To the Editor:
You published an article on 16 March quoting Charles Young of JD Power on the topic, 'Outlook worsens for UK as long as the pound is strong.'
Within this article, price elasticities were mentioned. Concerning the level of these price elasticities, a value of three was mentioned as a rule of thumb. That is, if the price is raised by 1 percent and competitors keep their prices stable, a volume loss of 3 percent will result.
We have made many worldwide price examinations and pricing studies in recent years for companies like Audi, BMW, Mercedes-Benz, GM/Opel and Volkswagen, and we cannot agree with this rule of thumb.
What do you learn from this pure figure of three? Nothing!
First of all, you have to make really clear what price variation you are talking about. Price elasticities vary a lot between price changes of a whole car brand, of a whole series, or of a single model.
Other factors affecting elasticity include regional or country-specific aspects, car segment and customer preferences. Nevertheless, in many pricing studies performed by Simon, Kucher & Partners for the automotive industry, the volume loss associated with a price increase of 1 percent can be reasonably given a first approximation as listed in this table:
Price changed for ... Results in ...
A single model -5% to -9%
A whole series -2% to -5%
Whole brand -1% to -2%
In any case it is important to get the best possible information about price elasticity. The corresponding volume and profit effects are much too big to allow mistakes. All the various elasticities are measurable, but not by just holding a thumb in the air. The rule to remember about price elasticities is: 'Not every elasticity is the same.'
Simon Kucher & Partners