price elasticity of demand and turnover

Economists like to talk about demand curves and the elasticity of price. Phrases such as "all things being equal" or "in an equilibrium situation" abound in these dissertations. Your eyes will glaze over quickly listening to these academic discourses. However, they have a real world application, even to our lowly crafts industry.

Let me try to explain what they are telling us. Let's say that you like avocados. They are seasonal, so sometimes you go to the grocery store and they are two for a dollar. Out of season you might have to pay two or three dollars for one. What those economists are saying is that over time you are apt to buy a lot more avocados at the cheaper price than you will when they are dear. Well, duh, you say. Okay, so that sounds more like common sense dressed up as rocket science talk -- that's why these folks make the big bucks and get the big grants for research on topics like demand curves and the elasticity of price.

However, we can develop a model of a demand curve that shows the number of craft widgets your market will buy over a given time period at various prices -- all things being equal, of course. The implied assumption here is that a relatively small change in price either way will greatly affect demand, and an increase in demand increases your turnover in a given sales venue. Pick the venue you want to look at: it can range from a given craft gallery to your entire wholesale distribution system. If demand for your craft widgets is indeed elastic, then you can spread costs over more unit sales and generate greater absolute profits merely by reducing price. In other words, don't reach for the highest price your pieces will command in the market -- you won't get that many reorders during the year, and your retailers will get very tired of dusting your display in their stores. A small drop in price that doubles your turnover makes everyone happy, and further price decreases just increase the smile factor. Besides, greater turnover means that you need to keep fewer store owners happy to keep the same, or more, money coming in. That's worth thinking about.

Here's a table showing what happens when you drop your price in increments of $2.50, which -- theoretically! -- increase your turnover by a factor of one. In other words, dropping your price $2.50 doubles volume, and dropping it another $2.50 trebles volume. At some point, as I show, continuing to drop the price does not bring you any more money, it just keeps you busy. However, the implications here are worth mulling over for a while. The retail craft show circuit is the perfect venue to test the price elasticity of demand for your particular craft widgets. If you don't do retail shows, enlist one of your galleries in a market test for a period of, say, six months.

Turnover:
One time
Two times
Three times
Four times
Five times
Unit price
$30.00
$27.50
$25.00
$22.50
$20.00
Direct cost
-10.00
-10.00
-10.00
-10.00
-10.00
Margin
20.00
17.50
15.00
12.50
10.00
Overheads
-10.00
-5.00
-3.33
-2.50
-2.00
Unit profit
10.00
12.50
11.67
10.00
8.00
Turnover
X1
X2
X3
X4
X5
Total profit
$10.00
$25.00
$35.00
$40.00
$40.00

 

   
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