Introduction to Price Elasticity

‍

‍

‍

Demand elasticity measures the responsiveness of demand for a commodity when there is a change in an economic factor. Mostly this economic factor is the price. However, other than price, a product’s demand can react to a consumer’s income level, product substitute, level of necessity and more. In this blog, we’ll be discussing the key factors affecting price elasticity of demand.

The concept of elasticity of demand is important for businesses and policymakers, as it helps you make informed decisions about pricing strategies, production levels, and even tax policies. Later in the blog, we’ll also understand the importance of price elasticity of demand.

‍

‍

What are the Factors Influencing Price Elasticity of Demand?

Price elasticity of demand is not as linear as it may sound. To succeed in the market, a company has to consider ample different variables to determine if its product is elastic or not. Understanding this helps in establishing a long-term pricing strategy. It's important to answer, "what are the determinants of price elasticity of demand" to develop a sustainable pricing process that will help you scale up in the long term.

Hence, now that we've briefly discussed its impact on pricing, let’s take a look at the 7 different factors affecting price elasticity of demand.

‍

1. The Availability of Substitutes

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

To put it simply here’s an example; the demand for electronics is relatively elastic because there are other substitutes for it, whereas the demand for gasoline, in general, is less elastic because there are no more substitutes available to satisfy consumer needs.

‍

2. The Proportion of Income Spent on Commodities

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

This, however, is strongly influenced by several factors such as the income level, the income portion spent on the product, and the type of product consumers are willing to spend on.

Moreover, not always is the determination of elasticity linear. Hence, to find the elasticity of products in complex situations both the price and the percentage of consumer income are considered.

‍

3. The Time Frame

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. To put it simply, the pace at which consumers can switch to another alternative and adjust their consumption habits.

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

‍

4. The Degree of Necessity

Demand responds to price changes depending on the product’s degree of necessity. Hence, this is one the vital determinants of price elasticity of demand. Necessities, such as food and housing, tend to have inelastic demand as consumers will continue to purchase them regardless of price changes. That’s because there is no other reliable substitute or finding an alternative would require time, energy and investment.

On the other hand, luxury goods, such as designer clothing and high-end cars, tend to have more elastic demand because consumers are more likely to cut back on purchases when prices increase.

‍

5. Brand Loyalty

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, even if prices increase, leading to inelastic demand. This, however, is not as water-tight as it seems. Brand loyalty loses influence in times of recession when consumers might opt for cheaper products despite the perceived lower quality. Income level is another accompanying factor that combined with brand loyalty impacts the elasticity of demand.

‍

6. The Level of Competition

In a market with high levels of competition, firms will have to be more responsive to changes in consumer demand, leading to more elastic demand. If they are replaceable with other similar items, the demand will fall as prices rise. Hence, companies tend to remain competitive by adjusting their prices after studying their competitors.

On the other hand, in a market with less competition, firms are able to charge higher prices without losing as many customers, thanks to the commodities’ inelastic demand.

‍

7. The Availability of Information

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 good or service, they are more likely to make well-informed purchasing decisions, which can lead to more elastic demand. We live in a time when countless reviews as well as information on alternatives are a few clicks away. As such, it’s more important than ever to capitalise on your online presence and make sure the web works for you rather than against you.

‍

Download Now:A Complete Guide to Implementing Price Elasticity

‍

Understanding the factors affecting price elasticity of demand helps companies find enough clarity to set pricing policies, both short-term and long-term. It also helps identify key value products that in turn would help maximise profit margins and also shift the tax burden by increasing prices.

In times of high competition, the prices of elastic products need to be changed frequently to not miss out on profits or sales volume. And this is where dynamic pricing enters. Likewise, firms are able to see through 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.

‍

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

‍

SYMSON is an AI-based pricing tool that helps you manage all your pricing affairs in one platform. You can also check the price elasticity level of your products and get a smart price recommendation from SYMSON. It analyses the market both in terms of 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.

‍

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:

‍

• 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.

‍

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

‍