Price elasticity - A potential pricing tool at IKEA

Abstract: Research questions: How will price altering affect sales volume for IKEA of Sweden Business Area 10’s products? Is it possible to estimate the products’ price elasticities? If so, what data is sufficient and how can these parameters contribute to future pricing procedures at BA10? What product properties are necessary in order to retain a reliable analysis? In which way are sales volumes influenced by macroeconomic factors such as real income, unemployment and business cycles? Is there an appropriate way to define homogenous markets for IKEA? If a model that describes the local behaviour is found, will this model be globally applicable or should it be modified to fit different markets? Are there any microeconomic substitution or complementary effects outside or within the IKEA range? Do internal factors, for example advertising and service levels, affect the demand and therefore sales turnover? How can a model take these effects into consideration? Purpose: The purpose of this Master thesis is to develop a theoretical pricing model that will assist as a quantitative tool for future pricing decisions. The tool will become a complement to the internal company factors and external environmental factors, which today have the greatest impact on the pricing procedures. In addition the model should preferably be applicable on both existing and new products. Methodology: In order to estimate the price elasticity for BA10’s products, the authors first had to gain knowledge concerning BA10’s products and the business areas’ current pricing strategies and procedures. Thereafter the authors designed a regression model with the help of academic theory. A demand curve illustrating the relationship between quantity demanded, Q, and the price, P, of a BA10 product was defined. Thereafter additional measurable factors that affect demand were defined, in order to deduct heterogeneity among countries. With the aim to attain reliable regression results the authors finally created a program, which performed all calculations automatically. The research process has been iterative and both quantitative and qualitative methods have been applied. Conclusions: The authors have designed a regression model that estimates the price elasticities for BA10 products. Products included in the model are currently in the range and have a sales history of at least one financial year. The authors draw the conclusion that price has a statistically significant impact on sales volumes for the majority of BA10’s products. Suitable prices are therefore crucial, in order to maximize turnover. The products belonging to the two lowest price groups have been identified as the most price elastic. In addition the authors have concluded that the demand for BA10’s products is positive correlated with income, i.e. the products should be classified as normal goods. The authors have identified three prior fields of application for the results of this thesis; optimization in price investments, forecasting and prioritisation in range development.