Price Elasticity of Demand in Indian Apparel Retail Industry
What is the Elasticity of Demand?
Elasticity measures the impact of a change in any of a variety of economic and non-economic factors. One economic variable that has the strongest correlation with demand is the price.
Price elasticity of demand is a measure of the responsiveness of consumers to a change in a product’s cost.
Elastic X Inelastic
If |E| > 1, then the variation in demand is larger than the variation in price, thus we call the product elastic.
Example: A person X goes to buy beef if he finds out that the price of beef has increased then he will not buy it because he can substitute it with chicken or pork.
If |E| < 1, variation in price results in less drastic variation in demand, so the product is inelastic.
Example: A person X goes to buy milk and finds that the price of milk has increased from 1$ to 3$, X will still end up buying it because it is a necessity and is ready to pay a higher price for it.
What is Demand Forecasting?
Demand Forecasting refers to the process of predicting future demand for the firm’s product. It is imperative for a business as it helps the businesses fulfill their objectives. If the demand for a company’s product is low to be able to reach its target quantity sold in a particular time period, then demand forecasting acts as an indicator for the company to take corrective measures to reach the target.
Price Elasticity in the Apparel Industry
The apparel market in India will be $59.3 billion in 2022, making it the sixth-largest in the world. Several factors result in the dynamic nature of demand in the market. To devise successful pricing strategies to maximize profits, studying price elasticity is imperative for retailers. According to the World Bank report, in India, the proportion of income spent on apparel averages 6%, 5.8% in Urban India, and 6.2% in Rural India. With internet penetration across the country, the urban-rural fashion divide is getting bridged. As the income levels in rural see an increasing trend and their lifestyles are changing. They are more inclined towards lifestyle changes. As the proportion of total expenditure spent on apparels is more in rural India, therefore, the demand is more elastic here in comparison to urban India when the prices change.
For some people, buying apparel is only based on necessity and done when clothes wear out. For others, shopping for clothing and accessories is a recreational activity, a regular part of their existence. This type of consumer segment’s behavior is based solely on wants and not needs.
The two factors because of which this division in the consumer base exists are income level, tastes, and preferences. The income level is a significant determinant of elasticity in demand because that causes a difference in purchasing power. The elasticity of demand for any commodity is generally less for higher-income level groups in comparison to people with low incomes because higher the income level, the more will be the purchasing power. As for taste and preferences, Commodities, which have become necessities for the consumer out of habit, have less elastic demand. It happens because such a commodity becomes a necessity for the consumer and he continues to purchase it even if its price rises. If a person belongs to a mid-low income level but is the wants that drive them to make buying decisions when it comes to apparel, even then the demand will be less elastic in this case. Another case where demand is less elastic is in the case of compulsive shoppers also known as shopaholics.
India is a mosaic of climates and tastes. If you break India up into four parts — north, east, south, and west — north India is the only region which is going to have winter, where you have mild-to-severe winter for eight weeks but in south India, on the other hand, there wouldn’t be a huge demand for winter clothes. So, the demand for the type of clothes is significantly influenced by geography. If there is a fluctuation in price then the demand for winter clothes is more elastic in north India as compared to south India. The reason being people in south India don’t have a strong need established for winter clothes for their demand to not change or change by less amount on fluctuations in price; on the contrary in north India, the need is well established, making the demand change by less.
The seasonality of a commodity is another significant facet that needs to be considered when talking about price elasticity. Taking the example of wedding clothes, there is a particular set of peak months which are referred to as the wedding season in India. Here, if expect for those peak months there is a fluctuation in price then demand will be largely affected the reason being, the commodity not having that degree of need at that particular time for the consumer to give off a larger proportion of their disposable income to make that purchase. So, in the peak season, the demand is usually less elastic and it will be more elastic in the off-season.
The life of a product is also a factor that affects consumer behavior. Taking an example, generally, a pair of denim is longer lasting than a western blouse, so the consumer will be more willing to spend buying denim rather than a blouse. Thus, the demand for products that are likely to last longer is more elastic than ones with comparatively a shorter life.
The apparel industry is one that runs on trends, apparel items that are in trend are likely to have a more elastic demand because consumers are going to be willing to spend more on them rather than spending more on something which is out of trend in case of price fluctuations. With Indian society leaning more towards westernization, there are cases when the consumer trusts that brand to an extent that their willingness to spend is driven more by the brand of the apparel item rather than their preference for it. So, in this case, the consumers’ demand will be elastic for specific brands but not for apparel in general.
There exists a phenomenon called cross-price elasticity in the concept of demand where the price of the competitors’ commodity which is a substitute affects the demand for the commodity in question. In such a case if a consumer wants to buy a particular item of clothing that is available in retail stores of two of the brands and assuming the consumer is indifferent to the brands and the consumer is likely to prefer the cheaper one. So, in this, the demand will be elastic if the substitutes to the product are competitively priced and if there is uniformity in the price then the demand will be inelastic in case of price fluctuations.
Advertising and promoting the commodity helps it in being more visible to the public. Therefore, the consumers are more likely to buy it as the brand is more visible, so companies do invest in advertising to increase the sales of the product despite a marginal price change, ensuring that the demand is inelastic. There remains a lot to consider, price changes and advertising campaigns can have unexpected effects. For example, if your competitors rapidly adjust to your pricing strategies, they can detract from your sales. Also, it’s possible to invest substantial resources in an advertising campaign only to learn the advertising doesn’t connect with consumers. But generally, it’s safe to assume that investing in advertising is an effective way to stoke demand.
Conclusion
Price elasticity of demand plays a vital role in business pricing strategies. Inaccurate price elasticity leads to wrong pricing decisions, which increase the unnecessary spend/cost. Especially in the apparel industry, pricing decisions play a crucial role in competing with competitors. The price elasticity is a complex variable to calculate because it is dependent on a lot of other variables and the strength of its dependence on a variable varies.
It is a key metric for devising price strategies and to evaluate the product or service that the company offers on the parameters such as uniqueness and sustainable value for consumers compared with other options available to them in the marketplace. If the product is highly elastic, it is being perceived as a commodity by consumers. Through branding or other marketing initiatives, a company increases consumers’ desire for the product and their willingness to pay regardless of price; it’s improving the company’s standing compared with competitors. It also helps the company to evaluate if the demand for its product is becoming more elastic if a competitor starts offering compelling substitutes or consumers’ incomes go down, making them more sensitive to price.
