What Is Price Elasticity And Why Should You Care?

What is Price Elasticity?

Actually it is a one very simple that can help you price the products and services in your small business the right way. The simple logic always holds true: Pricing your products and services too low and you are leaving profit on the table; pricing too high and you are getting exactly the same results! Isn’t it amazing how finding the right point for your business can help you maximize the profits?

You don’t need to have an advanced degree or be a statistical or financial guru to figure out the specific point for your company. Simply by testing meaning trying various price ranges and measuring the demand (number of units sold or number of new customers… whatever makes sense for your small business.)

After a while you will determine your price elasticity and fid the optimal pricing point where you can optimize your margins. After that you need streamline all your sales, marketing and operations to support this price point.

Here is the simple definition so you can understand what is price elasticity: Elasticity means measuring the percentage change in one variable that results from a 1% change in another variable. When the price rises by 1%, quantity demanded might fall by 5%. The price elasticity of demand is -5 in this example.

Different Types of Price Elasticities

Price elasticity of demand: how sensitive is the quantity demanded to a change in the price of the good. Price elasticity of supply: how sensitive is the quantity supplied to a change in the price of the good.

An elasticity is a unit-free measure. By comparing markets using elasticities it does not matter how we measure the price or the quantity in the two markets. Elasticities allow to quantify the differences among markets without standardizing the units of measurement. Examples of Unit-free Comparison is comparing price elasticity of Gasoline and Jewelry. It doesn’t matter that gas is sold by the gallon for about $1.09 and gold is sold by the ounce for about $290. We compare the demand elasticities of -0.2 (gas) and -2.6 (gold jewelry). Gold jewelry demand is more price sensitive. Now, let’s try to compare Paintings and Meat. It doesn’t matter that classical paintings are sold by the canvas for millions of dollars each while beef is sold by the pound for about $1.50. We compare the supply elasticities of 0 (classical paintings) and 5 (beef). Beef supply is more price sensitive.