Would demand for the products or services you sell vary with price increases or decreases? This conundrum is considered by the term elasticity in economic circles – how demand changes when prices change.
If demand for your products is elastic, any change in price will have a corresponding impact in demand. For example, if you increase prices and consumers/buyers are able to delay buying – in the hope that prices will reduce or that a lower priced substitute can be found – then demand for your products will fall.
Alternatively, if demand for your products is inelastic, any change in price will have less effect on demand. For example, if you increase prices and consumers/buyers are unable to delay buying or find a lower priced substitute – then demand for your products will be maintained.
Inflation
In times when prices are been driven upwards, due to supply disruption, elasticity plays an important role in how your business profits will be affected. This is the situation we are presently facing in 2022.
If you sell items or services that have readily available substitutes or that consumers are happy to delay buying decisions, then increasing your prices to compensate for the increased costs you are having to bear will result in a loss of sales that may exaggerate profit reduction.
But if you sell products with few substitutes and buyers are not prepared to delay purchasing your services then it is more likely that buyers will be prepared to pay your price increases.
Elasticity and inflation
Which means that businesses selling products or services that are inelastic – price increases will not unduly affect demand – have a distinct advantage over businesses that sell products or services where demand is elastic.
Planning to include elasticity
If you presently market goods that are inelastic you may have inadvertently made life much easier for the maintenance of profitability as you should be able to increase prices without significant reductions in sales volumes.
Businesses whose products are elastic, price increases will reduce sales, may need to expand their range to include products with a less reactive change in volume when prices are increased.
Ironically, the sale of inelastic products fuels inflation, price increases. But businesses have a right to adapt in efforts to maintain solvency and profitability. The real culprit of the present rise in inflation is supply-side – a global shortage of computer chips for example – and not businesses seeking to exploit these challenges for their own benefit.