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?"

The sign convention

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

Point vs arc elasticity

Pricing analytics distinguishes between point elasticity (responsiveness at a specific price) and arc elasticity (average responsiveness over a range). Both are essential, 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. Above and below that threshold sit two very different pricing regimes.

Three formulas matter. The first is the discrete approximation you compute from any two observed price points. The second is the textbook continuous form. The third is the one you actually use on real data.

Point elasticity (discrete approximation)

Use when you have a baseline volume Q and a small price change. Reasonable for moves of less than 10 percent.

Point elasticity (continuous form)

The textbook calculus form. Useful when you have a fitted demand function Q(P).

Arc elasticity (midpoint method)

The version used when you have two observed price points (P1, Q1) and (P2, Q2) and want a single elasticity that does not depend on which direction you ran the change. This is what most price tests report.

The three regimes

• Inelastic (|E| < 1): volume drops less than price rises. Revenue increases with a price hike.
• Unit elastic (|E| = 1): the break‑even point. Revenue stays flat through small price changes.
• Elastic (|E| > 1): volume drops more than price rises. Revenue falls with a price hike.

This is the single most‑cited number in pricing, drawn from a large meta‑analysis of brand‑level studies (Bijmolt and van Heerde). Most mainstream FMCG categories sit between -1.5 and -2.5 at the brand level. Premium tiers run -0.8 to -1.5. Value tiers and private label run -2.5 to -3.5. The practical ceiling commercial teams use for pricing decisions is around -1.7 to -1.8.

The category team is reading scanner data for CrunchField 300g through one major grocery account. In that account the SKU is priced at $4.29 per pack and sells 50,000 units per month, and the account‑level econometric read puts elasticity at -1.8. (The brand's triangulated central estimate is -1.7; account‑level reads run a shade hotter where private label sits next to you on shelf. The Elasticity Estimation Methods card covers why the two differ.)

Scenario: a 5 percent price increase to $4.50

The volume math

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

The revenue math

• Revenue before: $4.29 x 50,000 = $214,500
• Revenue after: $4.50 x 45,500 = $204,750

Because |E| > 1.0, the volume loss more than offsets the higher price. This price increase destroys revenue. The straightforward read on the elasticity coefficient says the move fails.

In FMCG, elasticity is the pricing input everything else builds on. Four working rules separate the people who use it well from the people who quote one number and walk away.

Calibrate to the segment, not the category

Most mainstream FMCG categories sit between -1.5 and -2.5 at brand level. Premium segments tend to be less elastic (-0.8 to -1.5). Value and private label tend to be more elastic (-2.5 to -3.5). The category mean is a starting point, not the answer.

Elasticity is not constant

It changes with the competitive environment, the economic cycle, the season, and the magnitude of the price change. A 3 percent increase might face an elasticity of -1.8, while a 15 percent increase in the same category could show -3.0 because you have pushed beyond psychological thresholds.

Triangulate, never trust one number

Three sources should agree before you commit a price decision:

1. Econometric model fitted to historical sales and price data
2. Price test run in matched‑store cells over a controlled window
3. Category manager intuition informed by competitive context

When all three disagree, dig deeper. When two agree and one is an outlier, trust the two and investigate the outlier.

Base elasticity and promotional elasticity are different numbers

A brand can be elastic on promo (responsive to a 20 percent off feature) but inelastic on base price (a 5 percent shelf‑price rise barely moves volume). Or vice versa.