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The Price Elasticity Guide

Why, benefits, use cases and more...


Price Elasticity of Demand


What is Price Elasticity of Demand?

Price elasticity of demand is the measure of how sensitive the demand for a product or service is to changes in its price. It is a concept in economics that helps businesses and policymakers understand how price changes affect the quantity of a product or service that people are willing and able to buy.


How to measure Price Elasticity of Demand?

If the demand for a product or service is susceptible to changes in price, meaning that a slight change in price leads to a significant shift in the quantity demanded. In that case, the product or service is said to be highly price elastic. On the other hand, if a significant difference in price results in only a minimal change in the quantity demanded, then the product or service is said to be inelastic. Moreover, a product’s demand sensitivity can impact the price elasticity of supply. Hence, it’s crucial to leverage robust pricing strategies.


The formula for Price Elasticity of demand

To calculate a product's price elasticity, we divide the percentage change in quantity by the percentage change in price. First, let's take a look at the formula for price elasticity of demand.

How can price elasticity formula help businesses determine prices?

Using the elasticity formula, businesses can determine and distinguish elastic products from inelastic ones. Next, you can set better prices for each product or category to maintain revenue flow and profits.

  • For elastic products, companies can reduce prices to increase sales volume. Decreasing prices will help improve your brand's price perception in the market.
  • For inelastic products, businesses can increase prices to draw higher margins with a limited impact on units sold.


Why is Price Elasticity of Demand Important for Companies?

By understanding how responsive their customers are to changes in price, companies can set prices that are more in line with what their customers are willing to pay, which can lead to increased sales and profitability.

Here’s how to leverage price elasticity pricing strategy using AI. »

Let's have a closer look at the importance of price elasticity of demand for companies:

Download Now: The Ultimate Guide to Implementing Price Elasticity »

Make informed pricing decisions

Price elasticity of demand allows companies to set prices that align with their customer's willingness to pay and adjust prices to remain competitive.


Optimise revenue and profits

Price elasticity helps companies optimise their revenue by adjusting their prices to maximise their revenue and profit margins. For eg, if a company has a product with high price elasticity, it can increase its sales volume by lowering the price slightly.


Help enhance your product development

Understanding price elasticity can help you stay informed about product development decisions. By examining the price elasticity of similar products on the market, companies can estimate the demand for a new product and set a reasonable price.


Create effective marketing strategies

By understanding customer reactions towards price changes, companies can tailor their marketing messages and promotions to appeal to customers at different price points.


Additionally, businesses offering highly differentiated or unique products and services may be able to justify higher prices, even if they are not directly competitive with other offerings in the market. Ultimately, the choice of a pricing strategy should be informed by a thorough understanding of the business's unique circumstances, market dynamics, and customer preferences.

In summary, AI in pricing equips organisations with the tools and insights to make smarter, faster, and more customer-centric pricing decisions. This leads to enhanced profitability, competitive advantage, and a better understanding of the market and customers,all of which are crucial for success in today's fast-paced and ever-evolving business landscape.

How to use software to optimise Prices based on Price Elasticity

By using pricing software, companies can identify their product’s elasticity, their demand’s behaviour and consumer reaction to price changes. You can also analyse historical data to find out the demand at a certain price sold then. Likewise, you can lower your prices or set high prices for maximum revenue and profits respectively.

Watch and learn with these videos on how to get started on using SYMSON’s platform to optimise your prices. »


5 Price Elasticity of Demand Types

There are several types of price elasticity of demand, which measure the responsiveness of the quantity demanded to changes in price. Read more about the different types here.


Perfectly Elastic Demand

This occurs when a slight change in price results in an infinite change in quantity demanded. In other words, consumers are susceptible to changes in price and will only buy a product at a specific price.


Perfectly Inelastic Demand

This occurs when a price change does not impact the quantity demanded of the product. In other words, consumers are willing to buy a product regardless of its price.


Relatively Elastic Demand

This occurs when a small change in price results in a fairly significant change in quantity demanded. In other words, consumers are sensitive to changes in price and will likely buy more of a product if the price decreases. 


Relatively Inelastic Demand

This occurs when a price change has a relatively small effect on the quantity demanded. In other words, consumers are not very sensitive to changes in price and will likely continue to buy a product even if the price increases.


