Nov 30, 20222 min read

The Importance of Understanding Elastic and Inelastic Demand for Start-Ups & Their Pricing Strategy

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In-elastic Demand

In-elastic demand refers to a situation where the quantity demanded of a product does not change much in response to a change in price. In other words, consumers will continue to buy the product even if the price goes up. This can happen when the product is considered a necessity or when consumers have few substitutes to choose from.

Figure 1: In-Elastic Demand

Elastic Demand

On the other hand, elastic demand refers to a situation where the quantity demanded of a product changes significantly in response to a change in price. In other words, consumers will buy less of the product if the price goes up. This can happen when the product is considered a luxury or when consumers have many substitutes to choose from.

Figure 2: Elastic Demand

Determining Pricing Strategies

For start-ups, understanding the elasticity of demand for their product is vital for determining pricing strategies. If the demand for the product is inelastic, the start-up can charge a higher price and still maintain similar sales. However, the demand for the product is elastic. In that case, the start-up will need to be more careful about pricing, as a higher price may lead to a significant decrease in sales.

Testing Pricing Strategies

To test the elasticity of demand for a newly launched product, a product pricing expert would likely conduct market research, such as surveys or focus groups, to gather data on consumer preferences and willingness to pay for the product. They may also collect data on the prices of similar products and the market size for the product category.

Final Thoughts

With this information, they can use economic or financial models to estimate the elasticity of demand for the product. They may also conduct A/B testing of different prices for the product in a controlled environment to see how price changes affect demand.

About the Author

Adam Ryan is a Professor of Practice (Adjunct Professor) at Monash University and is a principal at Watkins Bay. Adam has over twenty years of start-up experience in Australia and the USA. An expert in Company Structuring for Innovation, Strategy, Mergers & Acquisitions, and Capital for early and growth-stage businesses.