Price is Right: Or is it?

Much has been written about the recent troubles at NETFLIX and the common prevailing view is that at least some of the loss in its subscriber base could be attributed to the recent increase in their price. In all likelihood, the company, believing its demand to be inelastic, assumed that the price increase would not have an adverse impact on membership. At Jigyasa Analytics, being closely associated with the publishing industry, we've seen several newspapers and magazines, increase prices with great success while others have not fared as well. Having conducted elasticity estimation studies on numerous occasions, we thought this might be a good occasion to share some of our thoughts on this topic.

So, what factors determine a successful price increase? The simplest answer is identifying a group of consumers who value the product enough to be willing to pay the higher price. This group is usually determined by a conducting a test study. However, organizations need to understand that there are limitations to this approach. First, unless the study sample is correctly chosen the results might not translate to the general customer base. However, a bigger concern is that as markets evolve and change, these studies might become irrelevant. It is not unusual for organizations to refer to studies that are 3 to 5 years old to make pricing decisions. However, customers willingness to pay is determined by their perception of value and well as their ability to pay. And this perception of value in turn is determined by the customers satisfaction with the product as well as the availability of other products. So over time things can change: business cycles can impact people’s ability to pay, new alternatives may become available to the consumer reducing their willingness to absorb a price increase or issues with the product itself that might make its consumption not as satisfying as before.

For the reasons mentioned above, organizations need to accept that elasticity is not a number frozen in time, but rather a dynamic figure being shaped by various market and economic forces. As such, a culture of constant testing, analysis and estimation needs to be put in place to track elasticity. This is something that can be done with relative ease with the help of online testing panels and automated estimation algorithms. However, for certain organizations, online studies might not be representative of their entire customer base, and for them, other more traditional testing methods might be needed to supplement online studies. While there might be cost and speed issues with traditional studies, it is still important to conduct them more often (even if it is at a small scale). Automation can still be leveraged for analysis and estimation of these studies. Undertaking these measures will setup an organization to be truly dynamic in its response to ever changing market forces and get its pricing strategy right.

Jigyasa Analytics delivers insightful, impactful, and cost-effective analytics solutions to its clients with the help of intelligence driven customized automation. To find out more about us visit us at www.jigyasaanalytics.com