Question

Topic: Customer Behavior

Price-volume Relationship

Posted by Anonymous on 10/3/2006 at 10:43 PM ET 250 Points
Hi

I am looking for general model/equation that can give me the Price-Volume or Price-Customer Relationship. For example, i would like to reduce the product price by 10% in my supermarket, how many more customers i should expect after this drop in my price as a Sale 10% Off.

Any general mode would work, or if there is no general model, then please give me a reference of any category wise model, for example model for produce or electronics etc

Best Regards

Zeeshan
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RESPONSES

  • Posted by Harry Hallman on 10/4/2006 at 9:02 AM Member
    If there was a reliable model/equation for this no supermarket would have to advertise again. I think there is not, but I am not in that business. I do however, have a good deal of retail experience and I know that cutting the price is not always the answer.

    If you must do this I suggest you test and create your own model. Test it on several products and see what happens.

    Perhaps you should look to better service, or some kind of incentive program such as frequent buyer points. The points are then used for redemption of items you do not sell. Gift certificates to restaurants and such.
  • Posted by Peter (henna gaijin) on 10/4/2006 at 12:08 PM Accepted
    The problem is that no on can answer your question with an equation that will work for your product. This is because the amount of change varies by product, and we don't know your product and its relationship to the market.

    What you are looking for requires knowing the Price Elasticity of Demand for a product. This economic theory basically determines how much a product's sales will change if you change the price.

    In general, in products that are essential to consumers, such as the basic staple foods of the area, they are inelastic. If you raise the price of rice by 10% in China (where rice is a staple), the Chinese people will still buy rice (but buy less of other things so they can afford the rice) so the sales of rice won't decrease by 10%. But if you raise the price of chicken by 10% in China, the chances are the sales of chicken would decrease by at least 10% or maybe even more as they can easily switch to other meats, or not eat as much meat.

    Check out this web site for some more information:
    https://economics.about.com/cs/micfrohelp/a/priceelasticity.htm . You could perhaps follow the steps they talk about there and run a test of changing the price in one market and possible come up with an estimate of the elasticity of yuor product.

    Or look for this type of information in Economics Textbooks.
  • Posted by kannanveeraiah on 10/5/2006 at 8:14 AM Member
    Dear,

    I don't think there is a definite model which can predict the drop or increase in number of customers with certain percentage of increase or drop in price. There are many factors (target market, - number of potentials and types of customers, their buying habits, the type of product - whether it is a necessity or luxury- etc are involved) and there are many limitations.

    It is generally an accepted economic theory that a drop in price causes the demand to increase and increase in demand causes the price to rise. But this holds good only when all other relevant factors (that influence) remain constant. Unfortunately, to arrive at a firm conclusion and to take such a concrete decision we don't do business in vacuum.

    Even by increasing the price one could increase the sale volume if one positions well the product. Even when the demand is on the increase one may prefer to reduce the price - may be, to gain on the momentum and to prevent, otherwise, a possible competition.

    Of course, you need some inputs to take the decision. Make a marketing survey to find out whether your product is priced high and whether it is worth its price etc.. Get the feedback both from who have purchased your product and who haven't. Then if you find that the feedback tells you that your product is priced high and perceived ultility or value of the product is outweighed by its price certainly you need to reduce the price. Decide on the percentage decrease depending upon what your present mark up permits. When the customers feel that product price is prohibitively high you need to make big reduction to induce the customers to buy.

    But, all these depends on the product and the market.

    Hope, you are able to take a considered view of the situation that you are in.

    Best Wishes,

    kannan
  • Posted by Frank Hurtte on 10/5/2006 at 10:17 AM Member
    Stop......
    Before you cut prices accross the board here are a few things to think about...
    1) most customers do not know the price of everything. They just remember the price of maybe 20 items. For me its, hamburger, steak, my favorite breakfast cerial, almonds, and beer. I base my shopping experience on these few items.
    2) I buy some spices less than once a year. I have no idea what a good price is. I buy them from the store with the best prices on my short list above.
    3) As you make pricing decisions.. think about the top items people buy.. and remember the price of. you may actually want to raise the price of some speciality items.

  • Posted on 10/30/2006 at 7:41 AM Member
    Zusmani

    If the items you are selling are in a standard category or have lots of competition in the grocery/food biz, you can buy IRI or ACNeilsen snapshot data that will allow you to conduct price elasticity analysis. Make sure you filter out seasonality. Conduct a regression analysis with the log of price and volume over a period of time. MSExcel can do this for you quickly(use the addin pack for data analysis). If your coefficient is <-1, and your P value is <-.05 you have a highly elastic product.

    Norm
  • Posted on 9/19/2007 at 6:39 PM Member
    i just joined this site & came across this interesting question. don't know if it's been resolved, but i think i agree with most of the responses here. It's an elasticity question & there is no science to it. A model is by nature a controlled study of variables (ceterus paribus or "all other things constant" in Economics) & that is why Econ prof spend lifetimes collecting & analyzing data & refuting studies. I.e., if someone gave you a model & answered your question with confidence, it is either a spurious model or someone who should be the richest person on the earth in the history of mankind. I would think that it'd be on par with predicting interest rates, stock / bond prices, foreign exchange rates....

    Having said that, I have a model that i think will answer this question :)
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