Price elasticity of demand is a crucial component of dynamic pricing and indicates to what extent the demand for a certain product changes when the price of that product changes. Let’s imagine that you increase the price of your product with 20%, how much would the demand for this product change then? That is the question that the price elasticity of demand answers.
You can use price elasticity pricing in several ways. This really depends on your use case. Let's give you some examples of how you could use price elasticity pricing.
There is almost always a negative relationship between price and demand. If a product becomes more expensive, this will almost always result in less demand. But the change in demand is not the same for every product. When the prices of food increase, most of the time little happens. Basic food sources are considered to be primary products that will always have a certain demand. These essential products are typically priced inelastic.
When petrol prices rise, demand for it may drop. When petrol prices surge for a longer period of time, alternatives become more attractive. People may decide to buy an electric vehicle or even switch to public transport instead. Here you could argue that this product is price elastic.
This company uses price elasticity formulas to manage demand on one hand and to increase profit margins on the other hand. Uber’s surge pricing, the rapid rising of prices when demand is high, to make sure that their taxi drivers go to the location where prices and demand are high. This is beneficial to the taxi drivers and Uber because they are able to get more income, while it is beneficial for Uber and users because more Ubers become available in areas with high demand.
Pricing your products according to their price elasticity of demand can be beneficial in increasing your revenue and/or margin. However, if you would want to do that efficiently firstly you have to have well-organized and accurate historical sales data. We recommend the following steps in order to effectively implement price elasticity pricing in your organisation:
SYMSON can help businesses by automatically calculating optimal prices with price elasticity of demand formulas when historic sales and prices are known. The benefit of SYMSON is that it not only optimises the price for you but it lets you add organization-specific parameters. In order to set this up you need to complete the following steps in the SYMSON smart AI pricing management software: