What are consumer surplus and producer surplus?

What are consumer surplus and producer surplus?

01/04/2022 - Pricing strategy

Online pricing strategies are based on the classic theories of economics, which pursue market efficiency for both the retailer and the user. Consumer surplus and producer surplus are two basic concepts that your dynamic pricing strategy must address to reach the peak of benefits: total welfare. Do you know how these concepts relate to your business? We’ll tell you.

Consumer and producer surplus: definitions

Consumer and producer surpluses are the concepts that, in microeconomics, relate the needs and expectations of the two parties operating in a market: the buyer and the retailer.

Consumer surplus refers to the benefit to the purchaser of buying a product for a price lower than the amount they were willing to pay. This concept is closely linked to the elasticity of demand and the user’s perception of the product’s value, the type of need it meets, and the social expectations involved in its purchase.

On the other hand, producer surplus is the benefit that retailers gain by selling at a price higher than they considered acceptable in their expectations. This reflects the profit margin earned by the producer or retailer, which is a clear indicator of the company’s competitive advantage in the market. 

Total welfare in pricing strategies

The concept of total welfare determines the most beneficial price for the market and therefore for both parties: the price which improves the consumer’s expectations by being lower than the price they were willing to pay, and which, in turn, is higher than the price at which the producer was prepared to sell for. Thus, market balance is achieved, allowing a constant production rate to be maintained that meets the user’s needs, while returning sufficient profits to the company.

As you can imagine, this concept directly affects the prices selected for products in your catalogue. This is where both the demand curve and price intelligence tools prove their worth.

Total welfare in pricing strategies

How does price intelligence benefit market balance?

Price intelligence is a technique that uses big data to find the most profitable prices for an e-Commerce business, on a market-by-market basis, at all times. Consumer contact points with products are analysed and interpreted to understand how they behave in the purchasing environment.

A price intelligence tool, such as Reactev, provides the solution e-commerce businesses need to sell online at the best price, which improves both buyer and retailer expectations. Total welfare is achieved by realising this desired balance, allowing brands, among other things, to:

  • Sell at a price that protects profit margins.
  • Limit production surpluses.
  • Have a fair operating relationship with the market and consumers.

In addition to finding the right price for each product, it is possible to make the most of price intelligence by applying dynamic pricing. By setting as many variations as necessary with new prices for each product, you can consistently achieve maximum return from each sale.

Request a demo now with Reactev and see how you can improve your market position with price intelligence.

Category: Pricing strategyPromotion optimization

Tags: ecommerce

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Maria Jose Guerrero
Content Manager

The first dynamic pricing solution designed by and for retailers