Understanding price elasticity & value for money

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One of the famous phrases in Russia that says: “forget everything that you were taught at the university” shouldn’t be misleading for marketers who are willing to forget everything related with the price elasticity.

From my perspective the most important aspects that marketers should remember from their classes about price elasticity are related with the basic effects that influence price elasticity.

Below is a brief outline of these effects provided by Lambin (2007):

  • unique value provided by unique product and/or service offerings;
  • knowledge about product substitutes;
  • difficulty in making comparisons;
  • total associated costs in comparison with the total income;
  • costs sharing with other stakeholders;
  • unchangeable investments in the previously purchased products and/or services;
  • product scarcity when customers can’t buy much in advance;
  • value for money.

As I discussed some time ago in one of my posts the question “How to build the best brand and product value for money?” is widely discussed by marketers across diverse companies, even without making a clear link with the price elasticity (see for more details What does in Value for Money matter?).

These conversations should always start with the notion that paid amount of money characterises consumers costs only partially and the main focus should be on the overall “conditions of exchange” (Lambin, 2007). Under these conditions are usually meant all procedures associated with the change of ownership rights (e.g. price comparisons, negotiations, terms of payment, terms and time of delivery, cost-purchase experience and company’s involvement in after-sales stage).

Considering these important components of the “conditions of exchange”, Lambin (2007) provides an equation that can enable marketers to understand their value for money.

bestinsightsphere_value_for_money

Hence, shifts in the value for money can depend on such changes as:

  • amount of money paid by customers;
  • volume of products and/or services provided by a supplier;
  • quality of provided products and/or services;
  • various available discounts and margins;
  • purchase time and place;
  • payment mode, place and time.

To sum up, working on the brand, product and price strategy marketers should pay very close attention to various effects that influence price elasticity, and be specifically clear on the value for money that customers get from their products and/or services.

Sources: Lambin, J.-J. (2007). Market- Driven Management. Strategic & Operational Marketing (in Russian). Moscow: Piter

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