Unitary Elastic Demand

This occurs when a change in price results in a proportional change in quantity demanded. In other words, consumers are exactly as sensitive to changes in price as they are to quantity demanded.


Costs of Goods Sold (COGS)

Understanding the cost structure of a product or service is essential when implementing a competitive pricing strategy. This includes considering direct costs, such as materials and labour, and indirect costs, such as overheads and marketing expenses. By comprehensively analysing costs, businesses can determine the minimum price at which they can sell their offerings without incurring losses while ensuring they remain competitive.


Competitor prices

A thorough analysis of competitors is crucial when adopting a competitive pricing strategy. Businesses must identify their primary competitors, monitor their pricing strategies, and assess the price range within which their offerings fall. This information allows businesses to set their prices in a manner that is competitive while still delivering value and maintaining profitability.


Market conditions

Market conditions, such as supply and demand, also play a significant role in competitive pricing. When demand is high, businesses may have more flexibility in setting higher prices without losing customers. Conversely, during periods of low demand, businesses may need to lower prices to remain competitive and attract customers. By staying up-to-date with market conditions, businesses can make informed pricing decisions that optimise their competitiveness and profitability.


Product differentiation

The level of differentiation a product or service offers compared to competitors influences the effectiveness of a competitive pricing strategy. If a business can demonstrate unique features, superior quality, or additional value, it may be able to justify higher prices than its competitors. In contrast, for products or services with little differentiation, the price may become the primary factor in attracting customers, necessitating a more aggressive pricing approach.


Target customer segment

Identifying the target customer segment is another essential factor when determining competitive pricing. The price sensitivity of the target market will influence the business's pricing decisions. For example, if a business targets price-conscious customers, it may need a lower pricing strategy to remain competitive. Conversely, if targeting a more affluent customer segment, the business may have greater flexibility to set higher prices.


Identifying New Price Sensitivity Drivers

As you know by now, the first step would be to find new drivers that influence price sensitivity. To do this, you can combine customer point-of-view along with datasets. This process ensures more precision in calculating the sensitivity level.


Create a Regression Model

You can calculate the quantity, average price, and other numerical or categorical factors for each product to construct a data frame for the customer. Using this dataset, we at SYMSON built a regression model. Studying these datasets allows businesses to quantify the influence of each driver on price sensitivity and sales volume.


Aggregate Coefficients from the Regression Model

This step uses the regression output to calculate the price sensitivity scores of each product. The equation yields a price sensitivity prediction, which represents how a 1% change in price impacts the % change in quantity sold or demanded. For instance, price sensitivity of -4% means that a 1% rise in price results in a 4% drop in the quantity sold.


Interpret Price Sensitivity Scores

Based on the coefficient computation from the regression model, we assign weightage differently to different coefficients to calculate the sensitivity score. A higher sensitivity indicates that customers are more responsive to price changes, while a lower score indicates a less significant response.


Act upon Price Sensitivity to increase Margin or Sales

After the price sensitivity test for a set time period, you can implement strategies for the product group in order to balance profit margin expansion and sales growth.


Time-based Pricing

This approach involves adjusting prices based on seasons, day(s) of the week, or specific hours. For instance, hotel rates may be higher during peak travel seasons or weekends.


Demand-based Pricing

Pricing based on demand entails setting prices higher during periods of high demand and lower during periods of low demand. Airlines often use this strategy, with prices fluctuating based on factors like seat availability and time of booking.


Segment-based Pricing

This approach includes dividing customers into different segments and offering customised pricing based on their characteristics or behaviours. For instance, a software company may offen differ.


Competitor-based Pricing

Continuous analysis of market prices is necessary to promptly reprice your products either to stay competitive or to gain margins with a powerful value proposition. The dynamic pricing model considers this approach to maintain competence in the market.


Seasonal Pricing

You may have noticed that prices fluctuate for these industries greatly depending on seasonality. These industries are primarily looking to maximise revenue since they have a limited supply (i.e., they have a fixed number of rooms or seats).


Surge Pricing

Cab services usually increase their prices in areas or timings where they detect high demand, like events, pubs, and commute times.


