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Price Elasticity and Price Gap Studies |
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Question
What is the best price gap between our product and the category leader? How much change will we see in profit, volume and share due to a price change?
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Challenge
The client wanted to know what the best price position was for their product vs. the category leader. Historically, the client's product was priced about 12% under the category leader's price. However, the category leader had recently implemented a price increase. Our task was to design and provide the analysis so that the client could evaluate the following three pricing options for their product:
- Keep the price the same
- Raise the price to maintain the 12% price gap
- Determine whether or not there is a better price gap that out performs options one and two.
Furthermore, they required a projection of such a price move would trigger.
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Solution
We applied econometric modeling techniques in order to assess the price-volume relation ship for the category at hand. Using the coefficients established through the modeling analysis we built a category price-volume simulator that enabled us to project the volume and profit changes that various pricing changes would likely trigger. In the course of the simulation workshops we found the settings that best fit the client's goals and objectives. We communicated the findings through price gap charts as well as results from simulation analyses.
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Outcome
Our recommendation was to maintain an 8% price gap. The projections showed an 11% profit improvement over the 12% gap with less than a 1.5% volume swing. Using the results of our modeling as well as simulation exercises the client was able to understand the magnitudes of opportunities and risks inherent in that specific pricing decision.
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