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Zhi Finance » Why is it important for suppliers to understand the price elasticity of their merchandise?

Why is it important for suppliers to understand the price elasticity of their merchandise?

It is important for suppliers to understand the price elasticity of their merchandise to not only help improve the return on investment for merchandise promotions, but also to help with pricing decisions when working with retailers, helping them to analyze whether they should bear the loss of ongoing price reductions and promotional costs that may be only to the retailer’s benefit.

Typically, higher price elasticity may occur because of the following factors.

  1. low product differentiation, high similarity, and high substitutability. These products have high price elasticity in price promotions because they lack product characteristics and are easily substituted by other product promotions.
  2. High frequency of product purchase, high price transparency, easy to compare, strong consumer price awareness, or in the end market, distributors and retailers often have price competition.
  3. Weak consumer risk awareness. For example, some long shelf life, does not affect the health of everyday products, due to time to reduce prices, because the quality of goods did not go wrong, and can be used by consumers, but also easier to cause consumers to buy.
  4. Consumers lack product knowledge and do not have the ability to objectively judge the product. Information asymmetry, often causing inequality between the status of the buyer and seller. If consumers have sufficient knowledge and ability to identify a certain type of goods, they will be more sensible about the purchase of goods, and will not be impulsive to purchase a large number of such goods because of the occasional promotion of goods.
  5. The person who makes the purchase decision pays for the product himself. Perhaps most people will have experienced that when you buy a certain product on behalf of others, you will often not dare to choose other types and purchase quantities without permission because of the principal’s shopping requirements, so when your purchase decision is made by others, then it is difficult to exist the purchase impulse effect.
  6. Small market share. The study found that the market share of small products, its market elasticity is relatively large.

Price elasticity ranges from near zero (life-saving drugs) to near infinity (e.g., a slight change in the price of ordinary goods customers will switch to other goods). Many branded goods are often blindly selected by retailers as promotional items, and such promotions often lack long-term considerations, such as brand loyalty, brand health image, dynamics of the category, etc. In fact, price promotions alone for different categories and attributes may not deliver the best return on investment. Other in-store promotions such as display stacks, coupons, trial items and other activities can sometimes boost sales. The key to adopting a promotional approach is to evaluate the relative contribution of each factor in the marketing mix.

For suppliers, an understanding of price elasticity not only helps in developing pricing tactics, but also helps in positioning the item in the category and increasing its competitiveness.

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