A marketers explanation of the ‘Price Elasticity of Demand’, and its implications.

A marketers explanation of the ‘Price Elasticity of Demand’, and its implications.

Sep 15, 2021 | Analytics, Category, retail

 

‘Elasticity’ is something most of us did in economics 101. Why have we not used it more than the evidence of my eyes would suggest?

The price elasticity of demand is usually defined as the relationship between changes in price and the resulting changes in volumes sold.

Elasticity = % change in quantity/ % change in price.

For example, assume you raise the price of a widget from $100 to $120, which causes the volumes sold to go from 1,000 in each period to 900. The price increase is 20%, the volume decrease is 10%. Elasticity is therefore 10/20, or 0.5.

It is the absolute value of the metric that is important, the distance from zero, rather than if it is positive or negative. If the number of widgets sold had been 750 after the price increase, the elasticity would have been 1.25. (25/20) a more elastic response to the price increase than the 10% drop in the example.

It is crucial for marketers to understand the elasticity of their products if they are to optimise the price/volume relationship, as price is the most sensitive driver of profitability.

The challenge is that there are a whole bunch of psychological and competitive factors that weigh into the equation in a consumers mind, simply not accommodated by the simplistic price/volume curve we all saw in that economics 101 class.

You can speculate all you like about price elasticity, but the only way you will know is to evaluate it in the marketplace.

We are currently (September) in the season where there is a glut of avocadoes available. My local Coles store seems to be altering the prices daily, anywhere between 1.00 each to 1.69 each. It is probably that they are partly reflecting the deliveries into their distribution centres, but the data collected at the checkouts will give them a detailed view of the volumes at differing prices, and even the time of day. This data is invaluable market intelligence that can be used to optimise their profitability for the product category.

Given that cost is a lousy starting point upon which to base price, it may be that this Coles is leaving money on the table by reducing the prices below $1.49.

How many less avocadoes would be sold at $1.49 than at $1.10?

Someone in their data analysis system, somewhere, has the data to make this call with close to absolute certainty as it applies to this store.

Theoretical price research, outside of the real purchasing decision making, is at best inaccurate, at worst, misleading. A/B testing used to be a challenge, but increasingly we can use digital tools to interrogate the data that digital capture, in this case the checkout, that has become available to us.

Companies like Amazon with vast amounts of data are so good at it that they know the price elasticity of individuals in particular product categories. They display prices accordingly every time you search, in order to maximise the chance you will buy at the highest price they can charge, based on your history.  ‘Dynamic pricing’ is the now common term being used to describe this process.

Once you understand the elasticity of the price/volume profile of your product, you are in a better position to maximise profitability, while delivering value to your customers.

Header cartoon credit: Scott Adams. Not sure the analogy is a great one, but the idea was amusing.

 

 

Rethinking the construction of retail strategy

Rethinking the construction of retail strategy

Jul 11, 2019 | Change, retail, Strategy

 

As Bricks and Mortar stores, (B&M) except those run by on line monsters, Apple, Amazon, and a few others flounder, retail needs to rethink itself.

Easy to say, hard to do.

It is hugely ironic that the most successful B&M retailer on the planet, by the retail industry’s own measure, margin/square foot, is now Apple, and I suspect Amazon is not too far behind. 

Rent is the 3rd biggest cost in most retailers P&L, after staff and Inventory. Rent is in effect the  cost of distribution, or the major part of it, and is always raised as a cost that on line retailers do not have, which is their competitive advantage, along with convenience.

Of course, on line retailers do have distribution costs, increasingly absorbed in the price paid by the customer, or cunningly disguised as some form of membership, as with the sensationally successful Amazon Prime.

Distribution is the battle ground of retail. Reshaping the traditional retail model by cutting out the retail store, and delivering by some combination of post/courier/pigeon.  However, B&M retailers have gutted themselves by electing, on mass, to walk away from their primary competitive advantage: stores, and the relationships they can create and nurture with customers.

The competitive advantage of a store is that a customer can go in, look at, touch, try on the merchandise, and talk to a person, who hopefully has some level of product knowledge, and is able to build a rapport. This is a hugely potent competitive advantage if used well, but instead of using it, most retailers are cutting back their investment in stores, staff, and product knowledge, cowed by the spectre of on line price competition.

It is like a golfer, who when comfortably ahead, stops using his driver because his competitor is better at using his putter, so he uses his putter to compete, on what becomes uneven terms.

Stupid.

If retailers looked at rent, inventory carrying costs, and most importantly the cost of customer facing staff,  as the cost of customer acquisition and retention, they may make startlingly different strategic choices. They become items in their marketing budget, which can be subject to creative experimentation, and customer service and retention  optimisation, rather than a cost to be minimised.

I suggest that this seemingly  simple change in mindset, would lead to a huge change in their capacity to compete and succeed.

Bring out the driver again lads, stop playing the whole game with your putters!

