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Price Elasticity and Optimization

Price elasticity models and Optimum Price and Gap analyses address fundamental issues of pricing strategy. They evaluate how pricing and price positioning of your brand can drive sales and margins to support your pricing decisions at the national or regional level. In addition, our pricing models can identify key consumer price points and price gap thresholds relative to your competition, which impact sales and influence consumer perceptions of product quality and value.

We provide fact-based guidance and simulation tools to anticipate the impact of competitive price changes.

Price elasticity levels, however, are different at different price points. Let us look at the following chart, as an example:

Imagine the price of a car is $1,000,000. Reducing the price of the car by ( r P) from $1,000,000 to $900,000 will, most probably, not result in significant increase in the number of the cars sold ( r V). The price is still “relatively” high.

Let’s look at another extreme now. What if the price of the car was $1,000 and dropped to $900 ( r P2). Would you expect significant increase in the number of the cars sold? Probably not. For the price of $1,000 the majority of the potential buyers had already bought the car.

What if the price reduction, however, was at the range of r P1? As you can see, the price elasticity at this price level allows significant increase in volume ( r V1).

Shortly, “optimum price” is the price point after which price drop by 1% will not allow volume increase by more than 1%.

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