Google Shopping is a complex and ever-changing platform that consists of thousands of algorithms to give the user the best possible experience when searching for a product online. Strip all that back and you get a product comparison tool with one standout factor, price.
Price Elasticity Of Demand In Google Shopping
Being the cheapest on Google Shopping obviously has its advantages but in this blog, we will cover price changes and how these changes impact demand. This is known as price elasticity of demand and is a pretty useful concept to know about when analysing price changes.
What is price elasticity of demand? It’s a microeconomics concept that demonstrates the change in demand for a good or service when the price changes.
Well surely if the price of a product increases then the demand will decrease? This is correct, but the question is how much will demand decrease if prices change by X.
The 4 levels of price elasticity of demand:
Perfectly Inelastic Demand
Perfectly inelastic demand occurs when prices of a good change but demand doesn’t change.
Think about goods and services we can’t live without e.g. healthcare or water supplier. If the price of these goods or services increase then chances are there aren’t any alternatives in the market so we just have to accept the price changes.
Inelastic demand occurs when the demand change is smaller than the change in price. These are goods with few alternatives in the market such as – mobile phone providers, electricity supplier and award-winning PPC teams.
The inelastic demand curve below shows that a 40% increase in price only leads to a 10% decrease in demand.
Price Unit Elasticity
Unit elasticity is a neat bit of economic theory yet rarely happens in practice. This scenario is where price and demand change at the exact same rate.
This is the last one, I promise! Elastic demand is simply a scenario when the change in demand is greater than the change in price. These tend to be goods with lots of substitutes in the market.
In the elastic demand curve below, the price has increased by 20% which has caused a large drop of 50% in demand.
How to calculate price elasticity of demand?
With one simple formula:
Q1 – Original quantity demanded
Q2 – New quantity demanded
P1 – Original price
P2 – New price
I’ve calculated my PED, what do my results show?
- If PED = 0 – This means that when the price changes demand does not, demand is perfectly inelastic.
- If PED is between 0 and 1 – If the % change in demand from is smaller than the percentage change in price, then demand is inelastic.
- If PED = 1 – If the % change in demand is exactly the same as the % change in price, then demand is unit elastic.
- If PED > 1, then demand responds more than proportionately to a change in price, therefore, demand is elastic.
Putting theory into practice
Let’s use some real-life examples to demonstrate the theories above and how they can be used in business decision making.
One of the biggest controversies of the last 20 years is the 200% price hike of the Freddo. In 2000 the chocolate bar was priced at a mere 10p however Freddo lovers are now forced to pay an inflated 30p.
Unfortunately, I don’t have any information on the number of Freddos sold before and after the price changes. I will, however, use two different scenarios to demonstrate the differences in price elasticities of demand.
In 2016 the price of Freddos rose from 25p to 30p and as a result, the number of Freddos sold per week in the UK fell from 800,000 to 720,000.
A PED of 0.5 indicates that Freddos are price inelastic, people kept buying the loveable chocolate frog despite the price increase. It’s good news for Cadbury’s, they’ve managed to increase prices by 20% but only lost 10% in demand.
In 2016 the price of Freddos rose from 25p to 30p and as a result, the number of Freddos sold per week in the UK fell from 800,000 to 50,000.
A PED of 3.75 indicates that Freddos are now price elastic, people now have stopped buying Freddos due to the price changes. Not great news for Cadbury’s as people have clearly found substitute chocolates to buy!
How does this tie into Google Shopping?
As a business owner, it’s important to know your product range and have a sense of the elasticities of demand. This way when you make price changes you shouldn’t be startled with the change in demand.
Price elastic products often occur when multiple retailers are selling identical products on Google Shopping. Meaning if you increase prices you’re likely to see a big drop off in sales. However, you can use this to your advantage, if you can decrease your prices to undercut your competition chances are the loss from the price decrease will be offset by a large increase in sales.
Bespoke products or products with few substitute products are likely to have inelastic demand. Unfortunately, unlike elastic products decreasing prices won’t lead to a huge jump in demand. To increase revenue, consider raising prices slightly and you shouldn’t notice much of a decrease in demand.
Get to know your products
As simple as it sounds, having an idea about which products are sensitive to price will help you improve results through Google Shopping.
Making minor changes to the price and gathering performance data through Google Ads will help categorise products. Once you know this you will be well on your way to making data-driven pricing decisions to grow your business in a profitable way.