 

 

 

What does marketing to Supermarkets and Pharmaceutical research have in common?

What does marketing to Supermarkets and Pharmaceutical research have in common?

Mar 13, 2019 | Branding, Governance, Marketing, retail

Quantifying the ROI of marketing investments remains the single most challenging task of marketers. While marketing costs  remain being seen as a variable expense, stuck in the monthly P&L , it will remain hostage to the whims of expediency, corporate politics, and short term thinking. The real KPI of marketing investment should be the sustainable margin delivered over a considerable time, as you would with an investment in machinery.

The obvious problem is that you can measure the output and productivity improvements associated with a piece of machinery, the numbers become available with use, although, they are all in the past. Marketing investment is all about influencing the future, and measurement, even with the benefit of hindsight is very hard, and useful only as a learning tool.

Is there something we marketers can learn from elsewhere?

The  Kaplan Meier curve is a basic concept used all the time by medical and pharmaceutical researchers. For example, if they are testing a new drug for say, patients with diagnosed terminal prostate cancer, you plot on a daily curve the lifespan of those on the test drug, and those on the placebo.

Assuming there are 100 patients in the trial, at day 1, all 100 are alive, then  you plot the numbers who remain alive daily with, and without the drug. If the plot line of those with the drug goes above the line of those without, you can imply the outcome of longer life, and you have some numbers to support the conclusion. If the line of those on the drug dips below the placebo line, you are killing patients. Lines that stay together indicate the drug has no impact.

Simple idea, widely used in medical research.

For years I have watched suppliers to supermarkets being screwed by those supermarkets, and increasingly allocating advertising funds aimed at brand building , which delivers margins over time to the brand owners, and indirectly despite the protestations to the contrary, to the retailers. This reallocation of advertising to working capital and margin via in store promotional activities, and supermarket profitability, at the expense of advertising, has been a huge mistake.

It has seen the demise of some great brands. To be fair however, consumers have benefitted by cheaper prices, at the expense of choice.

A few weeks ago,  the recently merged businesses of Kraft and Heinz, announced a disastrous profit result. This came about as progressively brand advertising that gave consumers confidence in the  brands has been redirected to price promotion that is the primary competitive tool of supermarkets. Meanwhile, those  same retailers have introduced house brands that look very similar, and that trade off the value proposition developed by Heinz and Kraft over many years.

The same thing has happened in Australia, perhaps more so given the concentration of supermarket retailing.

I was around as a junior product manager in the early  days of Meadow Lea brand building, at what was then Vegetable Oils Pty Ltd, a long gone business, swallowed up by corporate stupidity.

 ‘You ought to be congratulated’ is one of the great propositions of Australian brand building. In a hugely crowded margarine market, Meadow Lea held at its height, a 23% percent market share at premium prices, four times that of its closest rival. This was a direct outcome of a good product, great advertising, and a brand that delivered.

I had a look in a supermarket yesterday, and had trouble finding anything labelled Meadow Lea.

What happened?

Retailer power happened, combined with the lack of  understanding of the power of great brand building consumer propositions by retailers. Meadow Lea was squeezed by retailers for more and more promotional dollars that ended up  being funded by reductions in the brand advertising and building activity, with the end result that the brand in effect no longer exists.

It has become nothing more than a label!

I wonder where the  next market building initiative will come from?

Certainly not from the manufacturers, as they know that immediately they create a market the retailers will undermine it with cheap versions, so there is no value in the risks involved in the innovation necessary, and no reward.

Back to where I started, and I do not have the data for this, but I bet that applying a Kaplan Meier analysis to  the delivered margin from Meadow Lea over time, both to the now owners of the brand, and the retailers, would show that the allocation of brand activity to the low prices demanded by retailers had hurt everybody concerned, including consumers.

Image credit: Wikipedia

 

 

Is Amazon at it again, remaking retail in their own image.

Is Amazon at it again, remaking retail in their own image.

Mar 11, 2019 | Innovation, retail, Strategy

Amazon launched their ‘Dash’ button in 2015 in an experiment with Procter and Gambles Tide detergent, the monster of the category in North America. It is a one touch, one product order and delivery system that has succeeded, expanding to a range of 350 Sku’s in the middle of 2017 (latest numbers I could find)

Now Amazon  has withdrawn the Dash button from ‘service’. I guess the role played by the buttons is being overtaken by voice operated loyalty systems, largely Amazon Prime and Alexa, and on top, they were recently declared illegal in Germany for breaching consumer laws.

Killing off a successful service that was still growing at a very fast rate, but that was being replaced by a newer set of technologies is a logical move, but one only a company with the power of Amazon, who also owned the replacing technology space, would contemplate.

Clearly, Amazon  is now a technology and data business first, and being a retailer, where they started, is a very long second. 

