Determine Price Sensitivity If you’re thinking about a price change and are very concerned how your customers may react, you can run through this exercise and generate an estimate of their price sensitivity. A higher price typically means lower volume. Yet you may generate more total revenue and/or profit with fewer units at the higher price; it depends on how sensitive your customers are to price fluctuations. If they’re extremely sensitive, you may be better off at a much lower price with substantially greater volume. Estimate how sensitive your customers are to fluctuations – it will help you determine the right price and volume combination. More importantly, you can estimate how a price change can impact your revenue. Price Elasticity. Think “price sensitivity” – how quickly will your customers defect if you raise your price? If you raise your price 1% and many of your customers defect, they’re extremely sensitive.
“Price elasticity” is a difficult value to calculate unless you have plenty of price and volume data and an economist on staff. However, a general estimate is better than nothing; this exercise will help your team generate the estimate together.
Summary EXERCISE SUMMARY
When to Address
If you’re working on your pricing strategy and need to understand how price changes will affect your revenue and profit
Who Should Participate
Business leaders: company founders, owners, presidents and vice presidents Marketing and sales leaders Product managers Channel managers
Where to Use the Results Why it’s Important
Use them to influence your final price decision and as a benchmark for future price evaluations.
Many companies haven’t estimated price elasticity and haven’t determined the price that will deliver the maximum revenue and profit.
Pricing Determine Price Sensitivity
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