By Mylena Vazquez
If there’s one company with a strong and loyal base, it’s Disney. And for Disney, this diehard fandom has historically translated into extremely low price elasticity.
Price elasticity, contrary to what it might sound like, does not have to do with how much a company changes its prices. That’s one part of the equation, but it’s more than that. Price elasticity is about how consumers respond when a company changes their prices. As business owners, this is one of the most important measures to understand: in one sense, it tells us how much our customers are willing to pay before they jump ship.
In its simplest form, price elasticity relies on the notion that pricing and sales have an inverse relationship. In plain English, it means that when a company raises its prices, the number of products it sells decreases; when a company lowers its prices, the number of products it sells increases. However, each company also has something called an elasticity ratio—found by doing a complicated calculation, something best left to the experts—which tells you how much changing your prices will affect your company’s sales volume.
A sugar company will probably have a high elasticity ratio; if Domino raises its prices, chances are you’d be just as fine with Dixie Crystals! A company like Disney, however, has an extremely low elasticity ratio. There’s not much that can replace a Disney experience!
This isn’t totally surprising for the theme park category as a whole. In fact, as far back as 1982, researchers Mathieson and Wall found theme park prices to have extremely low elasticity. However, Disney still holds a unique power even within this auspicious category.
Magic Kingdom, which touts itself as the most magical place on Earth, has the highest attendance, by a landslide, of any theme park in the country. The demand is there even as Disney continues to raise ticket prices; people are just as willing to pay the price, even people who cannot actually afford it. In fact, in the tumultuous decade following the 2008 financial crisis, Disney continued to raise their prices at double the inflation rate, yet they continued to generate increasingly higher revenues year over year.
But, of course, Disney is not limited to just their theme parks. In fact, the majority of their revenue comes from their original business venture, media and entertainment. In 2021, Disney’s revenue from parks, experiences, and products was $16.55 billion, compared to the $50.87 billion revenue it generated from its media and entertainment segment—over three times as much. Disney Plus, the company’s streaming service, has only been available for two-and-a-half years, but it is projected to overtake Netflix, which controls a majority 47.1% of the market share, by 2026.
So, how does a company like Disney get to be this price inelastic, where their increases in price do not significantly drive down their volume of sales? And, more importantly, how can we try to recreate this for our own businesses?
The truth is that Disney depends largely on its brand equity to keep their prices inelastic. Brand equity is how customers perceive the brand; if customers perceive a brand favorably, it is considered to have high brand equity, for example. And Disney has, of course, one of the highest brand equities out there. It has amassed legions of devoted followers throughout the decades. As evidenced above, Disney fans are willing to sacrifice a lot to get their fill of the magic.
So what’s a small business to do? Cultivate a dedicated and loyal customer base, of course—but that’s easier said than done. Until then, dig deep into the numbers. Determine your company’s elasticity ratio and play around with how much it affects your price fluctuations. You never know, you might just find some magic in the numbers.
Have you ever analyzed your company’s price elasticity? How has it helped you grow your business?