E-Commerce Sites

Sites like Amazon test different prices throughout the day and year based on customer behaviour and the volumes of data. They may also change prices seasonally, for example, during the holiday season.


Market-Based Pricing

During times of inflation, companies are likely to see a decrease in consumer spending and an increase in costs. As suppliers' costs increase, most companies increase their prices accordingly to keep profit margins intact. Others may choose to slash prices to encourage spending.


Customer-Segment-Based Pricing

Some products can be offered to different customer segments at various price points based on their purchasing power and habits. SaaS companies, for example, have different tiers of pricing based on the kind of user they sell to, whether individuals or businesses.


Product Lifecycle-Based (price skimming)

This is usually seen in luxury brands where the initial price for a product may be much higher at first, compared to later in its lifecycle when the hype (and demand) die down.


Collecting your historical data

The algorithm gathers historical and real-time data from various sources. This includes internal data like sales history, production costs, and inventory levels, as well as external data such as market trends, competitor prices, and customer behavior.


Processing the accumulated data

The collected data is cleaned and prepared for analysis. AI algorithms require high-quality, relevant data to make accurate predictions. This stage often involves handling missing values, removing outliers, and ensuring the data is in a format suitable for analysis.


Selecting relevant factors

The algorithm identifies which factors (features) are most relevant to pricing. This could include product types, time of day, seasonality, customer segments, and more. Selecting the right features is crucial for the effectiveness of the pricing model.


Training the model

The AI uses the prepared data to train a machine-learning model. This involves feeding the data into the model and adjusting the model's parameters until it can accurately predict prices. Common techniques include regression analysis, decision trees, and neural networks.


Testing and Validation

The model is tested on a separate set of data to validate its accuracy. This helps ensure that the model will perform well on real-world data and not just the data it was trained on.


Predictive Analysis:

Once validated, the AI model analyzes current market data and predicts the most effective pricing strategy. It considers how different pricing options might affect demand, competitor responses, and overall profitability.


Dynamic Pricing:

The AI algorithm continuously updates its predictions based on new data. As market conditions change, the algorithm adjusts its pricing recommendations to remain optimal. This is often referred to as dynamic or real-time pricing.orm well on real-world data and not just the data it was trained on.


Pricing Monitoring and Adjustments:

The performance of the AI pricing model is continuously monitored. If the market changes or the model's predictions become less accurate, it may be retrained or adjusted to improve performance

A price elasticity of -1, for example, indicates that a 1% increase in the price of a product will result in a 1% decrease in the quantity demanded. Likewise, price elasticity of -2 indicates that a 1% increase in price will result in a 2% decrease in quantity demanded, and so on.

There are multiple determinants of price elasticity of demand - from income elasticity of demand to the availability of alternate products. Let’s have a closer look at them.

In summary, competitor pricing analysis is a critical component of an effective pricing strategy, helping businesses to understand the market landscape, identify opportunities, and develop strategies that maximise profitability and competitiveness. By continuously monitoring and adapting their pricing strategies, businesses can stay ahead of the competition and deliver value to their customers.


How to Get Competitor Data?

Obtaining competitor pricing data is essential for businesses looking to establish an effective competitive pricing strategy. By gathering and analysing this data, businesses can better understand the pricing landscape, identify trends, and make informed decisions that help them remain competitive. Here are several methods businesses can employ to gather competitor pricing data. Here’s a thorough guide to data scraping.


Manual research

One straightforward approach to collecting competitor pricing data is through manual research. This can involve visiting competitor websites, physical stores, or online marketplaces to gather information on product prices, discounts, and promotions. Although this method can be time-consuming and may not provide real-time data, it can offer valuable insights into competitor pricing strategies.


Price tracking tools

Several price tracking tools are available in the market that can help businesses monitor competitor prices. These tools enable businesses to track prices for specific products or categories across multiple websites and platforms. Some price tracking tools also offer additional features, such as historical price data, competitor analysis, and market trend analysis, which can provide valuable insights for developing a competitive pricing strategy.


Web scraping

Web scraping is the automated process of extracting data from websites using specialized software. Businesses can use web scraping tools like Beautiful Soup, Scrapy, Selenium, Cheerio, etc., to gather competitor pricing data from e-commerce platforms, competitor websites, or other online sources. This method can provide more accurate and up-to-date data compared to manual research. Still, it may require technical expertise and ongoing maintenance to ensure the accuracy and reliability of the data.


