Elasticity: The Economic Concept Behind How Companies Price Products | WSJ Price Index
Summary
TLDRThe video script discusses the concept of price elasticity during high inflation periods, noting consumer spending has remained resilient despite rising prices. It explains elasticity's impact on demand and how companies aim for inelastic products. The script also explores factors affecting elasticity, such as necessity, competition, and consumer perception, and how companies like P&G and Kraft Heinz are adapting strategies, such as promoting cost-saving benefits and offering smaller-sized products, to maintain market share amid changing consumer behavior and economic pressures.
Takeaways
- 📈 Consumer elasticities have held up better than expected year-to-date, despite high inflation.
- 🔍 Companies anticipate increased price elasticity, meaning demand may fall as prices rise.
- 💡 Price elasticity is a measure of how sensitive the quantity demanded of a good is to a change in its price.
- 🛍️ Elastic products, like perfumes and staples, see demand decrease with price increases, while inelastic products, like groceries and toilet paper, do not.
- 🏠 Branded household goods have shown inelasticity, with consumers continuing to spend on these items even during economic downturns.
- 💼 Companies prefer inelastic products as price increases do not significantly impact demand.
- 💰 Gym memberships are currently inelastic, with price increases not leading to a decrease in membership rates.
- 🛒 There has been a shift in consumer spending from goods to services as the economy recovers from the pandemic.
- 🔑 Factors affecting elasticity include the necessity of the product, competition, availability of alternatives, and consumer emotions towards the brand.
- 📉 Companies like Unilever, Proctor and Gamble, and Kraft Heinz have reported lower volumes, indicating that some products are becoming more elastic as demand decreases with price increases.
- 🛒 Strategies to maintain market share when products become more elastic include promoting cost-saving benefits and offering smaller-sized products at lower prices.
Q & A
What is price elasticity and why is it important during periods of high inflation?
-Price elasticity measures the responsiveness of the quantity demanded of a good to a change in its price. It is important during high inflation because it helps companies understand how sensitive consumer demand is to price changes, which can affect their pricing strategies and revenue.
Why have consumer elasticities held up better than expected year-to-date despite high inflation?
-Consumer elasticities have held up due to various factors, including consumers' continued willingness to spend on certain goods and services, as well as the resilience of certain sectors like travel and experiences post-pandemic.
What is the difference between elastic and inelastic products in terms of demand response to price changes?
-Elastic products are those where demand is significantly affected by price changes; if the price goes up, demand falls. Inelastic products, on the other hand, have demand that is less sensitive to price changes, meaning a price increase does not significantly impact demand.
Why do companies prefer their products to be inelastic?
-Companies prefer inelastic products because it means they can raise prices without significantly affecting demand, allowing them to maintain or increase revenue without losing customers.
What factors make a product's demand more elastic or inelastic?
-Factors affecting elasticity include the necessity of the product, availability of alternatives, consumer perception of the brand, and the price range of the product. Emotional attachment to a brand can also play a role.
How has the pandemic affected the elasticity of certain household goods?
-During the pandemic, branded household goods have proven to be inelastic, as people continued to spend on these items even during economic uncertainty, contrary to past trends where consumers might switch to cheaper alternatives.
What is an example of a company that has successfully raised prices without seeing a dip in demand?
-Planet Fitness is an example of a company that raised the price of its black card membership and did not see an initial dip in the percentage rate of new members signing up.
How are companies responding to the shift from goods to services in the economy?
-Companies are adapting by focusing on services such as travel, experiences, movies, and dining out, as consumers are increasingly spending in these areas following the easing of COVID-19 restrictions.
What strategies are companies using to maintain market share as their products become more elastic?
-Strategies include promoting cost-saving benefits, offering smaller-sized products at lower prices, and leveraging retailers for better shelf space or product presentation to appeal to consumers.
How are supply chain disruptions and consumer demand changes expected to impact future price increases for goods?
-Economists expect that the easing of supply chain disruptions and consumer demand will lead to a slowdown in price increases for goods, as companies may not need to pass on as many costs to consumers.
What dilemma are companies facing in deciding whether to raise prices or cut costs?
-Companies are grappling with the decision of whether to raise prices, potentially affecting demand, or to cut costs, which could involve layoffs or other measures, in order to maintain competitiveness and profitability.
