Price elasticity of demand describes how changes in the cost of a product or service affect a company’s revenue.
For some products, a small change in price will dramatically influence how many units the customer will buy. In other cases, price movements have little effect on demand. Therefore, understanding the price elasticity of each offering is crucial to maximizing profit.
Several factors can affect the price elasticity of products. For example, if substitute goods are readily available, the customer will immediately curtail purchases when the price rises. And if the good represents a major part of the buyer’s total spending, he or she will be more likely to shop based on price.
Understanding how consumers value a product can be vital for any company. Raising prices can be one of the easiest ways to boost profits, but only if consumers are willing to accept the added cost.