Industry reports and data providers

Businesses can subscribe to industry reports or purchase data from third-party data providers to access competitor pricing information. These sources typically offer aggregated data on pricing trends, market dynamics, and competitor activities, providing businesses with a comprehensive view of the pricing landscape in their industry.


Social media and online formula

Monitoring social media platforms and online forums can also provide businesses with insights into competitor pricing strategies. Customers often share their experiences, opinions, and even product prices on these platforms, allowing businesses to gather valuable information on competitor prices and customer preferences.


Competitor collaborations

In some industries, businesses may benefit from collaborating with their competitors to share pricing data. This approach can promote transparency and help create a more competitive market environment. However, businesses must carefully consider the potential risks and legal implications associated with sharing pricing information with competitors.


How are ERP systems and Smart Pricing Software Different?

Enterprise Resource Planning or ERP systems integrate various business processes to improve overall efficiency. On the other hand, smart pricing software uses artificial intelligence to set optimal and intelligent prices by analyzing market and customer data.

The former streamlines internal operations and the latter enhances profitability through data-driven pricing strategies. Read more about how ERP systems and price intelligence software are different. Let’s have a look at the basis of their differences:


Functionality and Specialisation

ERP Systems offer broad business management capabilities, including basic pricing functions. They're designed to integrate various business processes but aren't specialized in pricing.

AI-Powered Price Management provides specialized, advanced pricing capabilities. They focus exclusively on optimizing pricing strategies using sophisticated algorithms and are tailored for this specific function.


Pricing Strategy and Adaptability

ERP Systems generally support basic pricing strategies with manual updates and rules-based adjustments. They're less adaptable to rapid market changes and typically require manual update intervention.

AI-Powered Price Management
employs dynamic and real-time pricing strategies, automatically adjusting prices based on market conditions, demand, and competitor actions. They offer a more adaptable and responsive approach to pricing.


Analytics and Insights:

ERP Systems include general analytics and reporting features which cover a broad spectrum of business data, including some pricing insights. However, these are usually not as in-depth or specific to pricing optimization.

AI-Powered Price Management
provides advanced analytics and predictive modelling specifically for pricing. They can forecast market behaviour, predict the impact of price changes, and suggest optimal pricing strategies based on deep learning and data analysis.


Automation and Efficiency:

ERP Systems handle various business processes with a certain level of automation, but pricing updates often require manual intervention and are subject to human error.

AI-Powered Price Management offers a high degree of automation, particularly for pricing adjustments. They reduce the need for manual updates, thereby minimizing errors and increasing operational efficiency.


Scalability and Customization:

ERP Systems are scalable across various business functions but may have limitations when it comes to handling complex, evolving pricing strategies. Customization is possible but can be broad and not as deep for pricing needs.

AI-Powered Price Management
is highly scalable and customizable when it comes to pricing. They can accommodate an expanding array of products and complex pricing structures, adapting as the business and market evolve.

In essence, while ERP systems provide an integrated solution for managing various business operations with basic pricing capabilities, AI-powered price management systems offer a focused, sophisticated approach to pricing. They bring advanced analytics, real-time adaptability, and a high degree of automation to the table, specifically catering to the dynamic needs of modern pricing strategies.

What is Price Scraping?

Price scraping is when automated web scraping tools or software extract pricing data from various e-commerce websites, online marketplaces, or competitors' websites. This data can then be analysed to inform pricing strategies and make better business decisions.

What is a Price Engine?

A price engine is a specialised software tool that determines the optimal prices for products or services by analysing various factors such as market demand, competitor pricing, cost of goods, and customer behaviour.It uses algorithms and data analytics to dynamically adjust prices in real-time, helping businesses maximise profits, improve sales, and remain competitive in the market. Essentially, it automates and optimises the decision-making process for pricing.

How to Scrape Prices from Websites?
  • Identify competitors
  • Determine the kind of data you want to collect
  • Pick a data scraping tool
  • Analyse the scraped data
  • Create a powerful competitive pricing strategy
How to Scrape Prices from Websites?
  • Identify competitors
  • Determine the kind of data you want to collect
  • Pick a data scraping tool
  • Analyse the scraped data
  • Create a powerful competitive pricing strategy

How does Elasticity Pricing help Companies?

