By: Benjamin Garden, Vice President, Pricing Analytics
In a Conference Board survey of 51% of CEOs worldwide, inflation was their second-biggest external concern in 2023 (behind only a possible recession). In today’s age of “Big Data”, C-suite executives are eager to use data and analytics to address all of their business challenges – including inflation. While they are certainly overflowing with data, they may not know how to make sense of it and turn it into something actionable.
The best way to use data to address inflation is to use transactional data to estimate the price elasticity of demand; this measures how your customers respond to changes in the price of your product. If you raise the price of a very elastic product, then your customers will respond sensitively and buy far fewer units of it. In contrast, if you raise the price of a highly inelastic product, then your customers will continue to buy it in large quantities, and their spending will not fall drastically.
How can you use elasticities to develop your pricing strategy and overcome inflation? Raising your prices is inevitable in this current inflationary environment, so the key is to selectively increase the prices of your inelastic products while keeping the prices of your elastic products steady. This requires a careful examination of your product portfolio, and it involves assessing the impact of price changes on your customer’s entire basket of purchases. Some product categories may have a combination of elastic and inelastic items, so it is worthwhile to investigate them individually and find the specific basket that offers the most profitable opportunity.
Iris Pricing Solutions recently served a major global supplier of alcoholic beverages in its pricing strategy. Using a custom-built Pricing & Promotional Planning Tool (P3TTM), we uncovered a $3 million profit opportunity at one major European retailer. This P3TTM model is now an integral part of the revenue management team’s annual, monthly, and weekly planning process. Using the insights from price elasticities of demand, this model can be used to respond to changing market dynamics.
In conclusion, as CEOs grapple with the uncertainties posed by inflation and a potential recession, the utilization of data-driven strategies emerges as a beacon of hope. By harnessing the power of transactional data to gauge price elasticity of demand, businesses can make informed decisions on price adjustments and navigate the challenges posed by inflation. The success story of Iris Pricing Solutions underscores the effectiveness of such an approach, showcasing the transformative potential of data-driven pricing strategies. In a competitive landscape, the ability to adapt pricing strategies based on concrete insights presents a key advantage, allowing industries to thrive even in the face of economic turbulence. As we move forward in 2023 and beyond, the strategic utilization of data remains pivotal for businesses seeking to secure a resilient and prosperous future.
