Using Elastic and Inelastic Demand in Marketing

Understanding and leveraging the concepts of elastic and inelastic demand can be a powerful tool for marketers. Let’s find out more…

Marketing Considerations for Elastic Demand Markets

Consider Aggressive Pricing

Lowering prices can attract price-sensitive customers, helping to increase market share. With elastic demand, a small decrease in price can lead to a larger increase in quantity sold, potentially outweighing the lower margin per unit.

Pursue Volume-Driven Profit

By capturing a larger market share through aggressive pricing, companies can compensate for lower margins with increased sales volume, ultimately leading to higher overall profits.

Start Brand Building

Once a substantial market share is secured, companies can work on building the brand, which over time can make demand less price-elastic.

Pursue Economies of Scale

As sales volume increases due to elastic demand, companies can achieve economies of scale, reducing per-unit costs of production or distribution.

Try to Avoid Price Wars 

In markets with elastic demand, companies might engage in price wars. A strong competitive position allows a company to withstand these wars better than its competitors.

Create Differentiation

While competing on price is essential in elastic markets, differentiation in terms of product features, quality, or customer service can help maintain a competitive edge, even in a price-sensitive market.

Monitor Competitors

Maintaining a competitive position requires being responsive to market changes, competitor actions, and consumer preferences, which is crucial when demand is elastic.

Use Discounts and Sales Promotions

In markets with elastic demand, where consumers are sensitive to price changes, marketers can use competitive pricing strategies to attract price-sensitive customers. Temporary price reductions, discounts, and promotions can significantly boost sales.

Target Segments that are Less Price-sensitive

Tailoring marketing strategies to these segments can help maintain profitability even when employing price cuts to attract more price-sensitive customers.

Maximizing Availability

Intensive distribution ensures that the product is available in as many outlets as possible. This widespread availability is crucial for products with elastic demand, as it increases the likelihood of purchase by consumers who encounter the product in multiple locations.

Increase Impulse Purchases

Products that are widely available are more likely to be bought on impulse. This is particularly effective for lower-priced or frequently used items.

Marketing Considerations for In elastic Demand Markets

Use Premium Pricing

Where demand is inelastic, consumers are less sensitive to price changes. Marketers can use premium pricing strategies, especially for high-quality or unique products, without significantly affecting sales volume.

Focus on Quality and Brand Loyalty:

Emphasize product quality, reliability, and brand loyalty. Consumers are less likely to be deterred by price increases if they are loyal to the brand or perceive the product as superior.

Leverage Necessity and Rarity

Products that are necessities or have few substitutes can have inelastic demand. Marketers can emphasize the essential nature of the product or its unique features.

Bundle Products

Bundling products can make the demand for the bundle more inelastic, as consumers perceive greater value in the combined offer than in purchasing items separately.

Establishing a Luxury Image

Position the product as a luxury or premium offering. High-end branding can justify higher prices and appeal to consumers who associate price with quality.

Exclusive Marketing

Use exclusive marketing strategies, like limited editions or member-only products, to enhance the perceived value and uniqueness of the product.

Value-Added Services

Bundle products with value-added services such as extended warranties, exceptional customer service, or exclusive access to additional features.

Customization and Personalization

Offer customization or personalization options that meet unique customer needs, creating a perception of higher value.

Personalized Marketing

Use data-driven insights to provide personalized marketing experiences, making customers feel valued and more connected to the brand.

Partnerships with Complementary Brands

Establish partnerships with other brands that offer complementary products or services, creating a more comprehensive offering that justifies higher prices.

Selective Distribution

Use selective distribution strategies to control where and how your products are sold, maintaining a perception of exclusivity and justifying higher prices.

Characteristics of Elastic Demand

You may have come across the term ‘demand elasticity’ in your textbooks. The elasticity of demand is a measure of how much the quantity demanded of a good changes as the price changes. In the case of elastic demand, a small change in the price results in a substantial change in the quantity demanded.

Here’s a practical example: if a candy shop increases the price of a candy bar from $1 to $1.50, and the sales of the candy bar decline significantly, then that candy bar has elastic demand.

Primary Characteristics of Elastic Demand

Let’s discuss some key characteristics that contribute to a product or service having an elastic demand.

Necessity vs. Luxury:

Products or services that are deemed as luxuries, meaning we can live without them, often exhibit elastic demand. If a luxury item’s price rises, consumers can forgo purchasing it, which leads to a significant change in quantity demanded.

