Tuesday, 25 December 2012

Elasticity of Demand / Demand Elasticity in Customer Analytics

We briefly touched upon Price Sensitvity in the last post. Let's study a bit on the effect of Price on the customer using Demand Elasticity / Price Elasticity of Demand (PEoD).

PEoD = QNew-QOld/(QNew+Qold)

QNew and PNew  

stands for new quantity and price respectively.

Product Price Elasticity P(old) P(new) Qty(Old) Qty(new) Elasticity Column1
Wheat -0.11 10 15 120 117 -0.06329 -0.06329

The above table shows the Calculation of Price Elasticity for Wheat  the effect of change in Price on Customer's buying behavior

The following table shows the elasticity for some common products

Product Price Elasticity
Wheat -0.11
Eggs -0.14
Milk -0.21
Onions -0.67
Cigarattes -1.1
Beef -1.3

Negative price elasticity shows that when the price increases, demand decreases. The above table shows that the customer is more sensitive to Beef than Wheat. An Offer on highly sensitive product can induce the customer to buy more.

Identifying price sensitivity of products/category , the subtitute products and its sales over the period would help to get the right price / product for promotions

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