What is it?
Price elasticity refers to the sensitivity of consumer demand for a product in response to changes in its price. It measures how much the quantity of a product purchased will increase or decrease when its price is raised or lowered. If demand changes significantly with a small price change, the product is considered price elastic. On the other hand, if demand remains relatively stable despite price changes, the product is considered price inelastic.
Why is it important?
Understanding price elasticity helps CPG companies make informed pricing decisions. For example, if a product has high price elasticity, a small price reduction could significantly increase sales, while a price increase could lead to a large drop in demand. Conversely, if a product is inelastic, companies may have more flexibility to raise prices without significantly affecting consumer purchases. Brands use price elasticity data to optimize pricing strategies and maximize revenue while maintaining customer satisfaction and competitive advantage.
What are some examples?
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Private label cereal may have a high elasticity: a 5% price increase could cause a 10% drop in units sold.
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Premium chocolate might be relatively inelastic: a 5% price increase only reduces sales by 1–2%.
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Elasticity varies by channel: a product may be inelastic in natural specialty stores but elastic in conventional grocery outlets.