The Online CMO by Philip Hallenborg

One of the most difficult disciplines in marketing is that of pricing and elasticity of demand. In today’s article, I wanted to give my 2 cents on cross elasticity for substitute products in a portfolio. I have seen a lot of it lately. And I am realizing how easy it is to sell your stuff online such that you, by adding aggression to your low end, actually hurt your high end and total margin$ attainment.

Picture a portfolio with products A and B below. Product A is a cheaper, sometimes negative margin bearing, traffic and units driver. B is a more high end product. Because there are numerous configurations of A and B the high end target segment of product A will consider low end configurations of product B as well as high end configs of product A. Similarly, low target segment of product B will consider high end configurations of product A as well as product B configurations. As we increase margin aggression on product B we see volumes picking up (especially in lower price bands).

Problem is we also see the volumes of product B going up making impact of low-end price aggression visible both in margin and mix shift (lower chart). For most marketeers this should be an intuitive scenario.

What complicates things is that due to channel specific ownership of product prices, I cannot influence the price on product B. Had it been possible to lower the price, we would be able to sell much more units of B and thus raising the overall velocity significantly without hurting the mix too much.

The subsequent variation of margins is high. We see the organization wobbling from guard rail to guard rail in an attempt to balance unit growth and profitability. This highlights both a cross elasticity consequence but also another example of how channel specific strategies can lead to sub optimization in the on-line channel.

Key takeaway: make sure you have full freedom to adapt the full portfolio to a new pricing level for a specific product. In this case you may need to lower prices on both A and B to actually exit promo period with an optimized margin$ attainment.