Elasticity

Elasticity is a key concept when determining how much a change in a business driver results in a change in volume.  For simplicity, you multiply the % change in the driver times the elasticity to get the % change in volume.  (The formula for applying elasticity can be more complex, especially for pricing, but this simple multiplication will get a you a good answer if the change in the driver is within +/- 20%.  Some examples:  If the elasticity is 1.0, then a 5% increase in the driver results in a 5% increase in volume.  If the elasticity is 0.8, then a 5% increase in the driver results in a 4% increase in volume (0.8 * 5%).  If the elasticity is 1.2, then a 5% increase in the driver results in a 6% increase in volume (1.2 * 5%).  The sign of the elasticity should make sense in real life – positive if the driver and volume move together or negative if they move in opposite directions.  For example, if distribution goes up, volume also goes up so the distribution elasticity will be positive.  Price elasticity, on the other hand, is negative because if price goes up we expect volume to go down.  Elasticities can be determined in different ways, some simple calculations using data from your Nielsen/IRI database and some more complex from things like marketing mix or price-promotion studies.

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