Jun 4, 2020
Whether A Product Is Vital Or Trivial Affects How Much A Change In Price Will Change Sales
The same percentage change in price will have a materially different effect on sales depending on how vital or trivial the product is.
David Grace (www.DavidGraceAuthor.com)
It’s All About Pricing
Two of my recent columns have focused on the forces that set prices in a competitive market (Supply & Demand Don’t Affect Price The Way Most People Think They Do )and the policies that set prices in an uncompetitive market (How Sellers Calculate The Price That Will Earn Them The Highest Profit).
The purpose of this column is to explore how the nature of a product (vital or trivial) and its previous price (high or low) affect changes in its sales volume in response to an increase or decrease in price.
Put differently, the same percentage increase or decrease in price will have a materially different effect on a product’s sales volume depending on how vital or trivial the product is to its buyers and how cheap or expensive it was before the price was changed.
High And Low Price Boundaries
Other than those relatively rare situations usually involving perishable commodities that are sold below cost, the general boundaries on price are, on the high end, the Maximum Revenue Price, the monopoly price, and on the low end, a cost + total overhead + a moderate percentage profit price, for that product in highly competitive market.
Definitions
In this column
- A “high” price will mean one at or near the Maximum Revenue Price
- A “low” price will mean at or near a highly competitive market price
- A “vital” product is one which the purchaser desperately needs, a must-have product, and
- A “trivial” product is one which the purchaser has no practical need to purchase at all
Some examples of vital products are insulin for a person with type I diabetes, gasoline for a person who can only reach his workplace by automobile, electricity, drinkable water, hypertension medication for a person with high blood pressure, etc.
Some examples of trivial products are mass produced glass paperweights, chocolate-covered cherries, mass-produced plastic hair barrettes with yellow daisies painted on them, etc.
Vital Product Sales Have A Low Sensitivity To Price Changes
The sales volume for vital products has a low price sensitivity because
- People buy them because they need them, not because they are cheap
- People don’t buy more of them if they are cheap because the amount consumed is based on need not price
Diabetes buy insulin because they will die without it.
Diabetics buy only as much insulin as they need and making it cheaper will not increase the number of purchasers nor quantity each buyer purchases.
Trivial Products Sales Have A High Sensitivity To Price Changes
The sales volume of trivial products has a high price sensitivity because
- People can stop buying them without penalty
- The amount consumed is dependent on price, not need.
People who buy chocolate-covered cherries could stop buying them in an instant or they could switch to chocolate-covered berries or almonds and suffer little to no discomfort. But, if the price for chocolate-covered cherries was cut in half the people who liked them might buy much more of them and people weren’t previously buying them might give them a try.
An Existing High Or Low Price Affects The Sales Volume Upon A Change In Price
Sales volume is not only affected by a change in price, it also responds to how high or how low the price was before it changed.
The Sales Volume Of Vital Products Is Relatively Insensitive To The Level Of The Existing Price
People are highly motivated to acquire their minimum-needed supply of a vital product. A price increase above an already high price will only deter buyers to the extent that it is so high that it is almost impossible for them to continue to purchase it in the quantity they need.
As long as diabetics can scrape up enough money to buy insulin, they will continue to buy all the insulin they need in spite an increase from a high price to a very high price.
As indicated in Chart 1 below, if a month’s supply of insulin costs the average diabetic the low price of $50 and the price doubles to $100, diabetics will do whatever is necessary to get that extra $50/month and there will be a very little drop in sales volume.
If the price for a vital product is already low, then its customers are already buying as many units of that product as they need. Lowering an already low price of insulin will not cause diabetics to buy more units.
If insulin was $100/month and declined to $50/month there would be almost no increase in sales volume because diabetics were already purchasing all the insulin they needed, as illustrated in Chart 2 below.
On the other hand, if the price of insulin was already $200/month and it doubled to $400/month, those customers whose income was at the bottom of the normal curve would have to reduce the quantity they purchased and, as shown in Chart 3 below, there would be a moderate decline in the insulin sales volume.
And lastly, if the price of insulin was already at the high price of $400/month and it was cut in half, there would be a moderate increase in sales as the result of new purchases by those diabetics whose use of insulin had been involuntarily reduced when the price exceeded their ability to pay, as illustrated in Chart 4 below:
Trivial Product Sales Are Highly Sensitive To The Level Of The Existing Price
Because the customers of a trivial product at the existing price do not need that product, they will be highly sensitive to a change in the price.
If the price is already high, a further increase will lead to a large drop in sales volume.
If chocolate-covered cherries were $4/box and the price increased to $8/box there would be a large drop in both the number of customers and the quantity each customer purchased as illustrated in Chart 5 below.
Similarly, if the price of chocolate-covered cherries was already high at $8/box, a decrease would lead to a large increase in sales volume as illustrated in Chart 6 below.
If the price of chocolate-covered cherries was already low, a further drop would lead to a moderate increase in sales as illustrated in Chart 7 below:
If the price of chocolate-covered cherries was already low and the price doubled to a moderate level, there would be a moderate decrease in both the number of customers and the quantity each customer purchased as indicated in Chart 8 below.
Obviously, these charts illustrate the extreme situations.
Values Between The Extremes
Some products are closer to vital than trivial, for example coffee, light bulbs, and toilet paper while others are closer to trivial than vital, e.g. digital watches, glass coffee mugs, silk scarves.
The critical point is that the volume of units of vital products sold is less sensitive to changes in price than the volume of units of trivial products sold is sensitive to a similar percentage change in price.
In the end, sellers want to charge as close to the maximum revenue price as possible and the maximum revenue price will always be higher for a vital product than it is for a trivial product.
— David Grace (www.DavidGraceAuthor.com)
