Price Elasticity of Demand
How a 1% price move changes volume, revenue, and profit — the foundation concept every FMCG pricing manager uses every week.
The Hook
A 1% price increase drops straight to the bottom line. But a 1% price decrease needs an 18% volume surge just to break even.
A 1% improvement in price realization — across a published analysis of the Global 1200 — lifts operating profit by 8.7%on average. Compare that to 5.9% from a 1% variable cost reduction, 2.8% from a 1% volume increase, or 1.8% from cutting fixed costs. The rank order never changes: price is the single highest-leverage line on the P&L — by a wide margin — and the sensitivity runs from roughly 7% to 15% depending on the starting margin structure. Yet most FMCG pricing decisions still ignore how consumers actually respond. The tool that bridges the gap is a single number: price elasticity of demand. But elasticity isn't a fixed constant — it changes shape depending on the model you use, the price point you're at, and even the direction of the change. Large-sample research shows that price increases and decreases produce asymmetric volume responses: losing customers is easier than winning them back.
The log-linear curve at e = −2.2 sits close to the published meta-analytic brand-level average of −2.6 across 1,851 estimates. Most FMCG brands operate in the −1.0 to −2.5 range.
Three demand models for the same product — linear (straight line), log-linear / constant-elasticity (power curve), and logit (S-shaped). Near the base price they converge; at extreme prices they diverge dramatically. The model you choose determines your volume forecast — and your profit recommendation.
Price Elasticity of Demand
Price elasticity quantifies the percentage change in volume demanded for every 1% change in price. An elasticity of -2.0 means a 1% price increase costs you 2% in volume. The revenue impact depends on where |e| sits relative to 1.0 — elastic demand (|e| > 1) means price increases shrink revenue, while inelastic demand (|e| < 1) means price increases grow revenue. However, the profit impact depends on your contribution margin structure, not just revenue.
Elasticity is the foundational input to every pricing decision. The average brand-level elasticity across 1,851 published estimates sits at −2.6: for every 1% price increase, the average branded product loses 2.6% volume. But that average masks a 7× range— from −0.5 for essentials like baby formula to −3.5 for soft drinks. Your job is to know where your brand sits, and why. And to remember: price increases always cost more volume than equivalent price cuts recover. Demand is not a mirror. The full P&L consequence of that asymmetry — how a volume change flows through to EBIT — is the topic of the P&L Impact Lab.
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