Know-How Exchange : Research/Metrics

straight question, deserves a straight answer: no, the PED calculation remains the same: 'buy 1 get 1 free' would be treated as a 50% price discount. Of course consumer reaction may be different to the bundled promotion than to a regular discount, which is why it is worthwhile to calculate the sales elasticity for this case

There are basically 3 ways to address your questions:

1) run the bundled promotion and calculate the sales increase. The elasticity is nothing else but the % change in sales for a % chance in price (-50% in your example). This should be straightforward in the short run (when the promotion is being run). To look at the long run, you should also track the next weeks' sales, which can either go down (people accelerated their purchases) or stay the same (all extra sales were incremental)

2) run an experiment in 1 store to see what happens. Calculate as before and then decide to scale it up

3) look up the literature on the price elasiticity in bundled promotions (Google Scholar should help you out). While they will not cover the exact category, these papers should give you a benchmark

Cheers

I'm not an economist, so in all honesty, I don't know for sure but my gut is to say no, that it's not possible to figure out the price elasticity.

However, when it comes to buying, the drive to buy is often disconnected from price. Here's my humble two cents' worth on cost, on price, and on one of the elements that can sometimes give price elasticity its twang.

Much of the price elasticity and plasticity of an item depends on its desirability, on its seasonality, and on
how sales-worthy it is in that store, at that time, on that day or in that ZIP code compared with similar items in similar stores.

Here, brand perception of the specific store comes solidly into play, especially when the individual buyer weighs the sticker price of the item in front of them against the effort it would take to go across town to a comparable store to buy the same item, which may (or may not) offer the same degree of value, and, it must be said, ditto on the degree of pride of ownership, which is one thing that marketers and economists often forget about.

There is risk aversion (on the part of the buyer) inherently built into that "stay and buy here or go and buy across town" calculation.

Often, the "buying here or there" response is driven not by price, but by the perception of the buyer of the brand integrity of the store they're standing in, AND by that measure of the store across town.

Sometimes, the effort or risk involved to obtain and
gain ownership of the item adds to its perceived value, regardless of its cost. It's this response that fuels the demand for diamonds, gold, luxury Italian sports cars, and so on.

Similarly, other aspects of price elasticity and plasticity also depend on the marketability of an item (meaning, the store owner's KNOWING that an item will sell at a specific price and that it will either sell well, or that it will sell out).

When a retailer knows this information he or she can use it to their advantage when agreeing payment terms with wholesalers.

Let's say you're a wholesaler and I come to you and I order 1,000 cases of widgets at 25 widgets per case.

Let's also say I give you a rock solid guarantee that within 20 days, I'll need 3,000 cases and that if I default on this order, I'll pay you in full REGARDLESS of an order being placed or not.

How does that sound? Were I in your boots, I'd say it was a pretty sweet deal.

Now, if another reseller buys just 10 cases of the same widget on the same day and comes back six months later and orders just 5 cases, but in the meanwhile, I've placed my promised order of 3,000 cases AND come back for another 5,000 cases, who are you, as a wholesaler, likely to give better net terms to?

Me, or the smaller buyer?

Think about that for a second.

Now, imagine a national resale store doing this on a grand scale: they buy in huge quantity, they mark up merchandise by 100 percent while other resellers mark up the same goods at 400 percent.

They deeply discount their sales items and because of this they can offer huge ten for the price of five deals that undercut other resellers, and because of this they can dictate terms of net 60 or net 90 while other resellers can only expect net 30 terms.

This means they can order merchandise, stock and display it, price it below their competitors prices, sell out, reorder, and sell again, even at the same or slightly lower margins and STILL make a huge profit and they can do all this BEFORE their initial wholesale order comes due for payment.

It's called inventory turn. Wal-Mart are masters at it.

Even if Wal-Mart only buy a few cases in varying parts of the country, if they're buying from the same national wholesaler, they can still place one huge order that's then split across and delivered to multiple stores in multiple states where they can then split test and adjust elements of pricing within clusters (according to ZIP code, net household income in that area, and so on) and they can do this and continually track, adjust, and monitor their purchasing, pricing, and overhead costs, thereby allowing them to take advantage of the same generous net terms.

I hope this helps.

Good luck.

Gary Bloomer
Wilmington, DE, USA

We have conducted extensive price elasticity studies and promotion effectiveness analyses in a number of consumer product categories over the years, and the way you've laid this out, it is not possible to determine the price elasticity without first understanding promotion dynamics and effectiveness.

When you have a promotion price -- something less than regular price -- there are a number of factors interacting with each other.

Of course there is the pricing, and the whole issue of whether most purchases are by regular customers stocking up because the price is lower. You might have sold the same number of units over time (at full price) if you hadn't run the promotion. (This is often referred to as "eating your lunch for breakfast.")

Second, there's the advertising effect. Items advertised as being "on sale" will appeal to those who shop the ads, and you may have some share-swapping effect. Some customers bought the product at the store with the special pricing instead of at their regular store.

Third, there's the issue of competitive activity. What are competitors doing while you are promoting, or even before? Is it possible that a competitor had a better deal a week earlier and lots of consumers are out of the market because they stocked up on the competitive product last week?

Fourth, there's the display effect. If your item was in a special location in addition to its regular shelf location in the retail store, some people may have picked the item up on impulse, regardless of the price. (There's a whole body of research that says that in many categories the display effect is most critical factor -- more than price or advertising.)

Then there's the whole issue of whether the product might have sold more, but was out of stock for part of the promotion period because demand was greater than anticipated.

There are a few more things to consider, but I think you get the idea. You can ASSUME that the only variable was price and calculate price elasticity, but rarely would that assumption hold true in the real world.

True price elasticity is best measured over a long period of time, not just during a short-term promotion period. If the question is really about promotion effectiveness, then price is just one of the variables to consider -- and not usually the most important one.