Price Elasticity and the Impact from Inflation
By Jim Lewis, CEO Enhanced Retail Solutions LLC
There is constant chatter right now about inflation and price increases at every level of retail and wholesale. What inventory planners really want to know is how it will affect sales. As we adjust our forecasts, we are looking for any indicators that may help our predictive models.
One area that may be worth studying is the price elasticity of your items. It may provide insight to how a change in price (usually promotional) impacts sales up or down. I am not a price optimization expert, but I have worked with enough tools to understand the basic premise.
Creating the Model
Let’s start with a simple model. It uses 52 weeks of unit and dollars sales, either at item or category level. Then a baseline of sales and average price will be created. What you want is to correlate how many times the sales went up or down for different intervals of price changes. For example, when the price went up 20%, how many times did sales change and how much. This chart, from our Item Planner ladder planning tool does a good job showing that.
In this image you can see that when the price was increased 11-20%, sales decline by 61.72%. Out of 52 weeks of data this happened 17 times. There were also 5 instances when sales increased 554.1% when the price went down 5-10%. The higher the number of correlations the more credibility there is to the trend. A low number of correlations indicates there isn’t enough data to support the inference.
Adjusting The Plan
We use this logic to adjust sales up or down based on promotional activity. There are many other factors that could affect the price including seasonality, presentation and availability just to name a few. based on when the retailer promotes or changes the price of an item.
If you are interested in testing this out with your data, please let us know. We have some templates that can help you or you can use our Item Planner tool.
For more information, contact us.