How Price Elasticity Analysis Drives B2B Profit Growth
There has been significant focus on the elasticity of consumer goods since shopping has rebounded post pandemic, but many companies have yet to tap into the benefits of elasticity analysis in the context of business-to-business (B2B) pricing.
eCommerce Growth is Increasing Price Elasticity in B2B
McKinsey and Company recently reported that in 2021 65% of B2B companies now offer online sales channels and within the business, selling online makes up 18% of their total sales. The report concludes by stating that B2B eCommerce will be a linchpin going forward for sustained revenue growth. This major market change is shaking up the long-standing debate on whether elasticity has a place in B2B pricing by fundamentally altering sales dynamics. Elasticity refers to the interaction between price and quantity explaining how the amount of product sold varies with changes in price.
A highly elastic product would see a large decrease in demand with a price increase while the demand of a low elasticity product would stay relatively constant. Consumer electronics, clothing, and most luxury goods would be considered elastic because they are non-necessities with available market substitutes. In contrast, necessities like medicines, housing, and gasoline may have few alternatives and will not be impacted much by price increases without other changes in the market.
Neglecting implementation of elasticity-driven pricing structures can impact margins though loss of realized revenue in low elasticity markets and loss of customer loyalty in high elasticity markets. The change to a more eCommerce centric B2B pricing structure has led to higher availability of market substitutes and has decreased the amount of friction required to transition to a new supplier.
Reshaping and simplifying the process of B2B sales through eCommerce tends to increase product availability, thus adding more value to elasticity in the market. This paired with the uncertainty of a post-pandemic supply chain makes understanding how customers will respond to prices increasingly important.
B2B Price Optimization Must Account for Elasticity
Jim Vaughn, author of “Stop Racing In A Blindfold!: Big Data + Pricing Science Drive Bigger Profits,” said this when asked about the validity of elasticity in modern B2B pricing:“When you combine your transactional data with business insights and a good understanding of products and customers, you can calculate very good values for elasticity at the micro-market segment level.”
This illustrates perfectly what Zilliant does with our Price IQ® system. For nearly 20 years we have been successfully leveraging elasticity to drive a profit-revenue trade off and our elasticity model is an essential component for optimized pricing decisions that drive strategies at B2B companies across the industry spectrum.
When designing an elasticity model for a major food distributor we were able to leverage the skills of both our data team and our cloud infrastructure. We explored the company’s specific use case by segmenting on relevant business features and standardized elasticity with a Zilliant-derived seasonality index. This pricing system is now in the process of being deployed with a notable expected revenue increase.
Elasticity is becoming more impactful as market dynamics change and has repeatedly positively impacted the pricing ability of many organizations.