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Is the Price Right?

Pricing is an integral component of a firm’s marketing strategy. Setting a price too high may drive away potential customers. Setting a price too low may raise doubts among potential customers as to the quality of the good or service.

The trend in consumer prices (inflation) is an essential guide to businesses in price setting for their goods and services. Prices are the key to revenue and profits and they also influence employee demands for pay increases.

Price data for the standard market basket of goods and services purchased by urban households is collected by the U.S. Bureau of Labor Statistics from 23,000 retail and service establishments every month. Over time weights are used to adjust for changes in technology and the quality of goods and services.

In its analysis of a business’ primary market area, ECON First examines the relevant consumer price index for the relevant region. BLS collects price data by four major Census regions and for 26 local areas. The price data for more than 200 expenditure categories are tracked and periodically adjusted for changes in quality and technology.

The latest rate of price change by detailed good and service is a useful guide to businesses for changing prices, especially in combination with recent changes in total sales.

As seen in the graphs below, there is considerable variation over time in the rate of inflation among the various consumer goods and services. For example, the prices of essential goods and services for which there a few good substitutes such as medication, health care, and food tend to be relatively stable over time.

The prices of goods and services whose purchase can be postponed or for which there are ready substitutes swing more broadly, including durables such as furniture and electronics and services such as travel.

Obviously for goods and services where there are many substitutes (e.g., fast food restaurants), there is very limited latitude for price changes.

Knowing the most recent pattern of price increases for their good or service allows firms to keep price in line with competitors and to quickly identify whether the price of their good or service is trending up or down relative to all consumer expenditures. The trend over time also provides insights into the major demand and supply forces behind any changes in price.

ECON First helps clients in finding relevant data to construct their pricing strategy.

Dr. John E. Stapleford