📖 Glossary

Price Elasticity of Demand — What Marketing Science Actually Shows

Price elasticity measures how sensitive demand is to price changes. The Ehrenberg-Bass evidence on promotions, brand strength, and pricing power — and what it means for practice.

·7 min read

Definition (≤25 words). Price elasticity of demand measures how much a brand's sales volume changes when its price changes — its sensitivity to pricing decisions.

TL;DR. Price elasticity is a foundational economic concept with profound implications for marketing strategy. In packaged-goods and repertoire markets, the Ehrenberg-Bass Institute has shown that price promotions produce large but short-lived sales spikes — driven mostly by existing buyers buying earlier or buying more, not by genuine market growth. The deeper finding: brands with strong mental availability and market share have more stable, less elastic demand, which means brand building is the most reliable way to reduce price sensitivity. Most brands over-invest in the lever (price promotions) that produces the weakest long-term return and under-invest in the lever (brand building) that actually improves pricing power.

What is price elasticity, in plain terms?

Price elasticity of demand answers a simple question: if I change my price, how much does my sales volume change?

The formula is the ratio of the percentage change in quantity demanded to the percentage change in price. If a price cut produces a proportionally larger increase in volume, demand is elastic. If volume barely moves, demand is inelastic. Cross-price elasticity applies the same logic to a competitor's price change.

This is textbook microeconomics. What makes it interesting for marketing — and what the Ehrenberg-Bass Institute has spent decades investigating — is how elasticity actually behaves in real, competitive, multi-brand markets. The short answer: differently than most marketers assume.

What does the evidence show about price promotions?

This is where the marketing science becomes genuinely uncomfortable for conventional practice.

John Dawes and colleagues at the Ehrenberg-Bass Institute have studied price promotions extensively using scanner panel data — the actual purchasing records of real households over extended periods. The findings are consistent across categories and countries, and they are summarised in Sharp's How Brands Grow (2010).

Price promotions produce large, immediate sales spikes. This is not in dispute. When a brand goes on promotion, its sales jump — often dramatically. This is why promotions are so seductive: the short-term effect is visible, measurable, and satisfying.

But the deeper findings undermine the case for promotional dependence:

  • Most of the sales increase comes from existing buyers. The promotion does not primarily attract new customers to the brand. It prompts people who already buy the brand — sometimes, who already buy it regularly — to buy more now, or to buy earlier than they otherwise would. This is forward-buying and pantry-loading, not genuine demand creation.
  • The effect decays rapidly. The sales spike disappears as soon as the promotion ends, and the brand's baseline sales typically return to their pre-promotion level. There is no lasting lift in market penetration or market share.
  • Promotions train buyers to wait. When a brand promotes frequently, its customer base learns to purchase on deal. Over time, the full-price purchase erodes and the brand becomes structurally dependent on discounting to maintain volume. The "regular" price becomes a fiction; the promoted price becomes the real one.

The net effect: price promotions are a highly efficient mechanism for temporarily reshuffling demand within a category, and a highly inefficient mechanism for growing a brand. They are activation — the 40% side of the 60:40 rule — deployed as if they were a growth strategy.

How does brand strength affect price elasticity?

This is the finding that connects price elasticity to marketing effectiveness — and it is the one most practitioners miss.

The general pattern, documented across Ehrenberg-Bass research and consistent with the Dirichlet model of brand competition, is that brands with stronger market positions — higher market share, greater mental availability, more distinctive market presence — exhibit more stable, less price-sensitive demand. This does not mean they are immune to price competition. It means their buyers are less likely to defect to a cheaper alternative when prices rise, and less likely to switch purely on the basis of a competitor's promotion.

The mechanism is straightforward. A brand with high mental availability is thought of readily in buying situations. Its buyers have established habits, associations, and familiarity. They are not constantly re-evaluating the category on price — they are reaching for the brand they know. Price is one factor in the decision, but it is not the only factor, and for habitual buyers it is often not the primary one.

A brand with low mental availability, by contrast, is bought only when promoted — there is no other reason to choose it. Its demand is highly price-elastic because price is the only lever it has.

This creates a vicious cycle: low mental availability → high price elasticity → dependence on promotions → no budget for brand building → mental availability stays low. The brand becomes a commodity that can only compete on price.

The flip side is a virtuous cycle: consistent brand-building investment builds mental availability, makes demand less elastic, improves margins and pricing power, and funds more brand building. Over years, this compounding effect widens the gap between strong and weak brands in a category. The best-margin brands are not the ones that spend least — they are the ones whose mental availability makes their buyers less sensitive to price.

