Price Elasticity - The All-Rounder for AI-Controlled Price Optimization

In this blog, we’ll explore the concept of price elasticity, arguably the most important concept when it comes to AI-enabled price optimization.

 

What does price elasticity do?

There is no other approach that works as efficiently, economically and sustainably as price elasticity. What is particularly remarkable is that it not only provides an ideal basis for price differentiation, but can also decisively support your entire pricing process chain, including:

  • The strategic planning of pricing policy;
  • Determining the most competition-relevant assortment components;
  • Detection of products that are particularly important for your customers and therefore price image;
  • Simulating the earning potentials of various strategic approaches to pricing;
  • AI-controlled calculation of market-driven, demand-oriented prices for an entire product range.

 

How is price elasticity determined?

Price elasticity is determined via the relationship between price and sales. At the individual product level, price-sales functions are formed, which measure the prices at which a product was sold and frequency of the sales. From a price-sales function, you can understand how demand for a product changes when the price is changed. Strictly speaking, we are actually analyzing elasticity of demand rather than elasticity of the price.

 

What does price elasticity reveal?

Depending on how elastic the demand for a product is, this provides information about:

  • How sensitive your customers are to a price change,
  • how relevant this product is in your competitive environment, and
  • how you should treat this product within your pricing strategy.

 

How do you use price elasticity to optimize prices?

If the demand for a product is highly elastic, sales will change significantly if you change the price. Customers will react sensitively to a price change for such a product. At the same time, in most cases this will mean that this product is also highly relevant for your competitive environment. For this reason, price optimization should be carried out with particular attention for products that are very price-elastic.

For prices with low elasticity, price changes have a comparatively small effect on sales. This means that your customers tolerate price changes, or may not even notice them at all. It also indicates that the competitive relevance of such products is significantly lower, so these products should be used to operate effectively and sustainably.

After using price elasticity to analyze your assortment offering, you’re able to draw strategic conclusions that will form the basis for AI-controlled price optimization.