Have you ever loved a product so much that you would buy it at any price? Would you be willing to go without soap if the price increased 100 percent? Have you ever spent more than you’ll admit to your friends for a luxury item from your favorite brand?
If you answered “yes” to any of the above, you already know intuitively what an inelastic product is.
Price is a major influence on consumers, and changes in price can have a ripple effect across an entire market as consumers alter their behavior in response to the price. Brands and retailers need to understand the concept of price elasticity and inelasticity if they want to predict how the market will respond to a price change.
In this article, we’ll dive into inelastic products and prices specifically. We’ll look at what elasticity and inelasticity mean, some examples of inelastic products, and how they can influence your pricing strategy.
What is Price Elasticity and Inelasticity?
In economics, price elasticity is a term used to refer to the change in the demand for something as its price changes. In general, when there’s a price increase, the quantity demanded decreases, and vice versa. This is generally visualized by a demand curve, where the quantity demanded is on the x-axis and the price is on the y-axis.
Overall, elasticity is a concept that helps economists and businesses understand and measure how a price change will impact consumer consumption patterns. Is price a factor in how shoppers think about that specific product?
Inelasticity is the mirror image of elasticity. What products and markets are prices not a factor (or a very limited factor) in buyer behavior?
Price elasticity is a term used to refer to the change in the demand for something as its price changes.
Elasticity and Inelasticity of Demand
Elasticity of demand describes how sensitive demand is for something, and can be measured by economic factors like price or income. Price is the most common way elasticity of demand is measured.
Essentially, what price elasticity of demand measures is how much the quantity demanded of a good is when the price changes. When the price goes up, by how much does quantity demanded decrease? When the price goes down, by how much does quantity demanded increase?
Inelasticity of demand refers to certain goods where price changes don’t affect quantity demanded too much, if at all. An inelastic product, then, is one that can have its price change dramatically and the quantity demanded is not significantly affected.
The equation to measure price elasticity of demand is:
Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)
This formula generally yields a negative output, since price and quantity demanded are inversely related, though the output is usually expressed in its absolute value. With this, you can see if a one unit increase in price equals a one unit decrease in quantity demanded.
When the price elasticity is less than one, the good is inelastic, as the unit increase in price did not yield a unit decrease in demand. When it’s greater than one, the good is elastic. Here, if the price increases by one unit, it should decrease demand by more than one unit.
If the output here is exactly one, we would say that the demand is unit elastic.
Examples of Inelastic Products
There are three main traits of a product that can predict the likelihood that it’s an inelastic product:
- The product has no close substitutes
- The product is an essential such as basic food, fuel, or household staples.
- The starting price is low.
Gasoline. Unless you’re going to get rid of your vehicle completely, you need to fuel up. You may try to find alternative transportation when it’s possible, but as long as you have a car, you will likely be willing to pay for gas at any price.
Household Necessities. Soap, toiletries, batteries, paper products, etc. are all essentials for most households. If the price of one brand goes too high, you might switch to another, but it’s unlikely any consumer would go without anything they consider a necessity unless it was an extreme case.
Food. This one is obvious, since everyone has to eat! Just like with household necessities, you may look for alternative brands and types of food to eat, but most people won’t outright go without even if the price gets higher than you want.
Very low priced items. How much does a pack of gum cost? How much do Post-It Notes cost? You probably don’t know, because they are so low-priced. When products, like these examples, are already starting at low prices, a price jump may not deter consumers as much as something expensive would.
Collectors’ Items. Collectors’ items typically have no close substitutes, and devoted buyers will be willing to pay almost anything to get their hands on the goods they covet.
Luxury Goods. Like collectors’ items, luxury goods have a degree of price inelasticity. Price is a factor in the buying process, but people who buy luxury goods aren’t necessarily price sensitive. They’re willing to pay more for the status, the feeling they get from owning a luxury good, and other non-price-related considerations.
How Inelasticity Can Impact Your Pricing Strategy
Brands and retailers who are thinking about how price inelasticity and elasticity can impact their strategies have to remember that for every product, some consumers will have a higher degree of price sensitivity than others. Not every consumer responds the same way to a price change, and that’s important to recognize.
For example, if you’re implementing a dynamic pricing strategy, you have to understand which customers have a relatively inelastic price sensitivity to the product, and which ones are very price sensitive. With that knowledge, you can implement dynamic pricing and improve profitability by selling your product at a higher price for those who are willing to pay more.
Another situation where understanding the inelasticity of your product is key is in markdowns or discounts. Markdowns can be a great way to boost sales for a short time, but if you’re selling an inelastic product, they’re a waste. If customers aren’t price-sensitive, then it doesn’t matter if they’re getting a deal. In this case, you would be sacrificing margins for minimal gain.
Understanding inelasticity and elasticity is vital for any successful pricing strategy. Without it, your pricing strategies and tactics will always be missing a key layer of insight around how your customers will react to price changes.