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How can we know that our price increasing will not impact much or no impact on the volume ?

Anonymous A

I recently have a case study question that how can we be confident to increase price without affecting the current volume ? which factors that we need to consider to make sure that our hypothesis is right (increase price, but no or a little impact on the volume) ?

Thank you

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Vlad replied on 07/08/2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi,

There are several things that you can look at it in order to check the price increase hypothesis:

  • Competitors with higher prices are growing faster / have a bigger share than you
  • The value proposition of your product / the perceived value of the product is much higher than the current price
  • The price perception remains the same (e.g. you have a price differentiation within the product portfolio)
  • The next available alternative for the customer is much worse than your current product
  • You have a monopoly on the market
  • Price is a sign of quality (e.g. luxury goods)
  • You have a patent

Best

Francesco replied on 07/09/2018
#1 Expert for coaching sessions (1600+) | Ex BCG | 800+ reviews with 100% recommendation rate

Hi Anonymous,

your question basically translates in what affects price elasticity of demand – that is, how much quantity would decrease if price increases by one unit.

Once you increase the price, consumers have two options: either stick to your product, or move to a competitor/substitute. They will decide to switch so far that two conditions are in place:

  1. The value provided is now lower than alternatives – basically now V1(p)< V2(p), where V1(p) is the perceived value of the current service for a defined price, and V2(p) is the perceived value of the competitor/substitute service for a defined price
  2. There is an effective possibility to move to other options that are considered more valuable.

There are two key elements affecting such points.

  • Quality of your product compared to alternatives. Quality could either be related to intrinsic qualities (eg your software is 2x faster than competitors) or only perceived ones (eg marketing and sales make the product appear better than what it actually is). This will affect what is the perceived value V1(p)
  • Switching costs to move to an alternative (including opportunity costs for Do-It-Yourself solutions)

Let’s say for example your dentist just increased the price for what he normally requests for a visit. So far that you perceive the quality you receive is still better than alternatives, you won’t switch. But even if you perceive that other options have higher value, you still won’t switch if switching costs are too high (eg the closest good alternative is too far from where you leave).

Hope this helps,

Francesco

Anonymous B replied on 07/08/2018

In addition to what Hemant said, it will also depend on price elasticity of the consumer segments. If the a segment is price elastic then they will reduce consumption. For e.g. in case of increase in airline prices, some price conscious segment will consider and move to other modes of transport like trains etc.

Hemant
Expert
replied on 07/08/2018
Current partner @ Andreessen Horowitz (VC firm). Ex-Mckinsey, ex- strategy guy at Google.

Comes down to alternatives available and drivers of purchase.

For luxury, demand is relatively insensitive to higher price and often even goes UP if prices are raised. Mostly due to a combination of (a) lack of alternatives in terms of product or brand that PROTECTS the demand from inflationary pressures + (b) perception of exclusivity driven by higer prices -- e.g. demand for high-art goes up with higher prices, same for high-end bags etc.

For commodity, there is a lack of protection in terms of brand - a potato is a potato is a potato, and easy availability of equivalent alternatives -- "got coke? no? ok, have pepsi? ok - good!".

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