When we talk about Revenue Growth Management (RGM), pricing is often seen as the primary lever for generating revenue. But is it really the only one? In today’s increasingly competitive and complex market, companies are discovering that focusing solely on price adjustments, without considering cross elasticity, can limit their growth potential and negatively impact profitability.
Cross elasticity refers to how price changes in one product can affect the demand for other products within a portfolio. This interaction is particularly relevant for companies managing multiple brands or products in the same segment. For instance, raising the price of a premium product might push consumers toward a more affordable option within the same portfolio, cannibalizing sales.
The Crucial Role of Cross Elasticity
In a recent interview with Wise Athena, Jayesh Singh, Senior Global Pricing Analyst at Imperial Brands, [watch interview here] highlighted, “Understanding cross elasticity is key. It’s not just about adjusting the price of one product, but about analyzing how that adjustment impacts the entire portfolio. Raise the price of one brand, and you might unintentionally boost sales of a lower-priced alternative within your lineup, cannibalizing your own market.”
Singh’s point underscores a critical challenge that many companies tend to overlook. Companies often focus on the direct impact of a price change on a single product, but the ripple effects within the same portfolio can be just as important. The article “Pricing Estratégico: Tras la captura de valor con solidez competitiva” by Allan Gamboa supports this idea, suggesting that a strategic approach must consider dynamic elasticity, meaning that prices should adjust not only to current demand but also in response to how products interact with each other across different segments and market conditions.
How Does Cross Elasticity Affect Value Capture?
The concept of value capture refers to a company’s ability to justify higher prices based on the consumer’s perception of value. When a company understands how cross elasticity impacts its portfolio, it can set prices that not only optimize sales for one product but also protect sales across its broader offering. For example, if a company raises the price of a premium product, it must ensure that this increase doesn’t push consumers away from its entire portfolio in favor of a competitor.
A recent McKinsey report highlights that companies adopting a holistic approach to pricing, considering cross and dynamic elasticity, have seen up to a 10% improvement in overall portfolio profitability. This underscores the importance of not only considering the direct impact of pricing but also its collateral effects within the product ecosystem.
AI and Predictive Analysis as Allies in Cross Elasticity
Artificial intelligence (AI) and machine learning tools, such as those offered by Wise Athena, are revolutionizing companies’ ability to predict cross-elasticity effects. By combining historical data with real-time analysis, companies can better anticipate how a price change will affect their other product lines and adjust their strategy accordingly. This not only enables more effective value capture but also helps companies avoid common pitfalls like internal cannibalization.
Gamboa’s article also mentions that dynamic elasticity can vary by region, seasonality, and even competitor actions, reinforcing the need for pricing strategies that are flexible and adaptable to different scenarios. The ability to adjust prices based on these fluctuations offers a key competitive advantage.
How Can Companies Effectively Manage Cross Elasticity?
One key recommendation from experts is that companies should not only analyze the individual impact of a price change but also implement a more holistic approach that considers the interaction of all products within their portfolio. As Singh noted, “Pricing is both an art and a science. It’s not just about the data; it’s about understanding how consumers will perceive and react to that price change within the context of your entire product lineup.”
Gamboa’s article suggests that companies that capture value effectively don’t just adjust prices to maximize the sales of one product—they carefully balance these adjustments to protect long-term profitability across the entire portfolio.
Final Thought: Is Pricing the Only Factor?
While pricing is crucial, it shouldn’t be the only factor considered in a successful RGM strategy. Cross elasticity, dynamic analysis, and value capture are equally important components that, when managed effectively, ensure a company maintains a strong and profitable competitive position.
If you’re ready to explore how cross elasticity can unlock new growth pathways, reach out to us at info@wiseathena.com. Athena’s AI-powered models offer advanced insights to strengthen your revenue growth management strategies beyond pricing alone. Our team of experts is here to create tailored solutions that align seamlessly with your goals.
Stay ahead of the competition and realize the full potential of your CPG business. Let’s embark on this transformative journey together!
