In one line
Price elasticity is the percentage change in volume divided by the percentage change in price. If a 5% price rise loses 8.4% of volume, the elasticity is about −8.4 ÷ 5 = −1.7.
What it does
- Step 1: take the price and the units sold before and after the change, over the same length of time.
- Step 2: divide the change in units (in %) by the change in price (in %). The answer is negative, because volume moves against price.
- Step 3: check what it does to sales value: (1 + price change) × (1 + volume change) − 1.
- Step 4: check profit. Gross profit is units × gross profit per unit. A price rise lifts profit per unit; it pays only if volume falls by less than that lift can carry.
Business and brand
Impact on the businessP&L, cash, share price
- Below 1 in size (inelastic), a price rise lifts sales value; above 1 (elastic), it lowers sales value.
- Profit has its own break-even: the volume you can lose before a rise costs gross profit. Work it out before you change price.
- Published averages are a guide, not your number: a meta-analysis of 1,851 estimates found a mean of −2.62 (Bijmolt and colleagues, 2005), an earlier one −1.76 (Tellis, 1988).
Impact on the brandMemory, loyalty, pricing power
- A strong brand has a lower elasticity: its buyers stay when the price rises.
- Measured elasticity rises with frequent deals, as shoppers learn to wait for them.
- Elasticity is not fixed: habit stretches the response, so the first quarter and the full year can differ.
Try it
Work it through on the engine
Pick a change to Brightwater's shelf price. The engine runs the quarter, and the lab works through the elasticity, sales value and gross profit step by step.
| Step | Before | After | Change |
|---|---|---|---|
| 1. Shelf price | €1.25 | €1.31 | +5% |
| 1. Units sold (m) | 30.29 | 27.74 | −8.4% |
| 2. Elasticity | −8.4% ÷ +5% | −1.69 | |
| 3. Net sales (€m) | 23.98 | 22.49 | −6.2% |
| 4. Gross profit per unit | €0.42 | €0.45 | +6.2% |
| 4. Break-even volume | €0.42 ÷ €0.45 − 1 | −5.9% | |
| 4. Gross profit (€m) | 12.82 | 12.47 | −2.7% |
Net sales are after retailer margin and trade spend; gross profit is net sales less product cost. Units are cans sold to shoppers.
Notice: Elasticity −1.69: volume moved −8.4% for a +5% price change. Volume fell more than the −5.9% break-even, so gross profit fell.
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
- Tellis (1988), Journal of Marketing Research: price elasticity meta-analysis, mean −1.76
- Farris, Bendle, Pfeifer & Reibstein (2010), Marketing Metrics, Wharton School Publishing: price elasticity and break-even
Teaching this? Teaching notes, a 20-minute plan and homework.