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Blog Posts, Competitive Business Intelligence

Price Elasticity: It’s not always about the money

January 28, 2016
ericv Author 5 mins read
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Economic theory teaches that price and demand are inversely related. As a product’s price increases, demand for the item drops. Likewise, a drop in the market price almost always leads to an increase in demand. While economic theories depend on an ‘all things being equal’ assumption, the basic idea of price and demand carries over to the retail sector. In short, when consumers are deciding which product to buy, from which vendor, price is almost always the most important consideration.

Recently, a lot of attention has been given to the idea that shoppers are heavily influenced by their online experience and by the retail environment. It’s certainly important to have a website that functions well and offers a pleasant user experience, and shoppers prefer a store that is clean and easy to navigate, but data still suggests that neither is as important in swaying consumers as low prices.

price elasticity cta

Exceptions: When Price Doesn’t Determine the Purchase

As with most things, there are a few exceptions that don’t always follow the norm. TraQline, The Stevenson Company’s survey of over 200 consumer durable categories and 500,000 consumers annually suggests that when it comes to certain items, other factors are even more important than price. Here are two areas where consumers reported that price isn’t the most important deciding factor.

  1. Smartphones: When it comes to smartphones, price is rarely the deciding factor. In fact, it ranks a distant third behind features and brand loyalty. Consumers place a premium on items that offer the features they want or expect. If they can get those features from a brand they have used in the past, they are likely to be willing to spend more. iPhones present a perfect example of this brand loyalty. Consumers who have used iPhones are almost always willing to pay a premium price to stay with the Apple rather than purchase a less expensive Android model.
  2. Kitchen and Bath Faucets and Improvement Items: In the case of faucets and other items to spruce up the kitchen and bath, consumers report that they first consider appearance, followed by price and features. In addition, shoppers prefer a wide selection from which to choose. This suggests that expending time and resources to provide an attractive display and showroom would be a worthy investment, even if it results in slightly higher prices.

Market Areas Where Price Matters the Most

While price is an important consideration regardless of the product, sometimes it seems like price is all that matters. Here are three examples of items from TraQline that are predominantly affected by price, with other factors, typically a retailer’s product selection, coming in a distant second:

  • Portable Power Tools: 62% of buyers indicate that Price is a top reason for purchasing at a certain retailer. The second top purchase driver is a retailer having a good selection of products as indicated by only one in four consumers.
  • Sports Equipment: Price is one of the top purchase drivers for 64% of consumers, while 24% of buyers say the number two driver is the retailer’s product selection
  • Home Furnishings and Accessories: Consumers list Price as a top reason for buying at a retailer 61% of the time. Once again, a good selection of products comes in second as a purchase driver, at 35%

Buying Factors That Seem to Matter Little

Survey data reveals a few surprises when it comes to what sways shoppers’ decisions. Here are some areas which rank much lower in importance to consumers:

  • Recommendations: Responses indicate that this is the factor with the least influence.
  • Payment Plans/Installment Purchases: This factor ranks very low on all items except for smartphones, which are often packaged as part of a cellular plan.
  • Salespeople: Buyers believe that salespeople do little to affect their purchase decisions. However, issues with locating a salesperson while shopping could be coming into play here.
  • Warranty: A surprisingly low number or buyers listed a good warranty as a deciding factor.

Conclusion: Price is the Leading Purchase Factor

Regardless of the few exceptions, price is still the deciding factor for most purchases. As a retailer, it is critical to have the right data to be able to target the areas that will lead to the best return on investment. By knowing exactly which products break the elasticity curve and why, brands and retailers can focus on the factors that matter most to customers, helping to make informed decisions about where it pays to invest resources and where it’s essential to make every effort to keep prices low.

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