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 = Q_New-Q_Old/(Q_New+Q_old)
              ------------------------
              P_New-P_Old/(P_New+P_old)

Where
Q_{New and} P_New  
             

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

How to measure Price Sensitity of Customers

How to know if a Customer is Price Sensitive?

Understanding the customer based on his price bracket has lot of benefits. This would help the retailer stock products of appropriate price in the category and help the marketing team with sending suitable discounts / promotions.

What is Price Sensitivity?

Before we dive deep into this, it's better to have it defined to avoid ambuigity later. This is the change in buying behavior of the customer of a particular product / category due to the change in price. This means a customer will have different price sensitivities for different product or categories. This is sometime called as Price change sensitivity too

How to measure the price sensitivity?

There are various ways to measure it for a customer-product. One way is to find the demand elasticity.

We will discuss in detail on demand elasticity with some examples

Can a product's sales increase even when there is increase in Price. Though strange there are chances that it would be - these are called Giffen goods