Price elasticity of Demand is an economic principle I have had a interest in and feared throughout my years in retail. The new year has an impact on this theory as many places use the changing of the calendar year to increase their prices. With all the changes in peoples behavior on this one day change I found it too risky to add to the possible decisions customers make at this point.
The ability to find that magic price where you are profitable and can still provide the quality of product and service is a constant search. There are times when the all the variables line up perfectly and for a very short period of time supply and demand seem to be your bitches. Hubris becomes an aroma that lingers no matter the cologne or perfume chosen, or the location it’s dabbed.
No need to worry for soon enough the aroma will fade and that magic combination you once thought was due to your business brilliance and acumen will be just as elusive as the Philosopher’s stone. Like the bacteria that learns and resists our antibiotics over time, readjusting price or quality never impacts the outcome as it once did. Time has changes the rules and the variable in the magic formula. Demand has learned from you application of control and developed a tolerance to your actions.
Experience teaches us to be afraid of price increases and with good reason. If you lack the proper empirical exposure, listen to the hundreds or thousands that came before you; those that teach the subject; those that have been successful; those that failed. The path is different, but the lesson is the same.
The first exposure to a product or service usually sets the bar for future decisions. Weekly lunch outings, daily coffee, bi-weekly laundry services, special event dinners; They all have a point of elasticity for each individual. The point not only varies with time but with each person, each subgroup, and each market, but it also varies with each product. The variables are unique for different areas. From different regions of the world to different countries, to different states, to different neighborhoods.
I have battled the demon in every business I have been apart of, and experienced many different results. Price too low creating too much demand that eventually decreased quality. Price too high that limited the volume and hence profitability and the need to cover base costs. The number of opportunities to slide the variable of price are not infinite as each change creates an impact on the consumer whether it be his daily coffee or a car that is purchased every five or six years.
Each of us experience this on a regular basis with simple purchases at the grocery store. We check the price on a product and decide if it has enough value at the moment, at that price. And the exact same decision can vary from day to day even if the price does not. Today I may find the value acceptable, but tomorrow something may be different and the value isn't appropriate.
All of this is why I am so attracted to the concept and the understanding of this principle. Managing all the variables that are visible and those that are more camouflaged has intrigued me over the years. The naming of this theory might also be the attraction in my strange world. It is so perfectly descriptive of the principle in result and yet complex in it’s deciphering. All seems well while we tinker with the price and demand follows suit feeling like Geppetto before his famed puppet came to life. Both hands on the strings and a little bored with the outcome. However, there is a point at which demand can snap and boom!, we are no longer the puppeteer but the chaser. The strings no longer control the actions and our decisions no longer impact the outcome. Pinocchio now makes his own decisions and Demand has run amok and refuses to respond as it once did. So many things change when we stretch the formula and break the connection.
All these thoughts came storming back to me today as I went to have coffee at my usual place. It is a higher end coffee shop for our area both in quality and price. I order a simple coffee prepared with a scientific process. I have accepted the price point for product and the overall experience. It seems that others agree with me as the place is somewhere between steady and busy. Today when I was asked to pay, the price was thirty cents higher - just under a ten percent increase. In addition the new price crossed a price barrier that impacts customers more than the increase. It crossed into a new dollar amount, from in the three dollar and change price to above the four dollar amount, and I find myself questioning the value.
Is the value enough to keep me coming back? Can I tolerate the person sitting next to me who finds it necessary to speak loud enough to overcome the music playing through my earbuds at this new price? Is the free wifi the rare server who is more interested in his coworkers and friends than the customers balanced enough with this new price? The answer is “We will see the next time I choose to venture out to have coffee and work. The real question to me is whether it will merely reduce my visits or will it change my behavior altogether. Has it reduced demand for me or has the elastic snapped?
If the one day data collection of the busy-ness of the place compared to similar days past is any indicator, demand will wane for me and for others. It was significantly slower today than on similar days of the week in the past. First time I have noticed a change and time only will tell if it is correlation or causation. That, or maybe the guy at the iPad cash register just hit the wrong buttons and overcharged me today.