Black Friday and Price Elasticity
You may know that I am?NOT?a fan of price elasticity for companies.?We just experienced Black Friday, which provides a wonderful example of the danger of price elasticity.??
Black Friday is the day after Thanksgiving when most people have the day off with nothing to do except go shopping.?(OK, maybe that’s an exaggeration.)?It’s the official start of the Christmas shopping season.?The stores are all packed.?Retailers offer lots of sales to ensure they get their fair share of this incredible spending spree.??
Please allow me to make up some numbers to explain.?I do not know the true numbers. Let’s say 5 times as many people shop on Black Friday than the same day a week earlier.?Retailers, trying to get their fair share, offer big discounts.?Let’s choose one item where a retailer lowers the price by 20%.??
If you’re a math whiz, you’re probably ahead of me already.?But if you lower your price 20% and get 5 times the number of sales, your calculated price elasticity is -25, which is HUGE for price elasticity.??
Being a smart manager, if someone tells me my price elasticity is -25, I eagerly say, “lower price again.?If we lower it 1%, we’ll get 25% more sales.?Quick, let’s do it!”??
The implication behind this price elasticity number is that lowering the price by 1 percent generates a 25% increase in sales.?There is an implied causal relationship.?But at least in the case of Black Friday, we know a 20% price decrease does not cause a spike in demand.?The demand spike happened because it was the day after Thanksgiving.?
领英推荐
This is one example of why you must be careful when using price elasticity.?There are other nuances to price elasticity that should make you pause and think deeply if you’re using it.?Many other KPIs and metrics can help to make smart pricing decisions.?I’d recommend you use them instead.?
Now, go make an Impact!
And don’t forget to join us for our 2-day interactive pricing workshop in Las Vegas on January 12 and 13!
Professor of Enterprise and Logistics Engineering
2 年Thank you Mark. Even though price elasticity of demand might not explain everything that happens in the market and it’s estimation might not be as easy or straightforward, we cannot deny that it exists. Black Friday is indeed a good example ‘for’ price elasticity. People don’t go shopping just because it is a tradition. Demand is high because consumers know retailers drop their prices. Of course many other elements affect consumers’ and suppliers’ behavior and their decisions, including competiotion, aka cross elasticity.
Helping speakers, authors and thought leaders discover, develop and deliver their unique message to the world.
2 年Add "Black Friday" to my ever-lengthening list of things I HATE about Christmas. The holidays have become hyper-commercialized, and "Black Friday" is the most egregious example.
The opposite is also true. I listened to an analysis about Lulu over the weekend. LULU increased inventory 80%(ish) and while also increasing unit prices. In the short term, they maintained margins. But the cause for increasing inventories is the economy, not the raising of prices.
Pricing Expert @ Impact Pricing | Speaker, Author
2 年You can also read the full blog on our website: https://impactpricing.com/blog/black-friday-and-price-elasticity/ Splunk Mania Thermo Fisher Scientific TIBCO Thomson Reuters Varian