How to measure the price elasticity of demand?

Analysis of historical sales
The first technique uses internal sales information to calculate the average elasticity across different price pairs. This method is applicable to companies that have made multiple price adjustments and have detailed sales records.

One of its main advantages is its low cost, since it can be performed with the company’s internal resources. It can also be used to estimate market elasticity if aggregated industry data provided by third parties is available. However, results may be distorted by factors such as inventory changes or promotions.

Point-of-sale data
The second technique relies on point-of-sale records, especially useful in mass markets where purchases are made in stores equipped with electronic billing systems.

Its main strength is that the data reflects actual final-customer purchases, without inventory distortions. The downside is the high cost: supermarkets often charge suppliers significant fees for access to this data.

Direct price survey and Van Westendorp
Moving to preference-based techniques, the most traditional is the direct price survey, in which consumers are asked how much they would pay for a product. This technique has proven unreliable, as responses tend to be vague and not representative of real purchase decisions.

A more structured variant is the Van Westendorp analysis. Respondents are asked about four price points: one very low that generates distrust, one low but acceptable, one high yet still acceptable, and one so high that it becomes unacceptable. Although more elaborate, this approach is not recommended for accurately measuring price sensitivity.

Purchase-intention survey
A much more effective alternative is the purchase-intention survey. Instead of asking how much a customer would pay, the respondent is shown a specific offer and asked whether they would buy it at a given price. This better simulates a real decision.

For each price level, the percentage of affirmative responses is measured, allowing the construction of a purchase-probability curve. This curve behaves similarly to a demand curve and enables elasticity calculations between the different points evaluated. It is even possible to estimate the full demand curve from these data.

Although this technique allows exploration of wide price ranges and is applicable to both mass and industrial markets, implementation can be expensive, as it requires a large sample to ensure reliable results.

And what if we want to measure perceived value and price sensitivity at the same time?
Each technique has advantages and limitations. However, there is one approach that allows both perceived value and price sensitivity to be measured simultaneously: conjoint analysis. This topic will be covered in the next lesson.