Group: 2

Reported Date: October 04, 2022

Module: 2
Topic: Profit's Sensitivity to Price
Section and Time: MM E2019 6:00 – 9:00 pm Tuesday

Learning Objectives:

 To recognized the influence of price changes to capture customers.

 To differentiated the relationship between the price cuts, to sales volume and the
firm’s profit.
 To computed the elasticity of demand to optimize profit.

Reporter: Danica Anne J. Nipas

Topic: Pricing Sensitivity and Its Importance

Pricing Sensitivity

Price sensitivity refers to how changes in the price of products/services affect

how many units are purchased. Or in other words, pricing sensitivity is the influence of
changing price points on consumer purchasing behaviors. The Law of Supply and
Demand states that as prices go down, the quantity demanded goes up (and vice-
versa). While this usually is the case in most markets, we can think of a few examples
where setting prices too low can lead to lower quantity demanded. In most cases, if you
raise your price, some of your customers will leave you for less expensive options.
Pricing sensitivity differs greatly across people. Even the same people can be very price
sensitive for one type of product, but not very price sensitive regarding another.

Why Price Sensitivity is Important?

Understanding the pricing sensitivity for your product/service is key to maximizing

profits if buyers are less price sensitive toward your offering than for your competitors,
you usually can maximize profits by raising prices. The opposite is true if buyers are
more price sensitive toward your offering either way, understanding your customer’s
pricing sensitivity allows you to adjust prices accordingly and avoid leaving money on
the table. You don’t necessarily want to set prices to optimize profits just for the next
quarter if the long-term result is decreased profits over the next five years. Initiating a
price cutting war might lead to such results.

Reporter: Matet Anne Calapre

Topic: Profits Sensitivity Analysis and Its Formula

Profits Sensitivity Analysis

Demonstrates the Impact of small change in price on profits and uncovers

volume hurdles. In strategic decisions to attack a specific market at a new price point,
volume hurdles enable executives to quantify the required selling goals and compare
them against their expectations of potential demand. In tactical pricing decisions,
volume hurdles are a routine procedure in setting sales target for price promotions and
discount practices and for evaluating the profitability of price concessions at the end of
the promotions.

Profit sensitivity analysis is conducted to construct volume hurdles. We highlight

the importance of understanding the relationship between prices and demand leading to
an exploration of elasticity of demand. Evaluates the impact of a small price change on
profitability. It is a straightforward analysis of the expected profits earned at two different
prices. With a profit sensitivity analysis, we compare the expected profits to be earned
at the current price against those which may be earned at a different price.

Profits Sensitivity Analysis Formula

π = Q (P - V) - F

π - Profit
Q - Quantity Sold (volume)
P - Price
V - Variable Cost
F - Fixed Cost
Among the variables that determine the profit, a pure price change influences the
quantity sold but not the variable and fixed cost.

πi = Qi (Pi - V) - F
πf = Qf (Pf - V) - F

For normal goods price increase is associated with volume decrease and vise versa. "
negatively correlated " in normal markets.

Reporter: Joshua D. Balatucan

Topic: Volume Hurdles and Its Formual
Volume Hurdles

Result from the requirement for price changes to leave the firm better off, if not at
least as well off, after the price change than it was before. Based on the profit motive of
the firm, we can state that the requirement of price changes to improve profits as 𝜋𝑓
≥𝜋𝚤.

The required demand increase to justify a price cut and the allowable demand
sacrifice to justify a price hike. To quantify the required selling goals and compared
them against the expectations of potential demand. Routine procedure in setting sales
target for price promotions and discount prices and for evaluating the profitability.

Volume Hurdles Formula

𝜋𝑓 ≥𝜋𝚤
Reporter: Lorecca O. Malacas
Topic: Elasticity of Demand
Elasticity of Demand

Elasticity is formally defined as the ratio of the percent change in volume to the
percent change in price. A measure of the changes in volume delivered with a change
in price.

Elastic (|Ɛ| > 1)

Markets are said to be elastic when a small change in price has a large effect on the
quantity sold.

Inelastic (|Ɛ| < 1)

Markets are said to be inelastic when a large change in price has only a small effect on
the quantity sold.

Perfectly Elastic Demand

A perfectly elastic demand is a demand where any price increase would cause
the quantity demanded to fall to zero, and reducing the price of a good or service will
not increase sales.

Perfectly Inelastic Demand

IA perfectly inelastic demand is a demand where the quantity demanded does

not respond to price.

Unitary Demand
 Unitary elasticity of demand is a situation in which the price change affects the
quantity demanded at an equivalent percentage.
Reporter: Alma G. Dormiendo
Topic: Factors Determining the Price Elasticity of Demand and Economic Price
Optimization
Factors Determining the Price Elasticity of Demand

1. Nature of Commodity
- Ordinarily, demand for necessities like salt, matchboxes, Kerosene oil, etc. is less than
unitary elastic or inelastic.

2. Availability of Substitutes
- The greater the substitutes available for the product, the greater will be its
elasticity of demand.

3. Goods with Different Uses

- The greater the number of uses to which a commodity can be put, the greater is its
elasticity of demand.

4.Postponement of the Use

- Goods whose demand can be postponed to a future period have elastic demand.

5.Habit of the Consumer

- Consumer: Goods to which a person becomes habitual will have inelastic demand like
cigarette, tobacco, coffee, etc. It is so because a person cannot do without them.

6. Price Level
- Elasticity of demand also depends upon the level of price of the concerned commodity.
Elasticity of demand will be high at higher level of the price of the commodity and low at
the lower level of the price.
7. Time Period
Demand is inelastic in short period but elastic in long period. It is so because in the
long-run, a consumer can change his habits more conveniently than in the short period.

Economic Price Optimization

The method of identifying the price that maximizes profits and it relies on
qualifying the elasticity of demand, a measure of the relationship between price
changes and sales volume. From the profit sensitivity analysis, we see that raising
prices can increase profits directly by improving contribution margins and decrease
profits indirectly through their moderating effect on demand. These insights imply that
there is some price that balances the opposing influences and delivers the maximum
profits. Economic price optimization is an approach to identity the profit maximizing
price. Any price above the optimum will damage profits by depressing demand
sufficiently to destroy gains created by improving margins. Any price below the optimum
will damage profits by decreasing margins more than the gains earned in improving
volumes.