Finance
Price elasticity
Outline opportunities for raising or lowering prices.
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Price elasticity vs The price elasticity of demand (Marshall)
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The price elasticity of demand (Marshall)
Some of the short-term profit growth options discussed in [Strategic repositioning and shaping profit growth options](../strategic-repositioning-and-shaping-profit-growth-options--3835e8ad/index.md) related to the adjustment of product pricing in key segments, whether up or down.
Read articleChoice logic
Use this when.
Estimate how price changes may affect volume and revenue.
Use elasticity whenever a material initiative raises or lowers price relative to competitors.
Extracted signals
Strengths, limits, and pitfalls.
Price elasticity
- Start with a precise price, customer, product, channel and time window. Use realised net price and causal evidence where possible, then report uncertainty rather than a universal elasticity constant.
- A regional newspaper group facing declining profitability considered raising advertising prices. Its sales team expected any increase to destroy demand. Management surveyed retailers, entertainment businesses and other advertisers about the importance of newspaper advertising and their likelihood of buying different formats at different prices.
- Three quarters regarded advertising as important and placed newspapers high among available media. Around 25–35 per cent said they would not buy newspaper space at any price and were classified as outside the addressable segment. Among potential buyers, the estimated elasticity was −0.8, suggesting relatively inelastic demand.
Watch for
- Do not infer elasticity from one uncontrolled price change or from stated willingness alone. Promotions, mix, competitors, contracts, stockouts and delayed response can all produce a misleading estimate.
The price elasticity of demand (Marshall)
- Translate a proposed price change into its required and expected volume response, then test the implied elasticity against evidence and contribution economics.
- For a price reduction, state the volume or share increase required to improve contribution and derive the implied elasticity. For an increase, estimate the expected volume loss, customer migration and competitor response. Check whether assumptions match historical tests, customer research and comparable products.
- Typical price elasticities of demand
Watch for
- Do not import a web estimate from a broad category into a specialised offer without checking segment, geography, time horizon and starting price.
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