Elasticity: The Economic Concept Behind How Companies Price Products | WSJ Price Index

The Wall Street Journal

26 Sept 202205:57

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

00:00

💰 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.

05:00

🛒 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

Price elasticity refers to the degree to which the demand for a product changes in response to changes in its price. In the context of the video, it is a critical concept as companies are navigating inflation and trying to understand how price adjustments will affect consumer demand. The video discusses how some products, like branded household goods, have shown inelasticity, while others, like premium detergents, are becoming more elastic as prices rise and consumers look for cheaper alternatives.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video highlights the current period of high inflation and its impact on consumer spending and company pricing strategies. Companies are raising prices due to inflation, which typically would slow consumer spending, but the video notes that consumer spending has held up better than expected year-to-date.

💡Consumer Spending

Consumer spending is the amount of money consumers spend on goods and services. The video discusses how consumer spending has held up relatively well despite high inflation, but there is a turning point where it begins to slow down. This is significant as it affects company strategies, especially in terms of pricing and product elasticity.

💡Necessities vs. Non-necessities

The video distinguishes between necessities and non-necessities in terms of price elasticity. Necessities, such as groceries and toilet paper, tend to be inelastic, meaning that demand does not significantly decrease even if the price increases. Non-necessities, like perfume and luxury items, are more elastic, with demand falling more noticeably when prices rise. This distinction is crucial for companies to decide their pricing strategies.

💡Brand Loyalty

Brand loyalty is the customer's psychological commitment to purchase or use a product or service from one particular company. The video mentions that during the pandemic, branded household goods have proven to be inelastic, indicating that consumers continued to spend on these despite economic challenges, demonstrating a high level of brand loyalty.

💡Gym Memberships

Gym memberships are used in the video as an example of inelastic products. Despite price increases, as illustrated by Planet Fitness raising its membership fees, there was no initial dip in the uptake of their premium memberships. This suggests that consumers are willing to continue spending on certain services even as prices rise.

💡Price Range

The price range of a product is discussed in the video as a factor affecting its elasticity. Low-cost items are more elastic because a slight price increase can significantly impact consumer decisions, while high-cost items are more inelastic as small price increases are less noticeable to consumers.

💡Cost-saving Benefits

Cost-saving benefits are strategies companies use to maintain consumer interest in their products despite price increases. The video gives an example of a laundry detergent that can be used in cold water, which, while more expensive, is marketed as saving consumers money on energy costs, thus making it more cost-effective overall.

💡Package Sizes

Package sizes are mentioned as a strategy to appeal to different consumer segments, especially those with budget constraints. The video explains how offering smaller-sized products at lower prices can attract cost-conscious consumers, even though they might end up paying more per unit.

💡Retailer Partnerships

Retailer partnerships are highlighted as a strategy for companies to maintain market share. By working with retailers to secure more shelf space or improve product presentation, companies can increase the visibility and attractiveness of their products to consumers.

💡Labor Market

The labor market is discussed in the context of its impact on consumer spending. The video suggests that as long as employment remains stable, consumer spending is likely to stay solid, which is a key consideration for companies trying to forecast demand and set prices.

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.