module 3.6 price elasticity

Price elasticity

Price elasticity gives marketer a way to measure that sensitivity

Without elasticity , pricing decisions are mostly guess with elasticity , pricing becomes much more data driven

Core definition :-

Price elasticity measure : how much demand changes when price changes

More specifically : if price changes by 1 % how much does demand change

Formula :-

Price elasticity of demand =%change in quantity demand

Divide

%change in price

Don’t focus on memorizing the formula focus on what it tells you:

How strongly customers react to price changes

Elastic demand & inelastic demand

Think of demand like a rubber band

Elastic demand :-

• The rubber band stretches easily

• Small price change → large demand change

• Customer react strongly

Inelastic demand :-

• The rubber band barely stretches

• Large price change → small demand change

• Customer react weekly

Understanding elastic demand

• Customers are highly sensitive to price

• A small increase in price can cause a large drop in sales

Example : generic shirts

• Suppose a plan white shirt costs : ₹500

• You increase price to :₹550

Customer can easily switch to :

• Another seller

• Another brand

• Another website

Demand may drop significantly

This is elastic demand

Understanding inelastic demand

• Customer are less sensitive to price changes

• Prices can rise without causing major demand loss

example:- prescription medicine

Suppose a medicine costs :₹100

Price increase at :110

• most patients still needs it

• Demand changes very little

• This is inelastic demand

Characteristics of elastic products

• many alternatives exist

• Easy comparison

• Low differentiation

• Non essential purchase

Characteristics of inelastic products

1. Necessary products

2. Few substitutes

3. Strong brand loyalty

4. High. Switching costs

Why marketers care so much about elasticity

Because elasticity determines whether rising prices helps or hurts. Revenue

Example :- movie theatres

Movie Theatre often know Demand varies by time

Weekday afternoon :-

• Demand is elastic

• Many seats are empty

• Customer price sensitive

• Result: Discount pricing

Friday night :-

• Demand is less elastic

• People strongly want entertainment

Result: Higher price

Elasticity can change, depending on context

Elasticity is not fixed:-

A common mistake is thinking elasticity is permanent changes based on:-

• Competition

• Customer knowledge

• Economic condition

• Brand strength

• Product category

How great brands use elasticity

• Branding often exist to reduce elasticity

• Strong brands make customers focus on less price

Example :-

A customer buying a luxury watch may think about :

• Craftsmanship

• Status

• Heritage

• Design

Instead of”saying is it 5000 cheaper somewhere else”

Lesson the stronger the perceived value , the lower the elasticity

What businesses actually want :-

Most businesses what :

Lower price sensitivity

Lower elasticity

More pricing power

this is why companies invest heavily in :

• Branding

• Customer experience

• Loyalty programs

• Differenitions

They aren’t just selling products

They reducing elasticity