Price Sensitivity: 10% Price Increase = 20% Volume Drop (Elastic Demand)

What Is Price Elasticity?#

Elasticity = % volume change ÷ % price change. Elastic (>1): volume changes more than price. Inelastic (<1): volume changes less than price. At elasticity = 1 (unit elastic): volume % and price % change equally = revenue neutral. Example: SGD 50 price, 100 units = SGD 5K revenue. Raise 10% to SGD 55, lose 10% volume to 90 units = new revenue SGD 4.95K (nearly same).

Why Elasticity Varies by Product#

Luxury goods (watches, jewelry): inelastic (customer willing to pay, price = status). Commodity goods (milk, rice): elastic (many alternatives, customer price-sensitive). Branded goods: more inelastic (brand loyalty = price forgiveness). Unbranded: more elastic (no differentiation = price driven).

The Pricing Optimization Math#

Profit = (Price - COGS) × Volume. If you raise price but lose volume, profit might drop. Example: Product with COGS SGD 30. Current: SGD 50 price, 100 volume = (SGD 50 - SGD 30) × 100 = SGD 2K profit. Raise to SGD 55 (inelastic, only 5% volume loss): (SGD 55 - SGD 30) × 95 = SGD 2.375K profit (+18.75% increase). But elastic product (20% volume loss): (SGD 55 - SGD 30) × 80 = SGD 2K profit (no change). Conclusion: raise price on inelastic products only.

AskBiz Elasticity Modeling#

Models elasticity by testing price changes (A/B test: 10% of customers see SGD 55, rest see SGD 50, measure volume change). "Product A: elasticity 2.0 (elastic). Price increase would reduce profit. Recommendation: don't raise, focus on cost reduction instead. Product B: elasticity 0.5 (inelastic). 10% price increase = 4.5% profit increase = SGD 200/month additional profit. Recommended: implement price increase."

• Product A: base price SGD 50, volume 100 units.
• Raise to SGD 55 (10% increase): volume drops to 80 units (20% drop).
• Elasticity = 2.0 (elastic = price sensitive).