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price elasticity

Also called: price elasticity of demand, elasticity

How strongly the quantity sold reacts to a price change: the percentage change in volume divided by the percentage change in price. Compare it with the volume a price change needs to keep the same contribution.

Price elasticity describes how strongly the quantity people buy reacts to a change in price: the percentage change in volume divided by the percentage change in price. If a 10% price cut lifts sales by 30%, elasticity is about −3; if it lifts them by 5%, about −0.5. The sign is negative because price and volume usually move in opposite directions.

For product and pricing decisions, elasticity matters because a discount comes almost entirely out of contribution margin, not out of the price alone. A 10% cut on a product that keeps 30% of its price as contribution removes a third of what each unit earns, so volume has to rise by about half just to stand still. Whether a price change pays depends on comparing the volume it actually moves (elasticity) with the volume it needs (CM₀ / CM₁ − 1).

Elasticity is rarely known in advance and differs by segment, season and channel. Loyal customers barely react, new ones react more, and a short promotion often pulls purchases forward rather than creating new ones. That's why a practical approach starts from the break-even volume and then asks whether a test or past data make that volume believable.

Example

Klasna, an online tutoring school, tested 10% off its English 16-lesson package for a month: 520 packages instead of the usual 400.

  • Observed elasticity: +30% volume ÷ −10% price ≈ −3.
  • Contribution per lesson fell from 184.50 to 124.05 UAH, so the volume needed was 184.50 / 124.05 − 1 = +48.73%, about 595 packages.
  • Result: sales rose 17%, contribution fell from 1,180,800 to 1,032,096 UAH (−148,704).

An elasticity of −3 sounds strong, yet it was not strong enough: with a thin margin the bar was +48.73%, not +30%.

Common mistakes

  • Comparing elasticity with zero. "Sales went up" is not the test; compare the volume gained with the volume the margin needs.
  • Using the price change instead of the margin change. A 10% price cut can be a 33% contribution cut.
  • One number for everyone. Loyal and new customers react differently; a blanket discount gifts the loyal ones.
  • Reading a short promotion as lasting demand. Promotions often pull purchases forward.
  • Forgetting the other direction. A price rise can lose some volume and still earn more.

Learn it in the course