Can brand building actually reduce price sensitivity?

Yes — and this is the link to the Binet and Field work.

Les Binet and Peter Field's analysis of the IPA Effectiveness Databank consistently shows that emotional brand-building campaigns are associated with improvements in pricing power — the ability to maintain or increase prices without losing disproportionate volume. The mechanism is the same one described above: brand building increases mental availability, which reduces price sensitivity, which improves pricing power.

This is why the 60:40 rule matters for pricing, not just for growth. The 60% invested in emotional brand building is not just building demand — it is building price-insensitive demand. It is creating buyers who will stay even when a competitor undercuts on price. Over time, this compounds: each year of brand building makes the brand's demand slightly less elastic, slightly more profitable.

The brands with the best margins in any category are almost never the cheapest. They are the ones that have invested consistently in being thought of, being distinctive, and being emotionally resonant — so that their buyers don't even check the competitor's price.

Where people get it wrong

  • Treating promotions as a growth strategy. Promotions are activation. They convert existing demand. They do not create new buyers or grow penetration. A brand that grows its promotional budget year after year is not growing — it is becoming more dependent on discounting.
  • Measuring only the promotional spike. If your dashboard shows the sales lift during a promotion but not the post-promotion return to baseline (or the gradual erosion of full-price purchasing), you are seeing a flattering fraction of the picture. The honest measure is the net effect over a full purchase cycle, including any forward-buying.
  • Assuming high elasticity means you should promote more. If your brand is highly price-elastic, the solution is not more promotions — it is more brand building. High elasticity is a symptom of low mental availability, not a signal to lean harder on the only lever that works.
  • Confusing market-level and brand-level elasticity. A price cut may grow the category (market-level elasticity) while merely reshuffling brand share (brand-level elasticity). In mature categories, brand-level promotional elasticity is almost entirely zero-sum — your gain is your competitor's loss, and they will respond.
  • Ignoring the training effect. Every promotion teaches the buyer that the brand's regular price is negotiable. The more you promote, the more you train your customers to wait for the deal. This is a slow, cumulative erosion that doesn't show up in any single campaign's ROI but compounds into structural dependence.

In practice — what an evidence-led approach looks like

  1. Measure both promotional and baseline performance. Track not just the sales spike during a promotion but the post-promotion return to baseline, the share of volume sold on deal, and the trend in full-price purchasing over time. If your deal share is rising, you have a problem.
  2. Treat promotions as activation, not growth. Use them sparingly and tactically — to clear inventory, to counter a competitive move, to drive a specific short-term outcome. Do not let them become the default go-to-market strategy.
  3. Invest in brand building to reduce elasticity. The most profitable long-term strategy for pricing is to build mental availability through emotional, broad-reach brand campaigns. This is the 60% side of the 60:40 rule, and its payoff includes improved marketing ROI through better margins.
  4. Monitor share of search as an early warning. A decline in share of search often signals eroding mental availability before it shows up in sales data. If your share of search is falling while your promotional spend is rising, you are in the vicious cycle.
  5. Test price increases on strong brands. If your brand building has genuinely improved mental availability, your demand should be less elastic than it was. A disciplined, incremental price increase — supported by ongoing brand investment — may be more profitable than another round of promotions.

So what?

Price elasticity is where marketing theory meets the P&L. The evidence is clear and uncomfortable: the lever most brands pull hardest — price promotions — produces the weakest long-term return, while the lever they under-invest in — brand building — is what actually reduces price sensitivity and improves margins. Brands that understand this build mental availability, accept slightly less short-term volume, and earn better prices from more loyal buyers. Brands that don't end up trapped in a cycle of discounting, watching their margins and their marketing ROI erode year after year. The choice is not between promoting and not promoting. It is between using promotions as a tactic and treating them as a strategy — and the evidence says the latter is a slow-motion mistake.

Evidence & sources

  • Sharp, B. (2010). How Brands Grow. Oxford University Press. — Chapter on promotions and pricing; the Dirichlet model and market stability.
  • Romaniuk, J. & Sharp, B. (2016). How Brands Grow 2. Oxford University Press.
  • Dawes, J. (Ehrenberg-Bass Institute) — published research on price promotions and consumer purchasing behaviour.
  • Binet, L. & Field, P. (2013). The Long and the Short of It. IPA. — brand building and pricing power.
  • Ehrenberg-Bass Institute — publications on brand competition, double jeopardy, and the stability of market structures.

Definition type: DefinedTerm. Reviewed: 2026-07-09. Written by Andrei Tarnovski for Boringly Effective. Fundamentals over fashion.