Price Elasticity of Demand: Formula, CPG Benchmarks & Worked Examples

Price Elasticity of Demand (PED) measures the percentage change in quantity demanded resulting from a one percent change in price. It answers the most fundamental question in pricing: "If I change my price, what happens to my volume?"

Elasticity is almost always negative -- when price goes up, demand goes down. By convention in FMCG, we often express it as a positive number (e.g., "elasticity of 2.0") but the direction is understood: a 1% price increase leads to a ~2% volume decline.

Published pricing analytics work distinguishes between point elasticity (measuring responsiveness at a specific price) and arc elasticity (measuring average responsiveness over a range). Both are essential tools, but they serve different purposes. Point elasticity is theoretical precision; arc elasticity is what you actually measure from real sales data.

An elasticity of exactly -1.0 is the break-even point for revenue: the volume lost precisely offsets the higher price, leaving total revenue unchanged. This is the unit elastic threshold that separates two fundamentally different pricing regimes.

Point Elasticity (discrete approximation):
e = (Delta_Q / Q) / (Delta_P / P)

Point Elasticity (calculus form):
e = (P / Q(P)) x Q'(P)

Arc Elasticity (midpoint method):
e = [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)]

Classification:
- |e| < 1: Inelastic (volume drops less than price rises -- revenue increases with a price hike)
- |e| = 1: Unit elastic (revenue neutral)
- |e| > 1: Elastic (volume drops more than price rises -- revenue falls with a price hike)

Relationship between elasticity and revenue:
- If |e| > 1: Price decrease increases total revenue
- If |e| < 1: Price increase increases total revenue
- If |e| = 1: Revenue unchanged by small price changes

CrunchField Premium Cookies are priced at $4.29 per pack, selling 50,000 units per month. The category manager estimates a price elasticity of -1.8.

Scenario: A 5% price increase to $4.50.

Expected volume change: -1.8 x 5% = -9.0%
New volume: 50,000 x (1 - 0.09) = 45,500 units

Revenue before: $4.29 x 50,000 = $214,500
Revenue after: $4.50 x 45,500 = $204,750
Revenue impact: -$9,750 (-4.5%)

Because elasticity > 1.0 (in absolute terms), the volume loss more than offsets the higher price. This price increase destroys revenue. But the profit story may be different -- if the margin is high enough, the price increase could still be profitable (see Station 2 on break-even analysis).

In FMCG, elasticity is your single most important pricing input. Here is what experienced pricing managers know:

1. Most mainstream FMCG categories have elasticities between -1.5 and -2.5 based on large-sample research. Premium segments tend to be less elastic (-0.8 to -1.5) while value/private label segments are more elastic (-2.0 to -3.5).

2. Elasticity is NOT constant -- it changes with the competitive environment, the economic cycle, the season, and crucially, the magnitude of the price change. A 3% increase might have an elasticity of -1.8, but a 15% increase in the same category could show -3.0 because you have pushed beyond psychological thresholds.

3. Never trust a single elasticity number in isolation. Always triangulate: econometric models, price test results, and category manager intuition. When all three disagree, dig deeper.

4. The pricing playbook emphasizes that base price elasticity and promotional elasticity are measured separately -- products can be elastic on promo but inelastic on base price (or vice versa). This distinction is critical for choosing between price increases and promotion adjustments.