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What is price elasticity and how can I estimate it?
Price elasticity measures how much quantity demanded changes when price changes. If a 10 percent price rise cuts volume by 5 percent, elasticity is about minus 0.5. Estimate it from past price changes while controlling for promotions, seasonality and stock, or run controlled price tests.
Observational estimates are risky because prices rarely change at random. If you raise prices during peak season, volume may stay high for reasons unrelated to price sensitivity, leading to wrong conclusions.
Better evidence comes from tests: vary prices across comparable stores, regions, customer groups or time periods and compare. Elasticity also differs by product, customer type and competitive context, and is not constant across all price levels. Combine estimates with margin calculations to see the effect on profit, not only on volume.
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