Price Elasticity

Site testing is one of the most buzzed-about practices in ecommerce, and for good reason. The possibility of increasing conversions by 5%, 10%, maybe even 20% (!) is immensely appealing. Site designers spend countless hours optimizing and testing checkout funnels, product category pages, and even product descriptions to milk the most out of their websites.

But nothing impacts the bottom line more than customers paying for your product, which leaves the often-overlooked question of price testing. “How much should I charge for what I’m selling?” seems like such a simple question, but it’s actually really complicated! Say you increase prices… customers will probably buy less, but how much less? Is the drop in conversion rate worth the price increase?

All these questions circle around a core economic principle called price elasticity. Elasticity is how we talk about what a price change will do to the amount of a product you sell; if a 10% increase in price leads to a 15% drop in orders, your elasticity is 15/10 = 1.5.

"Non-linear" Elasticity

Unsurprisingly, price elasticity is, well, elastic. The sofa you’re selling has a different elasticity at $500 than it does at $1000. This makes finding the “right price” a process of repeated iterations. Say you test that $500 price point against $550 (a 10% increase), and find that your conversions only drop 2%. Odds are pretty good that you should increase your prices! So you bump your prices all the way up to $1000 and discover that all of a sudden, you’re selling a tiny fraction of what you used to. The best price is somewhere in the middle, and we haven’t even taken into account what it costs you to manufacture and ship this couch to your customers!

The perfect price is a function of elasticity and marginal costs, but the only way to know your product’s elasticity is to test it. That’s where Intelligems comes in: we provide the tools to figure out a product’s price elasticity, recommendations for a better price to test, and the platform to zero in on the best possible price for each item you sell.

Also, not everyone wants to just maximize profit. Sometimes the first sale to get someone in the door is worth taking a loss on because of the future gains that customer is likely to provide. Sometimes you have a bunch of inventory you just want to clear out by a certain date even if it means taking a hit on margins. Understanding price elasticity gives you the framework to achieve any of these goals with a level of precision that e-commerce barely ever enjoys.

Price elasticity is one of the most fundamental properties of what you sell. Let’s find out what it is together - request access on our site or check us out on the Shopify App Store.