A Refresher on Price Elasticity

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• price elasticity shows exactly how responsive customer demand is for a product based on its price.

• “Marketers need to understand how elastic, sensitive to fluctuations in price, or inelastic, largely ambivalent about price changes, their products are when contemplating how to set or change a price,”

• Note that the negative is traditionally ignored and the absolute value of the number is used to interpret the price elasticity metric, as it’s the magnitude of distance from zero that matters and not whether it’s positive or negative.

• “The higher the absolute value of the number, the more sensitive customers are to price changes,”

• Products that fall in this category are mostly “pure commodities,” says Avery. “There’s no brand, no product differentiation, and customers have no meaningful attachment to the product.”

• Gasoline is a good example here because most people need it, so even when prices go up, demand doesn’t change greatly. Also, “products with stronger brands tend to be more inelastic, which makes building brand equity a good investment,”

• “Our job is to create products and services that have unique and sustainable value for customers compared with other options available to them in the marketplace. Price elasticity is a way for us to measure how we’re doing in that regard,”

• If my product is highly elastic, it is being perceived as a commodity by consumers.”

• “A marketer’s goal is to move his or her products from relatively elastic to relatively inelastic,”

• “You can’t look at it in isolation,” says Avery. “You have to look at it in context of the industry and its competitive structure and in the context of consumers’ lives.”

• Elasticity is not the same thing as sensitivity, she warns. “Sensitivity is more of a qualitative concept where elasticity is a quantitative one. But they are closely related.”

• “but you also want to understand why consumers are acting the way they are. Understanding the why behind consumer behavior is critical to predicting how they will respond in the future.”

• It’s also important to keep in mind that understanding the price elasticity of demand for your product doesn’t tell you how to manage it