Presence of Substitutes:

Availability of alternatives or substitutes can lead to a high degree of elasticity. Let’s visualize this with an example: if the price of Pepsi suddenly increases, people might switch to alternatives like Coca-Cola or any other lower-priced soft drinks. Thus, Pepsi, in this case, has an elastic demand.

Proportion of the buyer’s budget:

If your product takes up a large portion of the consumer’s budget, there’s a higher likelihood of elasticity. For example, most of us pay heed to the price changes in gasoline because it consumes a considerable portion of our monthly budget.

Time: Duration and Urgency:

The factor of time also plays a vital role in affecting demand elasticity. If a product is needed urgently, its demand is usually inelastic. On the other hand, if consumers have ample time at disposal, they may shop around, compare prices and possibly switch to cheaper options if the price rises, leading to elastic demand.

Characteristics of Inelastic Demand

In simple terms, inelastic demand occurs when the quantity demanded by consumers doesn’t change much or even at all when the price of a product is altered. Unlike elastic demand, where quantity dramatically moves with price, inelastic demand remains unfazed.

Characteristics of Inelastic Demand

Let’s discuss some key characteristics that contribute to a product or service having an inelastic demand.

Essential Goods and Services

When we talk about inelastic demand, we are often referring to goods and services considered essential by consumers. Think products like gasoline, a key utility such as electricity, or even significant and prescribed medication. No matter the price fluctuations, the demand for these remains relatively steady.

Lack of Substitute Goods

If we can’t find a good replacement for a product or service, then its demand is likely to remain constant, regardless of price changes. For example, insulin has no known substitute. Thus, demand for insulin remains constant despite any price changes that may occur.

Small Portion of Consumer’s Budget

Gum or a soft drink won’t make a large dent in most people’s budgets. Small expenditures like these are less sensitive to price fluctuations. In other words, their demand is inelastic. Sure, the price of your favorite candy bar might increase by a few cents, but that’s usually not enough to deter you from an occasional treat.

Limited Time

For products or services where the purchase can’t be delayed, inelastic demand is often observed. Emergency medical services or last-minute flight tickets fall in this category. Even if prices skyrocket, the need for these services makes their demand inelastic.

• Luxury Cars: Consumers are likely to buy fewer if prices rise.
• Designer Clothing: Demand decreases with price increases, as alternatives are available.
• Electronics: Items like smartphones and TVs can have elastic demand.
• Jewelry: Non-essential and luxury by nature.
• Furniture: Especially non-essential, decorative pieces.
• Dining Out: Expensive restaurants or casual dining.
• Travel and Tourism: Including airfare, hotels, and luxury travel packages.
• Entertainment: Such as movie tickets, concerts, and sports events.
• Cosmetics: Higher-end beauty products.
• Gourmet Foods: Specialty or luxury food items.
• Gym Memberships: Particularly high-end fitness clubs.
• Subscription Services: Like streaming or premium memberships.
• Books: Especially non-essential genres like novels.
• Home Decor: Artwork, decorative items.
• Photography Equipment: High-end cameras and accessories.
• Gardening Supplies: For hobbyist gardeners.
• Craft Supplies: For hobbies and non-essential projects.
• Seasonal Products: Like holiday decorations.
• Toys and Games: Non-essential entertainment items.
• Fashion Accessories: Like high-end handbags and shoes.

Examples of Products with Inelastic Demand

• Gasoline: Essential for drivers, despite price changes.
• Basic Groceries: Such as milk, bread, and eggs.
• Prescription Medications: Necessary for health, little sensitivity to price.
• Utility Bills: Gas, electricity, and water services.
• Baby Formula: Essential for infants, few alternatives.
• Salt: Basic kitchen necessity, low price elasticity.
• Cigarettes: For habitual smokers, despite price increases.
• Public Transportation: Essential for daily commuters.
• Basic Toiletries: Like toothpaste and toilet paper.
• Medical Services: Healthcare needs, especially emergency services.
• Rent: Housing necessity, less sensitive to price changes.
• Diapers: Essential for families with babies.
• Insurance: Health, car, and home insurance are often necessities.
• Coffee: For regular consumers, a daily necessity.
• Pet Food: Essential for pet owners.
• Basic Clothing: Such as underwear and socks.
• Education: School and college fees, especially for mandatory education.
• Alcohol: For regular consumers, less price-sensitive.
• Internet Services: Essential in modern society.
• Banking Services: Like checking accounts and ATM withdrawals.