly the same across the different price points.

Now, in every market you have actually all of these three aspects that come together.

The dynamic of any particular industry is going to be a resulting of

what is the demand looking like?

Who are the players?

We just talked about the small player which is a large player.

But you have usually a range of players.

They will all have different elasticities depending on their size.

And then, you have the existing price points, the marketplace, and

different humps of elasticities.

That creates quite a unique environment for

every industry that you need to understand, but once you understand it,

you will be much more capable to define what the right price point is,

depending on the elasticity that you can foresee in the marketplace.

Thank you very much for going through this course,

we'll look forward to another course again.

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