How Price Elasticity Affects Small Business Owners in Michigan

Consumers are sensitive to price changes. And many are feeling the squeeze these days. Small business owners are also facing this pressure, but at a much larger scale.

As a small business owner in Michigan, you know that you can only charge so much for products or services before customers seek more cost-effective alternatives. Yet, determining what you should charge can be tricky. Especially when the economy is volatile. And what you charge will have a significant impact on your business’s growth, employment, and even your community.

You have to take into consideration your supply costs, manufacturing costs, staffing costs, and other requirements to deliver your product or service. So to avoid a Chapter 11 bankruptcy, you need to understand how price elasticity affects small business owners in Michigan.

What Is Price Elasticity?

In case you’re not familiar, price elasticity refers to how responsive demand is to price changes. Economists and businesses use it to understand customer sensitivity to these fluctuations.

The demand for some products or services is more elastic than for others. For those that are highly elastic, customers will be less receptive to an increase in price. These are products that aren’t a necessity, and the consumer could, therefore, do without or find it somewhere cheaper.

Meanwhile, when the demand is inelastic, businesses have more wiggle room. Gasoline is the perfect example. If the price per gallon goes way up, consumers may drive a bit less. But they won’t stop buying it, because they need it. Plus, the trucking and airline industries rely on gas too.

When times are challenging and businesses struggle financially, the first knee-jerk reaction is often to increase prices to offset the decrease in demand. But if the need for your product is negligible, this can be a huge mistake. And your company could face the looming possibility of needing skilled bankruptcy attorneys to help you.

How Price Elasticity Affects Small Business Owners in Michigan

If you have a product or service that can be swapped out for a substitute at a lower price, taking advantage of price elasticity models could save you from bankruptcy. These tools quantify the responsiveness (elasticity) of demand to help you understand your consumers’ behavior, optimize pricing strategies, and forecast sales and revenues.

But even if you’re fortunate enough that the demand for your product or service is inelastic, that doesn’t mean you’ll never need a bankruptcy attorney. Right now you may be able to raise your prices and it won’t hurt demand. But it also means that reducing your prices isn’t going to drive more consumption either.

And your product’s or service’s price elasticity can change over time based on various factors. Some are within your control. But others are predicated on market conditions.

What Causes Price Elasticity to Change?

One of the biggest factors for elasticity has to do with how easily a consumer can substitute your product or service for another. If your offering something brand new on the market, for example, then you’re in great shape. But as soon as another company starts offering the same product or something similar, the demand for yours will fall.

Another factor is how discretionary the purchase is. Is your product or service a necessity? For example, someone who’s shopping for a new dryer because theirs stopped working is going to be willing to pay a little more. Yet, someone who’s considering a new dryer when the old one still works isn’t going to have the same urgency.

Even the market for required add-on products, such as brand- and model-specific printer cartridges, is always expanding as the internet offers compatible alternatives.

Plus, the time of a price change can also impact price elasticity. For example, the price of a warm coat can be reduced in the summer. But most consumers aren’t thinking about warm coats in the heat of summer, so they are willing to pay more when the cold actually hits.

What About Luxury Items and Vices?

Strangely enough, it may seem that luxury items would be highly elastic because they aren’t a necessity. Yet, they are often inelastic since consumers purchase them not only for psychological reasons, but also because of their brand name. Still, some people are fickle. So while one brand name may be popular one year, the following year, it could be all but forgotten.

Addictive products such as cigarettes are also inelastic. Higher prices are not usually enough to get people to stop smoking. Even so, this is no guarantee either. Businesses respond to new information by offering products that could be a healthier alternative, or even services to help consumers quit smoking.

Are You Looking at the Potential of Filing for Chapter 11 Bankruptcy?

It’s tough to be a business owner these days. And clearly, price elasticity affects small business owners in Michigan just as much as anywhere else.

So if you’re struggling to keep your business afloat, just know you’re not alone. The experienced bankruptcy attorneys at Gold, Lange, Majoros, and Smalarz can help. Contact us today to set up your FREE consultation. And find out how we can help you move forward with business reorganization and debt workout through a Chapter 11 bankruptcy.