Price elasticity — It’s useful for companies to see exactly how price changes are going to affect consumer decisions and sales numbers, which is helpful in fine-tuning prices and positioning in order to increase revenue.
Demand is elastic in different ways depending on the substitution, or the consumer incomes. Consumption of necessities tends to have inelastic demand and consumption of luxury and discretionary goods tends to be elastic.
Increased Revenue
Information about price elasticity also assists businesses in executing better marketing and promotions. Companies, for example, that know that their consumers are sensitive to prices can make gradual price increases instead of one huge one to keep their customers satisfied and loyal.
Enterprises can use the information of price elasticity to flexibly adjust pricing to stay ahead of competitors. With elastic demand, if the price of a product changes it will drive sales and revenue and for an inelastic product nothing would change if the price changed.
Various market arrangements can also affect demand elasticity for goods and services. For example, in a market that is fully competitive goods and services can be elastically demanded; but in a monopoly market because there are no close substitutes demand can become rigid.
Decreased Revenue
A demand that’s elastic means that it is a product where the quantity being sought is greater or equivalent to the change in price; revenues decline and vice versa.
Businesses can make more money by raising prices and offering more products, but if average income of your ideal customers exceeds $75,000 per year, then you won’t be able to make more profits through lower amount of product sales.
Cutting operational costs is another cost effective way to bring in more revenue that will free up money for your business to do marketing or you can pass on the savings in terms of low prices. Prices could also become more or less elastic with market conditions: for example, if economic conditions get more difficult, consumers may become more price-sensitive and unimportant goods can be more elastic.
Increased Costs
Price sensitivity is an internal business concept that can have serious consequences for revenue forecasting, margin analysis, and positioning. With the knowledge of price elasticities firms can set their pricing optimally and have an edge in the market.
Goods have elastic (e> 1), unit elastic (e= 1) or inelastic (e 1). The elastic goods change in proportion to the price: if you sell expensive nightgowns, and you increased the price of one of them, sales would fall by proportion.
If an inelastic product is something that does not fluctuate in price, for example utilities or food, the demand is less variable. Basic goods have this property – people keep buying basic things even when prices go up. Non-essential goods such as designer handbags could have elastic demand instead since people would be substituting cheaper alternatives, which would lead to lower sales.
Decreased Profit
Depending on its demand elasticity, small price changes will induce big changes in quantity demanded. Some of these reasons have to do with the fact that there are alternatives to the goods and what proportion of income goes to these specific goods. If your company makes a new phone model that sells like hotcakes with customers coming by the thousands in droves, then its manufacturer can’t supply the demand and will lose out on sales as buyers buy in a rush.
Firms use elasticity analysis to calculate pricing that will drive the most revenue. Retailers, for example, sell sales to get rid of stock while also making money. Pharma companies can drive the price of lifesaving drugs up without losing customers due to inelastic demand. If you know elastic demand, you can formulate pricing guidelines and conduct promotions more efficiently than your competitors, and keep or increase market share and profit through the years.
