Price Elasticity Calculator

How the figure is built

Price elasticity of demand is the percentage change in quantity divided by the percentage change in price. Written out: (%Δ quantity) ÷ (%Δ price). It is normally negative, and the sign is usually dropped in conversation.

An elasticity above 1 in absolute terms means demand is elastic: a price cut raises revenue. Below 1 means inelastic: a price cut lowers revenue. Exactly 1 means revenue is unchanged, and the price move only affects costs.

The same thing with real figures

A price cut from $58 to $52 is a 10.3% reduction. Unit sales rise from 400 to 470, an 17.5% increase. Elasticity is 17.5 ÷ 10.3 = 1.70.

Revenue rises from $23,200 to $24,440, the elastic response raised revenue. But contribution tells a different story: at $26.10 of cost, contribution goes from $12,760 to $12,173. Revenue rose 5.3% and contribution fell 4.6%.

That divergence is why elasticity above 1 is not a sufficient reason to cut price. The break-even elasticity for contribution is much higher than 1, and on a 55% margin a 10% cut needs an elasticity around 2.2 just to hold contribution flat.

Where the figure deceives

Elasticity measured from a single price change is confounded by everything else that happened: seasonality, a competitor's promotion, an advertising campaign, a stock issue. A clean measurement requires holding everything else constant, which is what a proper test does and what a historical comparison does not.

It is also not constant across the price range. Demand is often inelastic near the current price and much more elastic past a psychological threshold, so an elasticity measured on a small change does not extrapolate to a large one.

Acting on it

Calculate the break-even elasticity for a contribution-neutral price change rather than the revenue-neutral one. At margin m, a price cut of d needs elasticity of at least m ÷ (m − d) × (d ÷ d), in practice, the same required-volume ratio expressed as an elasticity.

Measure it with a real test on a subset of traffic or a subset of markets, over at least two weeks, with everything else held constant. Elasticity inferred from last year's numbers is usually measuring something else.

Why most products are less elastic than expected

Businesses consistently overestimate how price-sensitive their customers are, because the customers who complain about price are the most vocal and the ones who never mention it are invisible.

Measured elasticities for differentiated consumer products commonly fall between 0.5 and 1.5, which means a price rise usually raises revenue. Commodities and directly comparable products run higher, 2 to 4, because substitution is easy and price is the only variable.

The practical implication is that a business that has never tested a price rise is probably underpriced. The test costs almost nothing: raise the price on a subset of traffic or in one market, measure for a fortnight, and revert if it does not hold. Compared against the effort of a sourcing negotiation or an advertising optimisation, it is the cheapest experiment available and it is the one least often run.