Analytics Portfolio

Price elasticity measurement and price optimisation

While the effect of prices and price changes is usually measured as part of a business driver analysis, it often makes sense to put special emphasis on this topic, as price is one of the most direct profit levers.

Model impact of price changes

Sales vary in reaction to price changes, but other factors also have an influence. A model is built to extract the influence of price independent of other activities.

Calculate revenue and profit impacts and optimise

Knowing the relationship between price and sales allows to simulate the revenue and, when taking costs into account, profitability implications of price changes and to find the optimal price configuration.

As a good guide for intuition, note that for a single product with elasticity E (taken as positive), the operating margin at the profit optimum is 1/E. This allows for an easy initial assessment of any planned price activity.

Include special price effects

If special price effects, like e.g. price thresholds, are suspected, we strongly recommend to include these in the model. As shown in the graph, in the case of price thresholds, i.e. price points (1.99€ say) above which customers buy significantly lower quantities, the profitability optimum tends to get caught in these points.

Include competition and substitution effects

A differentiated product portfolio allows for higher prices and margins overall, as some of the volume lost when increasing the price of one product will be captured by the other products (blue lines above). Thus, a detailed modelling of these substitution effects is of the essence when optimising across the portfolio.

About me

I am a consultant and project manager in marketing and business analytics. Having worked in the area for more than 15 years and having led the Data Science and Analytics teams at IRI Germany from 2009 to 2016, I am now again working as an independent consultant focusing on applications of Big Data and AI in marketing.

Quantitative Consulting

Boris Vaillant - Quantitative Consulting 17

QC 17