Businesses can develop a smart pricing strategy by understanding their product's price elasticity of demand. Here are a few ways in which price elasticity can help with pricing strategy. Here is how companies benefits from using AI elasticity pricing ».

Fast-food chains
Customise your pricing
Use competitive pricing
Unlock seasonality insights

In summary, price elasticity can help businesses develop a pricing strategy that maximizes revenue by setting optimal prices, identifying market segments willing to pay more, setting prices for new products, and determining the effectiveness of promotions and discounts.


How Elasticity Pricing can help you in your role

Pricing Strategy for 

A consistent flow of healthy revenue and high profits ensure CEOs or other C-level executives a scalable pricing system in their organisation for the long term.

Pricing strategy for Pricing Managers:

For pricing managers whose decisions are driven mostly by intuition, understanding price elasticity helps develop effective pricing strategies and hence, gain a positive result in profit margins!

Pricing Strategy 
for E-commerce Manager:

E-commerce managers gain significant clarity about their product assortment. Realising the revenue/profit potential of each product category helps establish a strong pricing process.

Types of commodities

Elastic products include: gasoline, premium/luxury goods, fast foods, etc.Inelastic products include: addictive drugs, Electricity, Necessity products

Types of commodities

Elastic products include: gasoline, premium/luxury goods, fast foods, etc.Inelastic products include: addictive drugs, Electricity, Necessity products

Substitute availability

If prices of an elastic product rise, people can switch to different products. For inelastic products, the demand remains more or less the same due to lack of alternatives.

Demand response pace

An  elastic product’s demand responds relatively quickly to price changes. But inelastic products are insensitive to price change.


As a manufacturer, you can integrate business rules in order to ensure compliance, set expectations, provide guidelines on work performance.


Distributors with the right strategy can optimise prices for better profit margins and reduce loss of revenue.

Impact on pricing and profits

A price drop in elastic products leads to an increase in sales/revenue and vice versa if price rises. But, in elastic demand, a price rise results in a boost in profit margins and vice versa during a price fall.

By choosing the right competitive pricing tool, businesses can gather valuable insights into competitor pricing strategies and develop data-driven pricing strategies that enhance their competitiveness, profitability, and market positioning.

How does Elasticity Pricing help Companies?

Businesses can develop a smart pricing strategy by understanding their product's price elasticity of demand. Here are a few ways in which price elasticity can help with pricing strategy. Here is how companies benefits from using AI elasticity pricing ».

Optimal pricing
Price discrimination
New product pricing
Promotional pricing

In summary, price elasticity can help businesses develop a pricing strategy that maximizes revenue by setting optimal prices, identifying market segments willing to pay more, setting prices for new products, and determining the effectiveness of promotions and discounts.

How To Use Elasticity in a Pricing Software

You can understand the elasticity nature of each product and category, consumer reaction to price changes and make informed decisions to develop a pricing strategy.

The Top 10 Pricing Softwares

Selecting the proper software solution for pricing can be tricky with so many different options available. we’ve compiled a list of well-known and lesser-known pricing platforms into a single, easy-to-read document to help expedite your search for the best solution.


6 Products that have Price Elastic Demand

Certain products that are price elastic, doesn’t necessarily mean price is the only influence. Read more »

If luxury goods prices go up, people delay their consumption.

Price rise in airline tickets make people delay the trip or find alternatives.

High fast food prices decreases demand as it’s easily avoidable.

Price increase in gasoline make people carpool or use public transport.

If OTT platforms increase prices, people may opt for shows from free sources.

If prices of furniture & decor rises, people may move on to a better deals.


How different businesses implement elasticity pricing

Essential food Industry

Basic food sources are considered to be primary products that will always have a certain demand. These essential products are typically priced inelastic.

Petrol Industry

When petrol prices surge for a longer period of time, people may switch to an electric vehicle or avail public transport. Here, you could argue that this product is price elastic.