Outlines
💰 Consumer Elasticity Amidst Inflation
The script discusses the concept of price elasticity in the context of high inflation. Despite rising prices, consumer spending has remained relatively strong, but experts anticipate a slowdown. Price elasticity measures how demand for a product changes with price fluctuations. Companies prefer inelastic products, where demand remains stable despite price increases, such as necessities like groceries. However, during the pandemic, branded household goods have shown inelasticity, with consumers continuing to spend on them. The script also mentions that gym memberships have remained inelastic, with Planet Fitness increasing its membership fees without seeing a drop in demand. Factors affecting elasticity include the necessity of the product, competition, availability of alternatives, and emotional attachment to brands. The elasticity of a product also depends on its price range, with low-cost items being more sensitive to price changes.
🛒 Strategies for Companies Facing Elasticity Challenges
As inflation continues, companies are grappling with the challenge of maintaining market share as products become more elastic. Some strategies discussed include promoting cost-saving benefits, such as Procter & Gamble's detergent that can be used in cold water, saving on heating costs. Another strategy is offering smaller-sized products at lower prices to attract budget-conscious consumers, although this may result in a higher cost per unit. Companies like Kraft Heinz also offer lower-priced packages with fewer items. Additionally, companies can work with retailers to secure more shelf space or improve product presentation. The script notes that while inflation slowed slightly in August, underlying price pressures suggest it could remain high, prompting industry leaders to monitor the labor market closely. The expectation is that as long as employment remains stable, consumer spending will continue, but recent signs of easing supply chain disruptions and consumer demand may lead to slower price increases for goods.
Mindmap
Keywords
💡Price Elasticity
💡Inflation
💡Consumer Spending
💡Necessities vs. Non-necessities
💡Brand Loyalty
💡Gym Memberships
💡Price Range
💡Cost-saving Benefits
💡Package Sizes
💡Retailer Partnerships
💡Labor Market
Highlights
Consumer elasticities have largely held up, better than expected year-to-date.
We continue to expect more elasticity.
Price elasticity is a hot topic in earnings calls during periods of high inflation.
Consumer spending has held up relatively well despite the highest inflation in decades.
We're reaching a turning point where consumer spending is beginning to slow.
Price elasticity measures how demand changes when the price changes.
Elastic products are non-necessities, like perfume and staples.
In-elastic products are necessities with few alternatives, such as groceries and toilet paper.
Branded household goods have proven to be in-elastic, especially during the pandemic.
Gym memberships are currently in-elastic, with price increases not affecting membership rates.
There's a shift from goods to the service side of the economy as Covid eases.
Elasticity depends on the necessity of the product, competition, and emotional factors.
Elasticity also depends on the price range of the product.
Executives' views on elasticity influence their pricing decisions.
Companies like Unilever, Proctor and Gamble, and Kraft Heinz reported lower volumes due to higher prices.
Retailers are cutting costs as consumers pull back spending in categories like apparel and home goods.
Sales of premium detergents are declining as consumers shift to cheaper alternatives.
Companies can maintain market share by promoting cost-saving benefits of their products.
Offering smaller-sized products at lower prices can appeal to consumers with less disposable income.
Companies may lean on retailers for more shelf space or better product presentation.
Inflation may run above the Fed's 2% target for some time due to underlying price pressures and wage growth.
The dilemma for companies is whether to raise prices or cut costs in response to changing consumer spending.
Transcripts
- [James] Consumer elasticities have largely held up
better than expected year-to-date.
- [Michele] We continue to expect more elasticity.
- [Narrator] Price elasticity is a hot topic
in earnings calls during periods of high inflation,
like the one we are in now.
When inflation is high, companies raise prices
and consumer spending usually slows.
As you can see here, consumer spending
has held up relatively well so far,
despite the highest inflation in decades.
But experts say we're finally reaching a turning point
where consumer spending is beginning to slow.
And that's where elasticity comes into play.
Here's how price elasticity works
and why so many companies are talking about it.
- How much does demand for something change
when the price changes?
When something's elastic,
it means if the price goes up, demand falls.
That's not a great thing for companies
because then they have to worry about that
any price increase will really affect demand.
- [Narrator] Here's the chief commercial officer
of Southwest Airlines talking about this idea
in the company's second quarter earnings call.
- [Andrew] Leisure travelers have a price elasticity effect
where you can't go much higher.
- Narrator] What companies want
is for their product to be in-elastic
meaning a price increase doesn't really impact demand.
Elastic products are usually non-necessities,
like perfume and staples.
