Price elasticity of high-end cotton apparel and children's toys

Price Elasticity

Comparing the price elasticities of two products, the first having price elastic demand, and the second having price-inelastic demand, followed by an assessment of their respective implications for total revenue are discussed in this analysis. For purposes of this analysis, the price-elastic products are high-end cotton women's apparel which has shown to consistently have a high degree of price elasticity from previous studies (Fadiga, 2003,136-142). The price elasticity of these high-end cotton women's products has persisted for many decades and now pervades the industry's value chain as a result (Shahnawaz, 2004, 74-84). The inelastic product included in this analysis is children's toys. The accumulative effects of mass merchandisers including Wal-Mart sustaining years of price wars in this category of products have significantly impacted the price elasticity of this industry (Zimmerman, Pereira, Kim, 2003, et.al) by limiting the number of substitute products available by forcing consolidation of the toy industry. Paradoxically the reliance on branding within toys has worked to further inelastic pricing demand performance (Petropoulos, 2000, 135-138) while on high-end women's cotton apparel the use of branding to reinforce exclusivity (Oliveira-Castro, Foxall, Schrezenmaier, 2005, 309-335). Price elasticity for each of these product categories is also completely consistent with the length of typical purchase and use cycles as well. As has often been shown of industries that exhibit a high elasticity of demand, the purchasing cycles for high-end cotton women's apparel is significantly longer than that of a children's toy. There is also the implied reliability, durability and extended use of higher-end women's cotton clothing, with the highest-end garments deliberately designed to last several fashion generations. Toys on the other hand are highly seasonal and quickly become obsolete, further leading to their industry having a greater degree of price inelasticity.

Price Elasticity of Children's Toys

By definition price elasticity is defined by the sensitivity of product demanded based on a percentage change of its price (Sahay, 2007, 53). When a product's price change leads to an equal to a larger percentage change in demand, a product is considered to be elastic. In industries that have become more inelastic over time there is a continuing effort to define dynamic pricing models that seek to optimize price given demand for a specific product at a specific point in time (McAfee, Vera te Velde. 2008, 432-448). This price optimization approach to strategically attempting to create a demand curve (Docters, Durman, Korman, Schefers, 2008, 22-25) has been successful in services industries trending towards inelasticity yet have been marginally successful in toy manufacturing and distribution. The inelasticity of the toy industry is also specifically created in part by the very rapid product lifecycles and use of severe price discounting at the end of every toy season to quickly reduce inventories through distributors and retailers. In effect the toy industry is by nature highly inelastic due to the nature of its seasonality and approach to competition and differentiation. The one exception in the toy industry is the area of electronic games, which have just as rapid of product lifecycles, yet have greater differentiation and therefore price elasticity based on depth and complexity of content and programming. Overall however toys are inelastic given the nature of their industry, the role of mass merchandisers in re-defining the supply chains and pricing of the industry, and the inherent nature of short purchasing and consumption cycles of these products.

Total Revenue Implications

Clearly the revenue implications of managing products with low price elasticity as toys are require an inordinate level of supply chain, distribution and logistics efficiency as the per-unit margins are already under severe pressure. For products that have higher levels of price elasticity there is the benefit of typically greater gross margins yet the constraint of longer sales cycles. Intermediating between these two extremes is the need for demand management and demand planning on the part of retailers who stock products with these extreme price elasticity characteristics. For the retailer selling high-end women's cotton apparel the challenge is to create a suitable inventory management model that capitalizes on enough inventory turns to allow for maximum profits without degrading the brand's equity or inadvertently redefining the demand curve of an industry (Shahnawaz, 2004, 69-84) for toys which have inherently shorter lifecycles and much more of a shorter sales cycles (Farrell, Shields, 2007, 445) the challenge to retailers in attaining maximum profits on these products are to focus first on operational efficiencies. The need for rapid inventory turns, accurate demand forecasting and planning, pricing optimization and optimization of shelf space to the floor level are all needed to ensure profitability is attained in this highly inelastic market. Counterbalancing each requires an integrated supply chain capable of managing the rapid inventory turns necessary for inelastic products while preserving the profitability and accuracy of demand forecasts for the highly price elastic product of high-end women's cotton apparel. Accurate demand curve analysis is crucial in both cases to maximize the level of profits by product.