Pricing decisions are at the heart of many business challenges in consulting cases. To recommend the right pricing strategy, you need to understand price elasticity—how much demand changes in response to price changes.
This article will help you grasp elasticity, apply it in case interviews, and interpret its impact on revenue and profit.
1. What Is Price Elasticity?
Price elasticity of demand measures how sensitive customers are to price changes.
Elasticity = (% Change in Quantity Demanded) / (% Change in Price)
- Elastic (>1): Demand changes more than price
- Inelastic (<1): Demand changes less than price
- Unit elastic (=1): Demand changes at the same rate as price
2. Why It Matters in Consulting
Pricing affects both revenue and profit. Elasticity helps answer key questions:
- If we raise prices, will revenue go up or down?
- Should we compete on price or volume?
- Are we targeting a price-sensitive segment?
“If elasticity is -2 and we raise prices 10%, demand will drop ~20%.”
3. Typical Interview Prompt
“Our client sells premium bottled water at $2/bottle. They’re considering a 10% price increase. Sales volume is currently 10 million units. What will happen if demand elasticity is -1.5?”
Solution:
- Price increases by 10%
- Demand drops by 15% (10% × 1.5)
- New volume = 8.5M units; new price = $2.20
- Revenue = 8.5M × $2.20 = $18.7M (vs. $20M before)
Conclusion: Revenue drops due to high elasticity.
4. Interpreting Results
When analyzing pricing strategies in cases:
- High elasticity: Focus on volume growth or value-added services
- Low elasticity: Explore pricing power and premium positioning
“Inelastic demand gives pricing power, but elasticity forces efficiency.”
5. Cross-Elasticity
Cross-elasticity measures how demand for one product changes when the price of another changes—especially useful in multi-product or competitive cases.
“If Coke increases prices, does Pepsi’s demand rise?”
6. Visual Tools
Some interviewers show charts to visualize elasticity. Be ready to read demand curves:
- Steep slope: Inelastic demand
- Flat slope: Elastic demand
Graphs may show revenue, quantity, or price trends. Practice interpreting axes quickly.
Final Thoughts
Price elasticity is more than a formula—it's a mindset. It helps you evaluate risk, customer behavior, and the trade-offs behind every price change. In interviews, use elasticity to bring depth to your recommendations.
Pricing decisions win cases. Make sure you understand how demand reacts before you commit.