In one line
Price elasticity is the percentage change in volume for a 1% change in price. At −1.5, a 1% price rise loses about 1.5% of volume.
What it does
- Volume moves against price. If elasticity is above 1 in size, a rise loses more in volume than it gains in price, so sales value falls.
- Margin per unit rises with price while unit cost stays put. Whether gross profit rises depends on how many units go: at the elasticities most packaged goods face, the lost units eat most or all of the extra margin.
- Shoppers react more to a deal than to the same cut in the shelf price: published deal elasticities are several times regular ones. Habit stretches the response over a few quarters.
Business and brand
Impact on the businessP&L, cash, share price
- A price rise lifts profit only when buyers barely react; at typical elasticities it gives up sales and share for little or no extra profit.
- A price cut buys volume at a real cost in margin, and rivals may match it.
- Analysts watch price and mix separately from volume in the results.
Impact on the brandMemory, loyalty, pricing power
- A brand that holds price without losing many buyers has pricing power.
- Repeated deep cuts teach shoppers the brand is cheap and to wait for deals.
- Quality backs a premium: better products earn part of their price back.
Try it
Set the price, or run a deal
Move the shelf price, or switch to a deal, and see volume, sales value and gross profit against the plan you started from.
Against holding price, Brightwater, first quarter
- Volume▼ 8.4%
- Sales value▼ 6.2%
- Gross profit▼ 2.7%
Notice: A 5% price rise moves volume ▼ 8.4%, sales value ▼ 6.2% and gross profit ▼ 2.7% in the quarter. Volume falls faster than price rises, so the extra margin per unit doesn't cover the lost units and gross profit falls.
Runs Countermove's market engine: the reference soft-drinks market, three brands, rivals holding their plans so only your change moves the result.
Sources
- Bijmolt, van Heerde & Pieters (2005), Journal of Marketing Research: 1,851 price elasticities, mean −2.62
- Jedidi, Mela & Gupta (1999), Marketing Science: deals and long-run price sensitivity