The elasticity of demand as a key indicator in your pricing strategy

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Profile picture for user Ángela de la Vieja

Ángela de la Vieja

When defining the most adequate pricing strategy for your catalogue of products and services, the elasticity of demand should always be your ally. The elasticity of demand allows you to know and analyse the behaviour of your customers when faced with a price change, facilitating decision making and favouring an increase in profits. This is an indicator that each eCommerce business should analyse continuously throughout the year since the success of new product launches or dynamic pricing and loyalty campaigns, for example, will depend on it.

To calculate the elasticity of demand, you need to divide the percentage change in the quantity demanded by the percentage change in price. The results, expressed graphically on the demand curve, will indicate the consumers’ reactions to price changes. Although a higher price is generally associated with a decrease in demand, this isn’t always the case since the price elasticity of demand is affected by other internal and external factors.

Among the internal factors that can affect the elasticity of demand is the positioning of the brand in the imagination of the customers. If the business is known for having high standards for quality or is considered a leader in its sector, it will be very difficult for variations in its prices to affect the willingness to buy of its already loyal customers. The same happens when the product is unique or scarce in the market. By standing out from the rest, it will be difficult for the demand for these products to be affected by changes in price.

On the other hand, the market and the competitors of each company can also determine the behaviour of the elasticity of demand. In this case, if your product can be substituted for another, an increase in price will most likely push the customers to buy that substitute good from the competition. For this reason, it’s also good to have tools to monitor the prices of the competition and know their strategies in regards to changes in the market.

How the demand curve varies: types of elasticity

The higher the elasticity value, the greater the quantity demanded will respond to the price variation. Based on this, by following the behaviour of the users, different types of demand can be established. Elastic demand happens when consumers are very price sensitive. In this case, any change in price will affect demand. Generally, in these types of products, the most effective strategy is to encourage the lower prices to reach a larger number of potential clients and increase your conversion rates – as long as the cost/benefit balance allows you to do so.

The opposite situation is seen with inelastic demand, in which changes in price cause practically no change in demand, either due to the characteristics of the good or service or because of a lack of competition. Here, if you raise prices, only a small number of customers will be lost and your profits will be higher. With this, eCommerce businesses can consider implementing new pricing policies to encourage growth.

With scare goods, it’s also possible to come across a third type of demand: unit demand. In this case, an increase in the price will cause an equal decrease in the quantity demanded. This means that your income will remain stable. It’s very complicated to find this in practice, though.

Technology benefitting eCommerce businesses

When dealing with a very large catalogue of products or services, manually calculating the elasticity of demand would entail a loss of resources for the company. To avoid this, automated tools with automatic self-learning capabilities are available that can quickly analyse KPIs of the business and of the market to give CEOs the best options out there. 

These new price intelligence solutions allow you to optimise your processes and save time in the analysis of prices and the evolution of demand. Thanks to this, you can also anticipate market variations, especially in the case of businesses that depend on the supply of raw materials to manufacture their products or eCommerce businesses whose services are continuously conditioned by the current socio-economic situation.

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