In-elastic products are typically things we really need
and that don't have many alternatives
like groceries and toilet paper.
But there are some exceptions.
- What has proven in-elastic,
particularly around the pandemic
has been branded household goods.
In past kind of bumpy economic times,
people have switched or traded down
to cheaper products around the house.
A lot of people who really watch the industry
have been surprised by how much people are willing
to continue to spend on these household basics.
- [Narrator] Gym memberships are also in-elastic right now.
For example, Planet Fitness raised the price
of its black card membership in May
bringing the monthly fee for new members
up from 22.99 to 24.99.
And the company said in August...
- [Chris] We haven't seen an initial dip
in our black card percentage rate
as we did with the past price increases.
- Covid has eased up.
Everybody's kind of making up for lost time.
They're wanting to get out.
So they're spending on travel.
They're spending on experiences, on movies, on eating out,
and it's been a really big shift
from goods to the service side of the economy.
- [Narrator] Several factors affects products' elasticity.
- It's the necessity of the product.
So how important is it?
You know, what's the competition like?
Are there a lot of other options?
Some of it's just emotional, you know.
Some people really believe a brand is a lot better
than another brand.
- [Narrator] Elasticity also depends on the price range
of the product itself.
If it's a low cost item,
a slight increase in price matters to consumers.
If it's a more expensive item,
then a small increase isn't as noticeable.
These are examples
of what executives consider when they talk about elasticity.
- What executives say and think about elasticity
matters a lot to consumers
because ultimately their assessment
of what consumers are willing to pay
will drive their decisions on how much to charge.
Last year, when CEOS were talking about elasticity,
they were more saying, wow, like everything's in-elastic
because consumers are just willing to spend.
- [Narrator] Now, prices are still going up
because of inflation but demand is starting to go down.
So certain products are becoming more elastic.
Unilever, Proctor and Gamble, and Kraft Heinz
each reported lower volumes in their latest quarters
meaning people purchase fewer brand items
amid higher prices.
Many retailers have lowered profit expectations for the year
and are cutting costs as consumers are pulling back spending
in categories like apparel and home goods.
- [Jeff] During the quarter, Macy's brand customers
across all income tiers slowed and shifted their spend.
- [Narrator] In recent weeks, sales of premium detergents,
like Tide, have been on the decline
according to industry data.
- After all this time
of like sticking to this very high-end detergent,
consumers are shifting to cheaper detergent.
- [Narrator] P&G executives said they believe
Americans will keep spending on household products
even if inflation and the overall economy worsen.
(light music)
So how can companies like P and G maintain market share
when their products become more elastic?
One strategy is to promote the cost saving benefits
of their products.
- And it'll save you up to $150 a year.
- And it's cold.
- There's a version of laundry detergent
that you can use in cold water.
So the detergent isn't less expensive.
In fact, it's even more expensive
than it was six months ago.
But they say, Hey, you know, but the money you're gonna save
on not having to heat your water makes this detergent
like overall more cost-effective.
- [Narrator] Another strategy
is to offer smaller-sized products at lower prices
to appeal to cash-strapped consumers.
- So if you only have $10, you can still get
your name brand detergent.
And that's something that consumers who don't have
as much money do sometimes out of necessity.
It also means they're actually paying more
for each quantity of the product
because the less you buy, the more expensive it is.
- [Narrator] A P&G spokeswoman says the company
has always offered various package sizes
to meet different consumer needs.
And those sizes vary by retailer and market.
Kraft Heinz takes a similar approach
by offering one-dollar Lunchables
and lower-priced packages of Kraft Singles cheese
with fewer slices.
Companies also have the option to lean on retailers
to get more shelf space
or improve the presentation of their products in the aisle.
(light music)
While inflation slowed a bit in August,
underlying price pressures and wage growth
suggest it could run well above the Fed's 2% target
for some time, which is why industry leaders
are keeping a close eye on the labor market.
The idea is that as long as people stay employed,
consumer spending will likely remain solid.
But supply chain disruptions and consumer demand
have both shown signs of easing recently
which economists expect will slow price increases for goods.
So the dilemma for many companies now
is whether to raise prices or cut costs.
- When do we start laying off workers
so we don't have to raise prices?
Depending on the industry, some companies are there,
some companies aren't there.
So I think figuring out when that happens
is where a lot of companies are right now.
(light music)
5.0 / 5 (0 votes)