Smokers know the truth. They’ll pay $2 for a pack, $5 or $10. It doesn’t really matter what the price is to a smoker. A pack of cigarettes is the definition of an inelastic product. Raise or lower prices and your sales barely move up or down.
We’d all like our product to be as inelastic as cigarettes. Then we can raise prices as much as we want. Of course, if the product is is not at all like cigarettes (i.e. elastic) a small drop in price could increase sales significantly. Either way you make more money by understanding the relationship between each consumer and your product.
Here are four tests for price elasticity.
- No substitutes
- If you have exclusive content that the consumer can’t get anywhere else he’ll pay what you ask.
- If you have a car, there is no alternative but to buy gas to fill up the car.
- If you depend on the train to get to work, the train company can increase prices with little fall in demand.
- Little competition
- If a firm has monopoly power then it is able to charge higher prices. For example, prices at highway gas stations tend to be higher, because consumers can’t choose where to buy food, without leaving the highway.
- Type-in traffic indicates little competition.
- Bought infrequently
- If you buy a good infrequently, such as a certain type of content, you are less likely to be sensitive to price.
- How frequently is this buyer purchasing similar content?
- Small percentage of income
- If the content is a small percentage of income, you may be less concerned about price.
- What is the relationship between the buyer’s income and your product?
These four tests give you an idea of how each consumer will perceive a change in price differently. The goal is to understand each interaction and use the knowledge to adjust prices to maximize revenue.
Thanks to EH