Price elasticity, or price elasticity of demand (PED), is an economic quantification that measures the responsiveness, or elasticity, of the demand of a product or service relative to a price change. In other words, when prices change, consumer demand changes and price elasticity is a way to quantify and measure that change.
Price elasticity is determined by dividing the percentage of change in demand by the percentage of change in price. The number you are left with is the price elasticity metric. The larger the number is, the higher the elasticity. A low number or null is regarded as inelastic.
Even if you’ve never heard the phrase price elasticity before, the concept is fairly intuitive. When prices for products and services increase, demand often decreases. While there are exceptions to this (see Kanye West’s clothing line) for the most part it simply makes sense.
There are a few key determining factors that influence price elasticity, among them are availability of substitute goods, duration of price change, and necessity of the item.
The availability of alternative goods and services has a huge impact on price elasticity. If consumers have easy access to low priced products that fulfill the needs of a product that has recently enacted a price increase, they will most likely switch to the more affordable option.
When close substitutes are available, price elasticity naturally increases. According to a study at Carnegie Mellon University, “increased price elasticity is a signal of increased customers search intensity.” In other words, consumers actively search for substitute goods, and even minor price changes can cause them to purchase substitute products.
Duration of Price Change
Some goods and services naturally experience price fluctuations. Airline tickets are a good example of this. If a casual traveller seeks airfare they will opt for the most affordable option, even if this means changing their dates of travel. However, when travel is required for business or other commitments, consumers are often forced to pay the higher price.
Necessity impacts price elasticity in obvious ways. When goods or services are vital for the consumer, and substitutions aren’t available, the elasticity of that product is low. For example, if a consumer needs to drive their vehicle for work, they must purchase fuel, even if prices increase dramatically.
Effects of Internet Marketing
So just how does Internet marketing affect price elasticity? There are many ways Internet marketing can impact PED, but the primary ways it does so is by helping consumers find the best deals available, increasing demand, and creating strong brand loyalty.
When the price of a product or service goes up, consumers will either pay the increased price or search for a substitute at a more affordable rate. Internet marketing helps businesses educate consumers on their products, services, and offerings, especially when they offer lower prices. The ubiquity of the Internet means the availability of substitute goods and services is almost infinite.
With search engines, DIY sites like Etsy, bargain sites like Amazon, auction sites like eBay, and over 100k other eCommerce sites, consumers have more options than ever. Internet marketing uses the power of so many options to educate and inform consumers on the wide array of substitute products that are available at more affordable rates.
One of the key aspects of marketing is to increase the demand and desirability for products. Internet marketing can help create a feeling of necessity around products, thus decreasing the elasticity of price fluctuations.
Influencers create a magnetic appeal around a product, thus increasing demand. Great Internet marketing uses creative, entertaining content that connects with its audience in an authentic, emotional way. This kind of connection increases demand and limits the impact of price elasticity for a well-loved product.
Marketing a lifestyle around a product increases the demand not only for the item, but for the culture it fosters. When the demand for a product is less about the item itself and more about the brand, price changes have less impact on consumer demand. Companies like can help you cultivate and maintain such a brand for your business.
The creation of brand loyalty is one of the biggest impacts Internet marketing can have on price elasticity. Of course, creating brand loyalty is no easy task and is one of the ultimate goals for any marketing campaign.
When consumers form deep attachments to particular brands, the products surpass being simple commodities and become an ingrained component of their identity. This makes the products virtually inelastic. Consider Apple, a brand with a very large and very loyal following.
We’ve all seen the images; large queues of customers hoping to be among the first to purchase the newest iPhone, iPad, or other Apple gadget. These consumers are not concerned about the price of the product. In fact, they actively pay more than the average consumer for a product they most likely don’t even need.
Apple’s marketing team have created a lifestyle brand that is about more than just their products. Because of this, price elasticity has almost no relevance for specific consumers of Apple products. When these customers buy Apple products, they’re not simply buying a product. They're buying their own culture and their own lifestyle.
Effective Internet marketing creates brand loyalty that counteracts price elasticity. Through thoughtful campaigns that pair desirable lifestyle images with product placement, marketers are able to convey a culture that supersedes price elasticity.
A Valuable Tool
Price elasticity is not necessarily a bad thing. It can be a valuable tool for businesses as it gives them a way to measure consumer response to price changes. This lets businesses make accurate price changes that increase profitability without driving their existing customer base to a lower priced competitor.
It is a simple fact of business that prices increase. When they do, it should be well planned to minimize price elasticity. Internet marketing can affect price elasticity in a number of ways. It can help consumers find more affordable options when price increases become prohibitive. It can also help brands retain customers by creating a lifestyle and culture that is impervious to changes in cost.
Sawaram Suthar is head of marketing at Acquire, and also a founder of Jagat Media, a digital marketing agency. A digital marketing consultant, he has experience in things including branding, promotions and page optimization, along with research and strategy. He has an MBA from the University of Pune. Anyone can find him on @sawarams.