Price elasticity is key to understanding product demand and how consumers react to changes in market price. A leading retail company for consumer product goods (CPG) wanted to determine how product demand changes with price. Currently, the client uses outside agencies to provide data as well as price elasticity metrics for insights into the buying behavior of consumers. The goal of the project was to build models to project changes in volume for different price and promotion changes. In-house models would allow the client to determine the optimal price for each product and respond more quickly to consumer changes, providing a strategic competitive advantage in the market place.
The data was aggregated at the account/store level across the country for a week which made estimating the price elasticity very difficult. The aggregated data was messy because it factored in influences from competing products, simultaneous promotions, multiple price points at different retail chains, etc. After factoring and normalizing the data, the team created models with inputs that included competing products, store effects, and promotions. The models measure relative changes in demand with price to determine the price elasticity and threshold for each product.
A Power BI dashboard and scenario testing tool was created to allow the client to evaluate estimated volume changes based on adjustments to any of the inputs. The models identified several products that were consistently offered above pricing thresholds. insights about how changes in prices of certain products influence demand will inform marketing budgets as well as trade allocation.