Price Elasticity

The percentage change in sales produced by a 1% change in price, generalised across studies into a single magnitude.

Meta-analytic generalisation: Tellis (1988), superseded by Bijmolt, van Heerde & Pieters, JMR (2005)

What it does

Puts a number in a conversation that is usually run on assertion. Across 1,851 elasticities from 81 studies the average is −2.62: a 1% price rise costs roughly 2.6% of unit sales. That is far more responsive than most internal pricing debates assume, and it sets the margin bar any increase has to clear before it is worth doing.

When it breaks

It is an average drawn mostly from packaged-goods research and it hides exactly the variance a single decision turns on. The estimate also moves with method rather than with the market — correcting for price endogeneity increases measured elasticity substantially, so two studies of the same category can disagree because of the model. And an elasticity measured on promotional variation says nothing about a permanent list-price change, which is the decision most teams are actually making.

Case

Bijmolt, van Heerde and Pieters assembled 1,851 price elasticities from 81 studies and found the average at −2.62, above the magnitude in the previous generalisation. They also found that sales elasticities have increased significantly in magnitude over four decades while share and choice elasticities stayed roughly constant, that accommodating price endogeneity increases elasticity strongly, and — a striking null — that accounting for consumer heterogeneity does not change it.

Bijmolt, van Heerde & Pieters — New Empirical Generalizations on the Determinants of Price Elasticity, JMR (2005) ↗

Diagram not yet drawn

A demand curve at the measured −2.62 slope drawn against the much flatter curve a pricing decision implicitly assumes, with the revenue gap between them shaded at a 5% increase.

In the wild

Unchecked · not part of the tier

What people have written about this tool in the last twelve months. A machine found these and nobody has read them. Everything above this line was checked by hand.

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