Price elasticity—or the price elasticity of demand—is a formula used to determine how a price change will impact the demand for a specific product. Simply put, inelastic products see little change in demand from a change in price, while the opposite is true for elastic products. 

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Price Elasticity of Demand (PED) is determined via a mathematical formula: % Change in Quantity / % Change in Price. It’s like supply and demand, where limited supply results in higher prices. With price elasticity, the measurement is how significant the impact on demand is when a small price change is implemented. 

In the real world, price elasticity of demand can be closely tied to brand reputation. For example, Apple has inelastic products because changes in price have little effect on demand: shoppers will still line up outside the store for a new Apple product. Few brands are on Apple’s level, of course, and will instead see shoppers buy from a competitor after a price change.  

Therefore, PED is an important metric to measure because it helps predict the behavior of shoppers and identify whether a price change will have a positive or negative effect on your sales.

Price elasticity relates to many other important metrics and measurements in the retail space. Specifically, price elasticity goes together with pricing intelligence and price monitoring. 

When speaking with major brands, we’ve heard that it’s important to measure price elasticity because retailers won’t always say when they’re going to discount an item or alter their pricing approaches. Instead, brands catch on because margins or average unit retail drop.  

This makes tracking prices even more important. Elastic products, those that are sensitive to price changes, are vulnerable to the actions of individual resellers. Those are the products that should be closely monitored for price changes, so you don’t find out when you notice shrinking margins. Brands that are on top of their pricing will know the price elasticity of all their products and then monitor those prices across all resellers. 

he concepts behind price elasticity are well and good, but the real issue is what you should do about it.

As we mentioned, brands that are tracking price elasticity are closely monitoring prices across their reseller network for any fluctuations and adjusting supply and demand accordingly. Beyond that, you should also be measuring consumer behavior as it relates to price. Current behavior is a strong indicator of future behavior. If your shoppers have reacted negatively or positively to a price change in the past, there’s a good chance they’ll do the same in the future.

In addition, you should understand price elasticity but then look past it into the factors that are making your products elastic or inelastic. A big one, like in the Apple example, is brand reputation and brand loyalty. Brands that have strong, even cult-like followings (Apple, Amazon, Tesla, Google) can adjust prices with less of an impact on consumer demand.

Price elasticity matters in retail. It is related to many other major metrics, behaviors, and sales drivers, and you should be aware of price elasticity to make educated, effective pricing decisions for your brand.

Original article : https://blog.wiser.com/price-elasticity-what-it-is-and-why-it-matters/