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Beef, as discussed above, is an example of a product that is relatively elastic. Relatively elastic where small changes in price cause large changes in quantity demanded (the result of the formula is greater than 1).“There’s no brand, no product differentiation, and customers have no meaningful attachment to the product.” Products that fall in this category are mostly “pure commodities,” says Avery.

Perfectly elastic where any very small change in price results in a very large change in the quantity demanded.

As she explains in her “ Marketing Analysis Toolkit: Pricing and Profitability Analysis,” there are five zones of elasticity. “The higher the absolute value of the number, the more sensitive customers are to price changes,” explains Avery. 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. Plugging those numbers into the formula, you’d get a price elasticity of demand of: The percentage decrease in demand is -10%. Now let’s say that the increase caused a decrease in the quantity sold from 1,000 coats to 900 coats. Say that a clothing company raised the price of one of its coats from $100 to $120. This is the formula for price elasticity of demand: When the price dramatically increases, demand may go way down because people can easily substitute chicken or pork. “Some products have a much more immediate and dramatic response to price changes, usually because they’re considered nice-to-have or non-essential, or because there are many substitutes available,” explains Avery.

#TWEETADDER ALTERNATIVE 2015 HOW TO#

“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,” says Avery. But the phenomenon is more quantifiable than that, and price elasticity shows exactly how responsive customer demand is for a product based on its price. Most customers in most markets are sensitive to the price of a product or service, and the assumption is that more people will buy the product or service if it’s cheaper and less will buy it if it’s more expensive. To better understand this concept and how it impacts marketing, I talked with Jill Avery, a senior lecturer at Harvard Business School and an author of HBR’s Go To Market Tools.

One of the critical elements of pricing is understanding what economists call price elasticity. In fact, determining price is one of the toughest things a marketer has to do, in large part because it has such a big impact on the company’s bottom line. Setting the right price for your product or service is hard.

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