Uber and other transportation mobility

Uber uses price elasticity formulas to manage demand on one hand and to increase profit margins on the other hand. Uber increases prices when demand is high. It is beneficial for drivers, Uber and the users because more rides become available in areas with high demand.


Price Elasticity in SYMSON’s AI Software

In SYMSON, you can identify products that are price elastic and inelastic. It calculates price elasticity of your products based on historical data for different price cycles. It can then suggest optimal prices to ensure optimised profits. Using elasticity pricing, our algorithm studies the current prices and prompts you to adjust the prices based on your business objectives and strategic positioning.

Studies historical product data

Export your historical data/prices or connect to SYMSON's API. It identifies patterns and helps in finding accurate prices for your product assortment.

Calculates price elasticity of products

Identify elastic and inelastic products in your portfolio with SYMSON. Integrate elasticity pricing into your pricing strategy.

Get price suggestions to optimise profits

Gain accurate price recommendations for different products and optimise your profits.


7 Steps to implement Price Elasticity Pricing in SYMSON

SYMSON helps automatically calculate prices with price elasticity of demand formulae with the help of historical sales and prices. You need to complete the following steps in order to implement price elasticity on SYMSON.

While looking for a pricing software, one should take into account the following data system integrations and features.

In SYMSON, besides the following top attributes, you can apply psychological pricing tactics, import and export seamlessly in your preferred file type and much more. Read more about what you can do with the Genius Dynamic Pricing in SYMSON.

Make a secure data connection with your chosen systems to continuously update prices.

Select the product groups which you wish to analyse.

Add business rules such as minimum margin and price change cap adjustment.

Choose between the highest margin or highest revenue possible.

Analyse the first results and implement your new prices.

After a price cycle has been completed analyse the results from your new prices.

Adjust your parameters if needed and run the next price elasticity analysis.

How SYMSON’s Elasticity Algorithm works

We created the algorithm with the help of Scientific Researchers from Erasmus University: bringing in scientific models, data science, and software engineering together in an AI platform where users can optimise product prices.

Gathers and Analyses Historical Product Data

SYMSON collects historical product data to calculate the price-elasticity, Key Value Items products, and other aspects to spot patterns and learn from the past.

Identifies the nature of your product assortment

Our system analyses your product assortment and identifies their price sensitivity for better categorisation. It then suggests the correct prices accordingly.

Allows to Customise the Algorithm to your Business

You can customise primary drivers like price elasticity, Key Value Items, margins, and more to your industry with customised drivers. Connect your data source to SYMSON to build your pricing strategy.

How SYMSON’s Elasticity 
Algorithm Helps Companies

How SYMSON’s Price
Engine Helps Companies

How SYMSON Helped WitwayGain a Competitive Edge in its Market

How SYMSON’s AI Pricing Tool Works

How SYMSON’s Competitive 
Pricing Helps Companies

Get profitable pricing for Key Value Items

After SYMSON helps distinguish Key Value Items, you can get profitable price recommendations that will help improve your margins.

Find optimal prices for price-sensitive items

Once SYMSON identifies your price-sensitive products, 
it studies the market and competitors to find the 
optimal prices for improved sales volume.

Raises profits margins by 4-7% on average

With proper strategies and prices, your profit margin is 
set to grow. Our platform can welcome a gross margin of 4-7% on average.

How SYMSON’s elasticity feature helped La Place enhance their pricing strategy

What you can do with Genius Dynamic Pricing?

What you can do with Genius Dynamic Pricing?

How SYMSON’s competitive pricing feature helped 
INDI enhance their pricing strategy

Detect Key Value Items accurately

SYMSON enabled La Place to detect Key Value Items per location.

Correctly assess elasticity of products

La Place could distinguish between price elastic and inelastic products.

Improving decisions about promotions

SYMSON helped analyse product performance and identify which promotions were effective.


Frequently Asked Questions on Price Elasticity

Got a question? We're here to answer! If you don't see your question here, drop us a line on our Contact Page.

What is elasticity pricing? 
What is the income elasticity of demand? 
What does an AI pricing tool do for elasticity pricing? 
What is Cross-price elasticity of demand?
What is Price Discrimination?


The Next Steps on your Pricing Journey

We’d love to share some incredible resources that will help you further understand pricing strategy and give you the best head start on your pricing journey.