Introduction to Price Elasticity

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Demand elasticity measures the change in demand for a product when there is a price change. But, other than price, a product’s demand can react to other factors. For example, a consumer’s income level, product substitute, level of necessity and more. In this blog, we’ll discuss the key factors affecting price elasticity of demand.

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The concept of elasticity of demand is crucial for businesses and policymakers. But why is it important? Knowing the elasticity level of your products helps you set optimal pricing. Customers may pay differently for each product or product group. Once you know how much they are willing to pay, your pricing will favour both the customer and your profits.

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Later in the blog, we’ll also understand the importance of price elasticity of demand.

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What are the Factors Influencing Price Elasticity of Demand?

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The price elasticity of demand is not as linear as it may sound. To succeed in the market, a company has to determine if its product is elastic or not. This includes considering various factors to identify the product's elasticity levels.

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Understanding this helps in establishing a long-term pricing strategy. So, what are the determinants of price elasticity of demand? How do you find the price elasticity of your products?

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Let’s take a look at the 7 different factors affecting price elasticity of demand.

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1. The Availability of Substitutes

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Reliable substitutes are one of the crucial factors influencing price elasticity of demand. If a product has reliable substitutes in the market, we see a significant demand change. The more substitutes available, the more elastic the demand for the good or service will be.

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But, it’s vice versa for inelastic products. The demand doesn’t react as much as it does in the other case when there is a price change.

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Here’s an example. The demand for electronics is relatively elastic because they have other substitutes. Whereas the gasoline demand, in general, is less elastic. That's because there are no more substitutes available to meet consumer needs.

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2. The Proportion of Income Spent on Commodities

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One of the vital factors affecting price elasticity of demand is the proportion of a consumer's income spent on an item. For high-income households, the elasticity of demand is low. But, it remains quite high for low-income-level groups.

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Several factors influence this demand change. Factors such as the income level, the income portion spent on the product, and the type of product consumers are willing to spend on.

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Moreover, not always is the determination of elasticity linear. Hence, there's one way to find the elasticity of products in complex situations. That is, you must consider both the price and the percentage of consumer income.

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3. The Time Frame

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This too is one of the powerful factors affecting price elasticity of demand. It refers to the pace at which the demand reacts to the change in price. That is, how fast consumers switch to alternatives and adjust their consumption.

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In the short term, buyers tend to stick to the same item and fail to find substitutes. They are unable to adjust their consumption habits in the short term. This leads to the product’s inelastic demand. But, in the long term, consumers may be able to find substitutes or adjust their consumption habits. This, of course, leads to a more elastic demand.

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4. The Degree of Necessity

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Demand responds to price changes depending on the product’s degree of necessity. Hence, this is one of the vital determinants of price elasticity of demand. Necessity items have inelastic demand. Such as food and housing as consumers will continue to buy them regardless of price changes. That’s because there is no other reliable substitute available. Also, finding an alternative would need time, energy and investment.

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On the other hand, luxury goods tend to have more elastic demand. For example, designer clothing and high-end cars. That's because consumers are likely to cut back on choices when prices increase.

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5. Brand Loyalty

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Brand loyalty can also affect the price elasticity of demand. Consumers who are loyal to a particular brand may be less likely to switch to substitutes. This happens even if prices increase, leading to inelastic demand. But, this is not as water-tight as it seems.

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Brand loyalty may lose influence in times of recession. Consumers might opt for cheaper products despite the perceived lower quality. Another accompanying factor with brand loyalty is the income level. Likewise, both impact the elasticity of demand.

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6. The Level of Competition

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In a market with high competition, firms must respond to changes in real-time. If they are replaceable with other similar items, the demand will fall as prices rise. Likewise, you must optimise your product prices to suit customer's willingness to pay.

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But, in a market with less competition, firms have the upper hand. They can charge higher prices without losing as many customers. Thanks to the commodities’ inelastic demand.

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But how do you know whether your product is elastic or not? We're not talking about manual calculations. Smart businesses use elasticity pricing tools like Symson to get an overview of all products and their elasticity levels. The algorithm runs a thorough analysis and recommends optimal prices for each product. It all happens in a matter of minutes reducing manual and inaccurate labour.

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7. The Availability of Information

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The availability of information about a good or service is another factor influencing price elasticity of demand. When consumers have access to more information about a product, they are more likely to make well-informed purchasing decisions, which can lead to more elastic demand.

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Download Now: A Complete Guide to Implementing Price Elasticity

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Understanding the factors affecting price elasticity of demand helps companies find enough clarity to set pricing strategies. It also helps identify key-value items whose pricing could increase footfalls. It would increase the chances of customers buying your inelastic products. Likewise, you can optimise margins after increasing prices within the customer's WTP.

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In times of high competition, you must change the prices of elastic products according to the demand. Or else, you may miss out on profits or sales volume. And this is where dynamic pricing enters. It lets you set prices based on real-time trends and economic scenarios.

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Likewise, smart firms can see through future demand trends. and establish a powerful pricing strategy for the long run. You can read more about how Symson finds the optimal product prices while considering your own business rules.

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How can SYMSON help determine the Price Elasticity of your Products?

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SYMSON is an AI-based pricing tool that helps you manage all your pricing affairs in one platform. Here, you can also check the price elasticity level of your products and get an optimal price suggestion. It analyses the market both micro and macro factors so your team can focus on higher strategies. If there’s a change in the market, SYMSON calculates and suggests a price change when needed. Take a closer look at our price elasticity algorithm to know more about how it happens.

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SYMSON provides you with an all-in-one pricing system for elasticity pricing. Let’s look at some features and benefits you can enjoy. Here are a few configuration options for the price elasticity model:

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• Set Goals: Focus on optimizing either revenue or margin.
• Select Models: Choose the best-fit machine learning model, such as linear regression.
• Segment Analysis: Filter by specific customer or product groups for precise insights.
• Economic Stability: Configure the model to account for stable economic periods.
• Scenario Testing: Run various scenarios to see potential outcomes.
• SKU-Level Detail: Get insights at the individual product level.
• Optimal Pricing: Use recommendations to set prices that maximize revenue or margin.

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Watch Webinar: The Best Practices of Applying Price Elasticity to your Pricing Process

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