Price elasticity measures how sensitive customer demand is to changes in price. It shows whether customers buy significantly more or less of a product when the price changes.
Why Price Elasticity Matters
Price elasticity helps teams understand how customers perceive value and how pricing decisions impact performance. It reveals:
- How demand responds to price changes; up or down
- Which products can tolerate higher prices without losing sales
- Where discounts will meaningfully increase volume
- How to protect margin by avoiding unnecessary markdowns
- How customers compare alternatives within or across categories
Elasticity is a core input for pricing strategy, promotions, and forecasting.
How Price Elasticity Is Calculated
Price elasticity is typically expressed as:
Elasticity = % Change in Quantity Sold/% Change in Price
- Elastic (>1): demand changes more than price, customers are sensitive
- Inelastic (<1): demand changes less than price, customers are less sensitive
- Unit elastic (=1): demand changes proportionally to price
Example: If a 10% price increase leads to a 20% drop in sales, elasticity is −2 (elastic).
Common Use Cases
- Pricing strategy: setting optimal price points
- Promotion planning: predicting the impact of discounts
- Assortment decisions: understanding which products are value‑driven vs brand‑driven
- Forecasting: modelling how price changes affect demand
- Margin optimisation: balancing volume and profitability
- Cross‑functional alignment: helping teams understand customer sensitivity
Related Terms
- Promotion
- Markdown Spend
- Demand
- Conversion Rate
- Assortment
- Forecasting
What Price Elasticity Really Tells Us
When we look at price elasticity through a systems lens, it becomes more than a formula it becomes a signal of how customers think, compare, and decide. The deeper insight comes from understanding why customers are sensitive or not: brand strength, product uniqueness, competitive alternatives, seasonality, and emotional drivers.
Price elasticity also reveals the cross‑functional dynamics behind the scenes. If marketing builds strong brand equity, elasticity decreases. If merchandising overbuys, promotions artificially inflate elasticity. If competitors discount aggressively, elasticity shifts. The system reminds us that elasticity is not fixed it’s shaped by the entire customer experience.
And at its core, price elasticity is a human story. It reflects perception, value, trade‑offs, and the emotional logic behind spending. When brands treat elasticity not as a rigid number but as a signal, they unlock smarter pricing, more intentional promotions, and more sustainable growth. That’s the heart of modern ecommerce: understanding how people respond to price and why.
