What would happen to the sales of your products if you slashed your prices by 50%?
The Australian Government has just announced a massive 1.2-billion-dollar programme to support the Hospitality and Tourism industry that is suffering from not having international visitors. They are offering a 50% subsidy on flights coming into certain travel destinations where previously there would’ve been a lot of international tourists, such as the Gold Coast, Whitsunday Islands and Cairns, as an example.
On the surface you might think “Wow, a 50% discount! Lots of people are going to take up this offer”.
You know, when we look at what’s going to happen to the demand for products and how many more people are going to buy them, there’s 2 factors that it’s really important to consider:
The first one of those factors is, what are the competitors doing? And so, if you are QANTAS for example, this doesn’t make your flights any cheaper compared to Virgin because Virgin’s flights will also be reduced by 50%.
And another important factor to consider is, what’s the cost of the flight as a proportion of the overall cost of a holiday? Because while the flight might be 50% cheaper, you still going to have to pay for the accommodation and taxis, and all of your food and entertainment and tours and any other expenses that you are going to incur on your holiday. So when we look at it in that context, it might not be a 50% discount on the cost of your holiday, it might only be a 10 or a 20% discount.
And we have to ask the question, is that really going to move the needle or not? Economists call the relationship between price and demand – Elasticity. That is the term that they use to describe it. It is really important, it is critical, to understand elasticity if you’re going to price your product properly, so that you know what the optimal price is going to be, especially, if you are doing Dynamic Pricing.
Now I ask the question, has the Government really considered elasticity in this situation? I dare say that they haven’t, and as a result their programme which sounds good on the surface is doomed to failure.
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