Price elasticity is the measurement of the change in quantity demanded and the change in the price of an item or service. This way, you can figure out just how sensitive a price is. Indeed, based on the result, you can figure out whether the product or service is elastic on inelastic.
If it is elastic, then the quantity demanded shifts whenever the price changes. Those that are inelastic, on the other hand, don’t see a change in the quantity demanded when there is a massive price change. So, how is this information relevant to your business?
For one, you can feel much safer the more data you have regarding how shoppers react to changes in price. Indeed, with the help of this information, it will be much easier to predict what your future sales will be like. You will also be able to set your prices with more confidence. Indeed, by knowing the price elasticity of demand, you will be able to figure out if you need to increase or decrease your prices, as well as if you should price discriminate, among many others. For example, if you find out that your demand is elastic, then it would be in your best interest to decrease your prices. However, in the case that your demand is inelastic, then you should increase your prices if you want your revenue to follow in the same path. In addition, if you figure out that the price elasticity of demand is very elastic, you can try using various advertising campaigns to bring down its elasticity. However, why do shoppers react elastically or inelastically whenever prices change?
For one, if you have a unique item that you can’t get anywhere else, then the demand is inelastic since customers don’t have any other place where they can get anything like it. Items that are necessities such as bread, for instance, are also inelastic because regardless of the price, people need to buy it as many meals require it! You will find that the same thing occurs for those products that people gain addictions to, such as coffee. Regardless of how much it is, people will purchase a cup each morning because they can’t go on with their day without it. The price elasticity of demand will also change depending on how much a consumer’s total income gets spent on the item of service, along with how strong their loyalty is to you, too. In addition, if you incorporate proper advertising campaigns, you can raise the demand for your item that way the demand won’t be as elastic.
Now, while the price elasticity of demand is easy to figure out with a simple formula, we do recommend taking advantage of pricing solutions. After all, manually making all of the calculations for each SKU, is not only time consuming but also yields a much higher risk of error. Humans will naturally always make mistakes; therefore, by using the help of a tool, humans can focus their time on things that they are better at, such as figuring out what are the next best steps for the company. Take, for instance, a price optimisation solution. Not only will it calculate the price elasticity of demand, but it will also be able to use the information to figure out where there are connections, along with many other types of analysis. The best part is that you know that the numbers are accurate since they are machine calculated. Additionally, the solution can process up to 60 different factors in comparison to pricing managers, who can only process three. In other words, it can do so much more than humans can at a much faster past than people can!
