Price elasticity measures how much demand changes when price changes.
The Basics
If a 10% price increase reduces quantity sold by 20%, elasticity is −2: demand is elastic. If quantity falls only 5%, demand is inelastic.
Estimating Elasticity
- Historical data: regression of sales on price, controlling for seasonality, promotions and competitors. Beware confounding — prices often change for reasons that also affect demand.
- Experiments: randomised price tests give cleaner estimates, where legal and acceptable.
- Surveys: conjoint analysis and willingness-to-pay studies.
Pricing Analytics Uses
- Setting list prices.
- Planning promotions and discounts.
- Markdown optimisation for seasonal stock.
- Segment and channel pricing.
Beyond Elasticity
Consider margins, competitor responses, brand perception and long-term customer value.
Ethics and Law
Personalised or dynamic pricing can breach consumer protection or discrimination laws and erode trust. Review with legal teams.