What is price elasticity?
Raise a price and most products sell fewer units. Elasticity says how many fewer. It turns pricing from a guess into a trade-off a team can calculate: how much volume do we give up for each point of price?
Elasticity is usually negative, because demand falls as price rises. People often quote the size alone, so "an elasticity of 2" usually means -2.
How do you read price elasticity?
| Elasticity | Called | What a price rise does to revenue |
|---|---|---|
| 0 to -1 | Inelastic | Revenue rises, because volume falls less than price rises |
| -1 | Unit elastic | Revenue stays about the same |
| Beyond -1 | Elastic | Revenue falls, because volume falls more than price rises |
Cross-price elasticity measures how demand for one product responds to another product's price. A positive number means substitutes, such as two competing sodas. A negative number means complements, such as printers and ink.
Demand is usually more elastic when there are close substitutes, when the purchase is a large share of the budget, and over longer periods, when people have time to switch.
What is an example of price elasticity?
Two products, one price increase
A retailer raises prices 5% on a store-brand cereal and on a well-known brand. Store-brand sales fall 12%, an elasticity of about -2.4. The known brand's sales fall 3%, about -0.6.
The known brand's revenue rises after the increase. The store brand's falls. The difference is pricing power, the extra value people place on a brand they trust.
Price elasticity vs. pricing power vs. willingness to pay
| Price elasticity | Pricing power | Willingness to pay | |
|---|---|---|---|
| What it measures | Demand's response to a price change | Ability to hold or raise price without losing customers | The most a customer would pay |
| Level | A product or category | A brand | A person or segment |
| Measured with | Price tests and demand models | Price and share trends against competitors | Surveys and experiments |
Why does price elasticity matter?
Price is often the fastest lever on profit, and the riskiest. Knowing elasticity shows when a discount will pay for itself and when it simply gives margin away.
- Smarter promotions. Discounts on inelastic products mostly lose margin.
- Brand value in numbers. Lower elasticity than competitors is evidence that the brand is worth something.
- Careful measurement. Promotions, seasons, and competitor moves all change demand at once, so elasticity needs tests or models that separate them.
How does Alli do this?
Alli by PMG's Brand Equity includes Pricing Power as one of its unaided signals. A brand people will pay more for can hold its price while competitors discount, which protects margin, and the signal is read against the competitive set so CMOs can show whether the brand can hold its price as competitors move.
Two years of signal history shows how the brand moved through price changes, competitor launches, and slow quarters, and the same brand signals feed Alli Scenario Planner, where brand strength shapes the revenue forecast.
Explore Alli Brand EquityPrice elasticity FAQ
What is the formula for price elasticity of demand?
Percentage change in quantity demanded divided by percentage change in price. A 10% price increase that causes a 15% drop in sales gives an elasticity of -1.5.
What does it mean if demand is inelastic?
Demand changes less than price does. An inelastic product can usually raise its price and increase revenue, because few buyers leave.
What is cross-price elasticity?
How demand for one product changes when another product's price changes. It's positive for substitutes and negative for complements.
How does brand strength affect price elasticity?
Strong brands usually have less elastic demand, because buyers value them beyond the product itself and are less likely to switch when the price rises.
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