Price Elasticity: what it is, why it matters, how we measure it
In plain terms, elasticity answers: “If prices change by 1%, how much do sales change?” A higher (more negative) elasticity means customers are quick to change their buying when prices move; a lower one means they’re relatively unfazed.
- Inelastic (score low): price changes have small impact on sales.
- Unit‑elastic: price and sales move proportionally.
- Elastic (score high): price changes have large impact on sales.
Why it matters
- Revenue trade‑offs: when sensitivity is high, price increases can reduce revenue; when low, they often don’t.
- Promotion timing: sensitivity typically rises in tougher times; promotions work harder when shoppers are price‑aware.
- Portfolio & mix: elastic categories benefit more from tactical pricing; inelastic ones from availability and service.
- Budgeting: understanding where sensitivity is trending helps set realistic sales plans.
How we measure it (high‑level)
- Rolling window: we re‑estimate monthly using ~36 months of recent data to capture the latest behaviour without being stuck in the past.
- Multi‑level modelling: we fit a model that learns a shared Europe‑wide relationship and country‑specific adjustments. This stabilises estimates where data are thin while allowing each market to differ.
- Signals, not noise: we check statistical strength (p‑values on price effects) so we’re less likely to flag changes that aren’t real.
- Normalised score: absolute elasticities can be hard to compare across places and time. We transform them to a 0–10 price sensitivity score, so you can quickly see whether a market is more or less sensitive than peers or than a year ago.
- Trend & volatility: alongside today’s score we track year‑on‑year change and how choppy sensitivity has been (volatility) to inform risk and promo planning.
Technical note: underlying models relate % changes in sales to % changes in prices (with controls like unemployment and seasonality), include country‑level random effects for price sensitivity, and are refit on a sliding window each month.