Glossary - Planning and finance
Cross elasticity of demand
Cross elasticity of demand, also called cross-price elasticity, measures how much demand for one product changes when the price of another product changes, calculated as the percentage change in units of product A divided by the percentage change in the price of product B. A positive result means the two are substitutes; a negative result means they are complements.
| Variable | Definition |
|---|---|
| % change in units of A | The demand response of the product whose price did not move, measured over the same window with traffic and promotions held as steady as possible. |
| % change in price of B | The price move on the other product, against the price customers actually saw before it. |
| Reading the sign | E > 0: substitutes (B dearer, A sells more). E < 0: complements (B dearer, A sells less). E near 0: largely unrelated. |
For large price moves, many analysts use the midpoint (arc) method, dividing each change by the average of the before and after values, so the result is the same whichever direction you measure. The size of the number shows strength: the further from zero, the more tightly the two products are linked. It is the two-product cousin of price elasticity, which measures a product's response to its own price.
Worked example
Judged on its own, the 1kg price rise earns A$1,800 more a month. But 48 of the 100 customers who stopped buying the 1kg bag did not leave the brand; they moved to the 500g bag, which carries its own margin. Counting that switch, the range earns A$2,280 more. Run the same logic the other way and a price cut on one product can look like a win while quietly cannibalising a higher-margin sibling. For a complement, such as a grinder and filter papers, the sign flips: cut the grinder price and filter sales rise, so E is negative.
What is a good cross elasticity of demand?
There is no good or bad value, only what the number means for a pricing decision. A strong positive E between two of your own products says they compete for the same customer, so price them as a ladder and read their contribution margin together. A strong negative E says they sell each other, which makes the cheaper one a candidate for an entry price or a bundle and the other the place to hold margin. A value near zero means you can price each product on its own merits.
Estimates are only as good as the test behind them. A clean read holds traffic, email and ad spend steady across the window, or uses a proper test design. Price elasticity on The Math works the own-price version, and the price increase calculator shows how much volume a rise can lose before it stops paying.
Cross elasticity vs related metrics
| Metric | What it measures | How it differs |
|---|---|---|
| Price elasticity | A product's response to its own price | One product, one price. Cross elasticity links two products. |
| Income elasticity | Demand's response to customer income | Driven by the buyer's budget, not by any product's price. |
| ABC analysis | Which SKUs carry the value of the range | Ranks products one at a time; says nothing about how they affect each other. |
| Average order value | Revenue per order | Complements that sell together raise AOV; cross elasticity tells you how strongly. |
Common mistakes
- Measuring during a promotion. A sitewide sale moves every product at once. You cannot tell which change caused which response.
- Reading bought-together as complements. Two products appearing in the same basket is affinity, not elasticity. Only a price change on one, with the other's demand measured, shows the cross effect.
- Ignoring cannibalisation when cutting price. A discount on one SKU that pulls buyers off a higher-margin substitute can raise units and lower total margin.
- Judging the result on revenue. Revenue can rise across both products while contribution falls. Always add up the margin on both sides.
- Assuming the number is symmetric. Customers moving from A to B when B gets cheaper does not mean the same share move from B to A in reverse. Measure each direction.
FAQ
Cross elasticity equals the percentage change in quantity demanded of product A divided by the percentage change in the price of product B. If B rises 10% and A's units rise 6%, cross elasticity is +0.6, and the two products are substitutes.
It means the products are complements: when one gets dearer, demand for the other falls, because customers buy them together. A printer and its ink, or a grinder and filter papers, are typical examples. Pricing one affects the sales of both.
It means the price of one product has no measurable effect on demand for the other, so the two are unrelated in the customer's mind. You can price each independently without worrying about cannibalisation or losing attached sales.
It shows where a price change will ripple across the range. Substitutes should be priced as a ladder and judged on combined margin. Complements suggest a keenly priced entry product and margin held on the add-on. Both stop a single-product decision from hurting the whole basket.
Updated September 2026