They know more about many of us, our habits, preferences, and foibles than we know ourselves, and have that knowledge stored for analysis, retrieval and action by emerging AI functionality. They also know that we are not looking for a wide range of choice, despite what we say, that just confuses us and actually reduces purchase. We instead want certainty. 

Put all that together with the now 472 FMCG Distribution locations (450 in the US) Amazon has via the purchase of Whole Foods,  and you have the potential for Amazon to anticipate what we might buy, shape it by adding usage tips, recipes, and thoughtful additions, all in a box that delivers to your door. It combines operational and logistic efficiencies with maximum margin to Amazon while wowing customers.  

Suddenly the withdrawal of the dash button makes more sense than ever, as in the supply chain of the very near future, it would have been just another point of friction.

Meanwhile, Coles and Woolies are tarting up their Deli sections in stores my now three year old granddaughter will probably never visit to do her shopping as an adult.

 

 

 

 

 

 

 

Where is the gap to be filled in retail?

Where is the gap to be filled in retail?

Mar 8, 2019 | Customers, Marketing, retail

The range of retail format options is huge and multifaceted.

At one end of the continuum you have pure on-line retailers,  to full service bricks and mortar retail at the other, and everything in between.

It is the ‘everything in between’ where the development is happening, and the opportunity lies.

Apple ‘Zigged’ when everyone else was ‘Zagging’ and spent a decade and billions of dollars opening retail stores. While they are now the most successful retailer in the world on a turnover/square foot basis, the reason was more about brand building over the long term than just retail revenue. Brilliant.

Amazon has been the catalyst to the on-line gold-rush, but you have to ask yourself are they are retailer, or a data business first? They started as a retailer, simply using a different channel, but to enhance their position they have evolved into a data company that uses on line channels to sell and deliver product.  With Amazon Go, they have combined bricks and mortar retail with their data capabilities, which can only become more important as they evolve their purchase of Whole Foods.

Meanwhile, B&M retail is either hunkering down, cutting costs, and generally moaning about how on-line sales are cutting their margins, or investing in their businesses, some by increasing service levels, others by setting about ‘digitising’ to compete.

Any way you look at it, the gap is in the middle.

That gap will be rapidly filled by deploying digital tools already available, or in development, based it seems on two rapidly converging technologies:

  • Facial recognition, powered by our on line profiles and pattern recognition software, and
  • Location definition powered by our devices and GPS.

Amazon Go is able to recognise and record stock movements from the shelf to your shopping basket, and back, as it happens, and debit your card with the purchase. It is a small step to use facial recognition as you approach a store, or product category while inside the store, and match that with your previous purchase patterns to make exclusive, and immediate offers to you tailored to your history.   You do not need to be Amazon go to deploy the second part of that scenario, you just need the facial recognition and location data connected to your purchase history, and perhaps purchase intent identified by browsing history.

This combination of location, facial recognition, purchase history and browsing patterns will be the game changer in the current gap.

The question to be answered is how we as members of the public and consumers feel about this complete exposure of what has been to date private. On the one hand we seem to want the convenience and immediacy it can deliver, but on the other, remain very wary of offering up our privacy to the unknown forces that can tap the data in ways never expected or sanctioned.

However, I suspect the horse has bolted, and the gap will rapidly  be filled!

Photo credit: Kristian Dye via Flikr

When price becomes almost irrelevant.

When price becomes almost irrelevant.

Nov 1, 2018 | Marketing, retail, Sales

Price is just an arbitrary scale for the ‘unquantifiables’ which has only two functions:

  • it is a reflection of the amount someone is prepared to sell something for.
  • It is a relative measure, helping you to make purchase choices by giving you and the seller a constant scale and language to reach an agreed point of exchange.

How often do you choose a restaurant because it is the cheapest?

You might decide to go Italian, or Chinese, then decide which one. You decide on a variety of factors, parking, quality of the food and service, are they licenced, who is it that is going with you, is it a special occasion or just a meal. The conversation in your mind goes on and on, often almost unnoticed.

Why is it then that we tend to make major commercial decisions on price?

Almost every  time I am involved with a client in a commercial purchase decision, one party or another uses price as a major point of choice and often leverage

Why?

Few people buy purely on price, and often you would not want them as a customer anyway, so why let them hammer you down?

Think about the value, what it is that the product or service is delivering, how it solves a problem, how it reflects the image to be projected,  how it fits in with everything else going on.

Price is just a means to come to a point where the value can be exchanged.

Value is what is important, price is just a way of converting value to a common language.

Next time you  are being belted about how high your prices are, agree, they are high,  but they deserve to be because of the value delivered.

Just talk about the value.

Talk persuasively about value, and price will become a result, not a driver of the decision.

The real challenge is to figure out how to do this in a situation where the other party has all the power.  A small supplier selling to one of the Australian supermarket gorillas has little leverage, the definitions of ‘Value’ will never be easily reconciled, so the hard choice is to walk away, and deliver value to  customers outside the supermarket system.

Header credit allanandallen.com