How the elasticity calculator works
The elasticity calculator turns your sales history into an estimate of how much volume moves when price moves. This page runs its eight steps on the calculator's own example. The example is made up.
Illustrative. Made-up data, written for this calculator. It describes no business.
1. The history
The example is 36 months of one product: its price, its volume, a competitor's price and the size of the market. Your own table takes the same columns. The calculator needs at least 24 months or 104 weeks.
| Your price | Competitor's price | Units sold | |
|---|---|---|---|
| Jan 23 | 100.00 | 104.00 | 1,062 |
| Feb 23 | 100.00 | 104.00 | 1,149 |
| Mar 23 | 100.00 | 104.00 | 1,116 |
| Apr 23 | 100.00 | 104.00 | 1,176 |
| May 23 | 105.00 | 104.00 | 1,090 |
| Jun 23 | 105.00 | 104.00 | 1,090 |
| Jul 23 | 105.00 | 104.00 | 1,009 |
| Aug 23 | 105.00 | 104.00 | 930 |
| Sep 23 | 105.00 | 104.00 | 961 |
| Oct 23 | 105.00 | 107.12 | 954 |
| Nov 23 | 105.00 | 107.12 | 933 |
| Dec 23 | 109.20 | 107.12 | 969 |
| Jan 24 | 109.20 | 107.12 | 1,001 |
| Feb 24 | 109.20 | 107.12 | 1,070 |
| Mar 24 | 109.20 | 107.12 | 1,066 |
| Apr 24 | 109.20 | 107.12 | 1,069 |
| May 24 | 105.92 | 107.12 | 1,143 |
| Jun 24 | 105.92 | 107.12 | 1,158 |
| Jul 24 | 105.92 | 107.12 | 1,039 |
| Aug 24 | 105.92 | 107.12 | 997 |
| Sep 24 | 105.92 | 107.12 | 982 |
| Oct 24 | 105.92 | 111.40 | 1,068 |
| Nov 24 | 105.92 | 111.40 | 1,072 |
| Dec 24 | 112.28 | 111.40 | 1,023 |
| Jan 25 | 112.28 | 111.40 | 1,042 |
| Feb 25 | 112.28 | 111.40 | 1,138 |
| Mar 25 | 112.28 | 111.40 | 1,248 |
| Apr 25 | 112.28 | 111.40 | 1,143 |
| May 25 | 112.28 | 111.40 | 1,221 |
| Jun 25 | 112.28 | 109.18 | 1,126 |
| Jul 25 | 115.65 | 109.18 | 998 |
| Aug 25 | 115.65 | 109.18 | 938 |
| Sep 25 | 115.65 | 109.18 | 881 |
| Oct 25 | 115.65 | 109.18 | 916 |
| Nov 25 | 115.65 | 109.18 | 945 |
| Dec 25 | 115.65 | 109.18 | 1,035 |
Your price and the competitor's above, your volume below.
2. What is measured against what
The calculator sets a volume measure against a price measure. With a competitor's price, it sets your volume against your price relative to theirs. With the market's size, it sets your share against your own price, then turns that into a volume figure with the market held still. It never works from your own price history alone.
Each dot is one month. Both scales are logarithmic, so equal steps are equal percentage changes.
3. The season, the trend and the odd month
Some months always sell more. The calculator allows for each calendar month, so a seasonal rise does not pass for a price effect. It also takes out the trend, the slow drift up or down across the years. If something else distorted a month, such as a strike or a one-off order, leave that month out of your table.
The grey line is volume as sold. The dark line is volume with each month's usual swing and the trend taken out.
4. The line through the months
The calculator fits a straight line through the months. Its slope is the elasticity: the % change in volume for a 1% change in price. It reads the months four ways. The headline sets each month's volume against that month's price, with a trend.
The slope of the line is the elasticity.
5. How sure it is
Each figure carries an 80% range. Ranges built this way hold the true figure about 8 times in 10, so about 1 in 5 misses. The range covers the noise in your history. It cannot allow for a change in customers or competitors since.
A figure shows only when the history points clearly enough to volume falling as price rises. The test is set so that, on made-up histories with no price effect, about 1 in 10 still passes. It shows none if your price ranged less than 3%, or if two readings point opposite ways. So test a large move before you make it.
- Levels (the headline): 1.6 (1.4 to 1.9)
- Year on year: 1.7 (1.4 to 1.9)
- Month to month: 1.8 (1.2 to 2.5)
- Price moves only: 1.4 (0.8 to 1.9)
Each bar is one reading. Each line is its 80% range. The example was built with an elasticity of 1.6.
6. What the figure cannot tell you
The history gives a figure and a range. It cannot say whether a competitor will match your move, whether the whole market shrinks when prices rise, or how long lost volume stays lost. Use the figure, then judge those three yourself.
7. Set it against your margin
For a small price rise, the break-even elasticity is 1 divided by your contribution margin on net revenue. At a 40% margin it is 2.5. Below that line, a small rise earns more on the units you keep than it loses on the units that go. The breakeven calculator does the sum for a larger move.
The bar is the estimate with its 80% range. The line is the break-even elasticity at your margin.
At this margin, the estimate sits below the break-even line. On this estimate, a small rise earns more on the units you keep than it loses on the units that go.
8. Keep it current
An elasticity holds for price moves within about 20% of the prices it was measured on. Customers, competitors and the season all move it. Estimate it again after each price change.
- Estimate the elasticity
- Set the price
- Watch the volume
- Estimate again
Try it on your own figures: the elasticity calculator.