Customers and pricing
Price elasticity of demand
How strongly the quantity sold reacts to a change in price.
Last reviewedWhat does Price elasticity of demand mean?
Price elasticity is the percentage change in quantity demanded divided by the percentage change in price. It is usually negative. If a 10% price rise cuts volume by 20%, elasticity is minus 2: demand is elastic, and the price rise lowers revenue. If volume falls only 5%, elasticity is minus 0.5: demand is inelastic, and the price rise raises revenue. Profit also depends on cost, so check contribution, not only revenue.
Where does it come up in case interview prep?
- Market share, growth, and price elasticityLesson in Business basics for non-business learners
- Main players, trends 2024 to 2026, regulation and casesLesson in Pharma, biotech and medical devices
- PricingLesson
- Competitive responseLesson
- Distribution, promotions, private label, and innovationLesson in Consumer packaged goods (FMCG)
- RevPAR and hotel economicsLesson in Hotels and travel
- Luxury and fashion economics: channels, markdowns, and currencyLesson in Luxury and fashion
- Stretch cases: profit to pricing, and entry to acquisitionLesson in Integrated multi-part cases
Related terms
- Value-based pricingSetting the price from what the product is worth to the customer.
- ContributionWhat each sale adds after its own variable cost.
- TAM, SAM and SOMTotal market, the part you can serve, and the part you can win.
- Market shareOur sales as a share of total market sales.
- Relative market shareOur share divided by the largest competitor's share.
- Penetration rateThe share of potential customers who already use the product.
- Share of walletOur share of what one customer spends in the category.
- ARPU (average revenue per user)Revenue divided by the average number of users.