Elasticity

Measures the volumetric impact from a price change holding all other variables constant.

Measures the volumetric impact from a price change holding all other variables constant. Elasticity = % volume impact for every % change in price. Elasticity is typically represented as a negative number. An elasticity of -2 means that for every 1% increase in price volume, volume will decline by -2%. 

External elasticity measures the % impact to volume of a focus product for every 1% change in the price gap between that focus product and other products from different brands. For example, imagine that the large size of Private Label Soda is 10% cheaper than the Large Size of Brand A Soda. If the external elasticity of Large Size Private Label soda was -0.5, and the gap price advantage went from 10% to only 5%, then the volume of Large Size Private Label would decrease by -2.5%.

Internal, or own elasticity measures the % impact to volume of a focus product for every 1% change in the price gap between that focus product and other products within the same brand (not the focus product). For example, imagine that the large size of Private Label Soda is 10% more expensive than the smaller size. If the internal elasticity of Large Size Private Label soda was -0.5 and the gap increased for 10% to 11%, then the volume of Large Size Private Label would decrease by -0.5%.

 

Related Terms

Everyday Low Price (EDLP)

EDLP or everyday low price is a pricing strategy where either a retailer or a product is limited to no promotions and uses their trade funds to offer a low price throughout the year.

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