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Price Elasticity of Demand

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    McNicholl
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    Dear Forum,

    I have an opportunity to design an experiment with the objective being to determine the price elasticity of demand and what to know if any of you can offer advice from practical experience or suggest some good papers from those who have.

    Bottom line is that there are approx 1500 customers who are buying at greater than 50% below our list prices for the material (excludes delivery and rental charges) who are considered “small” customers, meaning their annual spend is low enough to mean they do not have an account manager and the desire is to increase these prices without losing the customers.

    What I have in mind for the experiment is to actually adjust price of the products we sell and measure the response, quantity purchased at the new price. At the moment the general idea is to increase the price by 4 different levels (range 10% to 30%) and to apply each price increase level to a number of selected customers who are judged to be as alike as possible. Deciding what customers are alike is not so straight forward. This could be as basic as from the same industry sector and geographical region. There are of course other possibilities for judging likeness such as the product purchased and annual spend etc. After setting the new price levels then wait and measure the quantity purchased at the new price.

    I do not have information on the determinants of price elasticity of demand such as what percentage of the customers spend is on the products he/she buys from us. The customers can switch to other suppliers relatively easily in most cases.

    The population is approx 1500 customers (more actual delivery points than this) in 10 regions in one country and there are 100’s of different products. I think we probably should apply the price increases to a chosen few products.

    The price the customer pays is made up of (1) the price for the material consumed and this is the only price we have scope to change for this experiment; (2) delivery charge and (3) rental charge.

    Large scale customer survey is not an option in this case for working out price elasticity of demand. What customers say they would do and what they actually do are often two different things.

    I have been thinking over whether or not it could be possible to somehow make use of a Monte Carlo simulation in Minitab for this but not having a nice neat engineering equation to use as the “transfer equation” I am stuck at the 1st step.

    Perhaps there are some good suggestions out there.

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