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I feel that price elasticity is crucial to a sustainable business. If your business is not able to respond to trends in the market, then it will not survive. Businesses need to be flexible in many ways, but price is crucial because many consumers will make decisions based mainly or entirely on price.
It is very important for a company to know the price elasticity of the demand for its various products. Otherwise, it will not know the ideal price to charge for those products.
If a firm knows that the elasticity of demand for its products is low, for example, it should raise prices on those products. By doing so, it will increase its profits. If it does not know the price elasticity of demand for its products, it will not know the best price to charge -- the one that will bring it the maximum profit.
Not only is understanding price elasticity vital to your internal management processes, but exploring price elasticity with key customers provides invaluable insight into the customer value proposition. The right conversation with your customer is invaluable to both you and your customer.
We know that elasticity is a ratio of change of quantity in percentage and change of price in percentage :
e = change of quantity/change of price
The elasticity is a measure of sensitiveness. So, if we want to find out how sensitive buyers are to a change of price, made by a company to its products, we'll just have to analyze how sensitive sellers are.
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