Small Business Guide

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Small Business Guide

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Researching Product Price Elasticity

If demand for your product or service changes significantly with slight changes in price, the product category is considered to be elastic with respect to price. If no significant volume changes occur, even with significant price changes, the category is inelastic.

Example

Grocery store items are often very price sensitive, with +/- 10 percent price changes resulting in significant share and volume changes per brand.

Gourmet food categories are often inelastic. It may require a price increase or decrease of 50 percent to create any perceptible changes in consumers' behavior. Consumers shopping these premium-priced categories are not as value-conscious as shoppers in a regular grocery store environment.

What does price elasticity mean for product pricing? The greater the price elasticity, the closer you should price your products to similar competitive products and vice versa. While your product may be unique, consumers will not pay much of a premium for it if there are similar competitive choices at lower prices.

To find out more about price elasticity in your industry, study secondary data sources (e.g., AC Nielsen, Informational Resources, Inc.) for share and volume results correlated with brand pricing reductions. Talk to trade and association experts to obtain a feel for pricing elasticity.

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