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

Request a demo


Profile picture for user Angela de la Vieja

Angela 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.

Related Articles


Consumer behavior: How can behavior tracking be effective for setting the right pricing strategies?

Behavior tracking is becoming massively popular today. As a result, pricing strategies born from studying consumer behavior are a merchant's dream come true. If done right, it can conquer every market for the business quickly. With abundant data available, the strategic makeover of the pricing models is becoming easy for companies. 

What is behavioral tracking, and how is the data beneficial in pricing?

For a quick understanding, behavioral tracking refers to gaining in-depth knowledge and insights into consumers through their web data. Their browsing habits, spontaneous decisions, shopping interests, and preferences come under behavioral tracking. 

How can enterprises use customer behavior data?

Companies can use customer behavior data as a tool to strengthen their hold on the market. A customer’s preferences, values, and tendencies allow businesses to work in sync with them through the collected data. Apart from this, customer behavior can also aid in:

Tailoring customer needs for customer retention

Personalization is becoming the heart of a company’s growth. No matter in which area an enterprise is functioning, tailoring the services, products, and solutions is becoming increasingly crucial. Uniqueness and personalization attract the crowd like no other. 

Increasing the overall value

One of the best ways customer behavior data affects a business is by upgrading the value of customers for the business. The customer’s characteristics allow the company to target the people that match the business prospects well. 

Optimizing every type of content

Everything that is up for digital display requires content. You must have seen companies unveiling their products or services through advertisements and making the initial public appearance. Two essential sales strategies – upselling and cross-selling comes through content optimization.

Pricing Strategy

Last but certainly not least is the influence of customer behavior data on the pricing strategy. The pricing strategy essentially constitutes content derived from data analysis. Companies need to have a dynamic approach to the pricing system to attract the right customers. 


Saint Valentine’s Day, always a good opportunity

V-Day is looming, a long-awaited date for all and also a good occasion for the eCommerce. According the study conducted by Prosper Insights and Analytics, it is forecasted the average consumer expense that day will be the highest in last years. Furthermore, 25% of them will buy online, which means an increase of 4% regarding 2014 (The US department of Commerce). This is, therefore, a key date where market competitiveness increase and which could be assumed as a big opportunity for our business or, a big fail if we do not adopt the correct strategies.

How to turn this event into an opportunity? To achieve this goal, we need to adapt our prices to this hostile environment, i.e. we need to develop an appropriate Dynamic Pricing strategy that allows us to adapt our prices to the variations produced in supply and demand and to position us ahead of our competitors. In V-Day, the frequency in changes will be higher, carrying it out each hour or even each minute. It is estimated that 65% of leader retailers have the ability to respond quickly at these variations, such Amazon. For this reason, it acquires great importance the correct use of a software specialised in price motorisation of competitors. Do not miss the time and adapt your business to new adversities.


Which are the best footwear marketplaces to sell on?

Footwear marketplaces are booming. The last decade has seen the launch of new specialized marketplaces with millions of different users. Among them are Spartoo, Sarenza and Farfetch, portals with international reach. Their main value is that they unite hundreds of footwear brands, as well as offering clothes and accessories. Although each has its own characteristics, they are all vertical marketplaces, i.e., they focus on a specific area, and their sales categories are interrelated. For sellers, these portals provide an opportunity to expand sales channels and drive the globalization of their e-commerce business. We explain how to sell on these footwear marketplaces so that you can assess whether they align with your plans for the future and then start defining a possible pricing strategy.