Introduction to Elasticity vs Inelasticity
The elasticity and inelasticity of demand determine how sensitive the demand for a product is to its price change. It considers how people react toward a product when there is a certain price change.
There are other economic factors to determine elasticity. A few of them are substitute availability and income level of consumers. But the price is the most common factor that businesses use to calculate elasticity. Hence, if a product's demand changes with the price change, it is elastic. The demand is inelastic if it remains constant regardless of price changes.
There's a clear difference between elasticity vs inelasticity of product demand. It's crucial to identify the difference as you will set prices according to the nature of the demand.
Let’s take a deeper dive based on the most important factors. Also, in the end, we will discuss how it helps businesses in decision-making.
Elasticity vs Inelasticity of Demand: 5 Main Differences that Companies should know
The differences between price elastic and inelastic demand lie in various areas. Let's understand it based on those factors: whether they have substitutes, the types of commodities, etc.
Understanding the differences between price elastic and inelastic demand helps you set correct pricing strategies. You can tap into the demand response and check customer's willingness to pay. Based on those insights, you can set attractive or profitable prices.
Let’s study the differences based on factors like time frame and impact on pricing and profit.
1. Definition
What is Elasticity of Demand?
Demand elasticity refers to how a product’s demand reacts to a change in price. The higher the changes in product demand due to slight changes in price, the more elastic is the commodity. To calculate the price elasticity of demand, we need to divide the percentage change in quantity demanded by the percentage change in price:
Price Elasticity of Demand = Percentage change in quantity / Percentage change in price
Furthermore, in this case, if the price of a product increases, consumers may stop or reduce the purchase of the good or switch to another alternative available in the market. Typically, people also wait until the prices of the commodity go back to normal. However, price drops lead to people buying in higher quantities, but also bring in more new customers.
Using this formula for price elasticity of demand helps organisations determine the nature of their products. Moreover, it also allows you to set an effective pricing strategy as well as estimate the weight of the price in purchase choices. Now, let's understand the definition of the counterpart to differentiate price inelastic vs elastic demand distinctly.
What is Inelasticity of Demand?
As opposed to elasticity, when the demand for a commodity remains unresponsive to price changes, the product is known to have inelastic demand. Typically, inelastic products fall under necessities and don’t have acceptable alternatives. That is, people don’t have any other choice that resembles the product whose prices have increased. Hence, they continue buying these products in spite of price rises.
2. Types of Commodities
Determining the nature of the commodities helps differentiate elastic vs inelastic demand of those products. Necessities, such as food and medical care, salt, and water tend to have inelastic demand. Moreover, products that induce addiction like prescription drugs, alcohol, gasoline, cigarettes, etc., also have inelastic demand.
On the other hand, luxury products like luxury vehicles, designer clothing brands, electronics, and appliances, tend to have elastic demand. Typically, people tend to delay their purchases if the prices of luxury goods rise up. And when the prices reduce, the quantity purchased increases and also attracts new customers.
Therefore, in price elastic demand, the goods are considered a luxury, meaning that consumers can find cheaper alternatives and easily do without them. However, in the case of inelastic demand, the product or commodity is a necessity, people have fewer alternatives to pivot to and hence stick to the same product regardless of their price increase.
3. Substitute Product Availability
One of the factors that affect elasticity along with the price is the availability of substitute products. When there are multiple substitutes for an item or service, demand is more likely to be elastic. This happens as people can switch to a different product if the price of the original product increases.
Conversely, when there are few substitutes for a good or service, demand is more likely to be inelastic, as consumers have fewer options if the price of the original product increases. As discussed earlier, such products are necessities that people will continue purchasing.
4. Time frame
Another aspect of elasticity vs inelastic demand is how quickly it responds after the price change. In price elastic demand, For an elastic product, demand responds relatively quickly to price changes, while the opposite is true for inelastic products.
Due to a lack of reliable substitutes, products that have inelastic demand are insensitive to price change. For example, if gasoline prices go up, the decrease in demand is insignificant. Likewise, due to the availability of substitutes, products that have elastic demand fluctuate dramatically with the price change.
5. Impact on Pricing and Profit
One of the most important aspects of elasticity vs inelasticity is how they impact pricing strategies and company profits. When demand is price elastic, an increase in price leads to a decrease in revenue. But, a decrease in price leads to an increase in sales volume and therefore, revenue. Conversely, when demand is inelastic, an increase in price leads to an increase in revenue, and vice versa during a price fall.
Likewise, the elasticity of demand can significantly impact a business's revenue generation and profit margin. Hence, the pricing strategy of the products needs to be dynamic to remain competitive in the market and not lose any opportunity to gain both profits and sales.
A product with inelastic demand allows a business to charge a higher price and increase its profit margin with a limited impact on units sold. However, for a product with elastic demand, a business needs to charge a lower price to boost sales volume and maintain a steady level of demand and profit. Also, this strategy helps enhance your price perception in the market.
How Price Elasticity helps Businesses Succeed
When businesses take elasticity-informed decisions spanning their complete product catalogue, they practice driving higher overall revenue and profit margins. But the problem lies in executing learning promptly. Understanding the market from macro to micro, the price changes, the amount of profit you want to maintain for each product, and implementing price changes across platforms take time with the regular processes with ERP systems and excel sheets.
To implement dynamic pricing as fast as the demand changes in the market, an AI-enabled pricing tool can save you valuable time and resources, and get you miles ahead of competitors. You can read more about how Symson finds the optimal product prices while considering your own business rules.
Watch Full Webinar Now: The Best Practice of Applying Price Elasticity to your Pricing Process
How SYMSON can Help you Set Prices Based on Price Elasticity?
SYMSON is an AI-powered price elasticity algorithm that helps you set optimal prices. It analyses both macro and micro economic factors to find the best price for your product. In SYMSON, you can determine the elasticity level of all your products. You will also identify your customer's willingness to pay. Then, you can put a discount on elastic products while the inelastic can have a premium. Likewise, you can balance both profitability and a growing sales volume.
In the next section we explain how you can set up.
Configuration Options for Price Elasticity Model
SYMSON provides the following configuration options for the price elasticity model. You can use it for the most flexibility and make informed pricing decisions.
- Set Business Goals: Choose to optimize for either revenue or margin.
- Choose Models: Select the most suitable machine learning model, like linear regression.
- Filter Segments: Customize analysis by customer or product group for targeted insights.
- Economic Stability: Adjust the model to consider periods of economic stability.
- Run Scenarios: Test different assumptions to understand potential impacts.
- SKU-Level Analysis: Get detailed insights for individual products.
- Predict Prices: Set prices that optimize for revenue or margin based on recommendations.
Download Whitepaper Now: The Best Practices of Applying Price Elasticity to your Pricing Process
Price Elasticity Recommendations
SYMSON offers clear, actionable advice on the following:
- SKU-Level Analysis: You can assess a detailed analysis at the SKU level.
- Optimal Prices: Get recommendations tailored to regions or customer groups.
- Comprehensive Results: This includes Price Elasticity Score, Data Quality Score, and impacts on margin, volume, and revenue.
Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!
