Price elasticity is a tricky topic: Some companies don’t fully understand it, others see it as an abstract concept. For decades now though, one thing has remained true: If you don’t know your price elasticities, you won’t be able to set an optimal price, especially for new products. The problem with price elasticities is that they vary strongly depending on the product and situation. There is never one constant price elasticity. But at least, the methods for measuring it have improved greatly over the years. And yet many companies choose not to measure price elasticities, thereby missing out on considerable profit potential – as history has shown.
When Mercedes launched its A-class in 1997, it planned on offering the car for DM 30,000. After thoroughly analyzing the price elasticities, costs and production capacities, we recommended a price of DM 31,000 – which ultimately generated added profits of DM 150 million per year.
Advice of Simon-Kucher experts:
Establish the importance of price elasticities in your organization. Conduct an elasticity analysis before launching important products or changing prices, and continuously use these results for simulations and to assess business cases.