Campbell's Does the Elasticity Math

Faced with rising costs, Campbell's is raising prices on about half of its products by an average of 4–5%. But how much will sales fall as a result? On its recent earnings call, CFO Todd Cunfer explained that the company is using an assumed price elasticity of demand of −1.5 to forecast the impact. A 5% price increase would therefore be expected to reduce unit sales by approximately 7.5%. Revenue would actually decline, but profits could increase because the higher margin on remaining sales more than offsets the lost contribution from reduced volume. Campbell's expects the price increases to improve its bottom line despite their negative effect on sales.

The calculation is complicated by competitors' responses. Campbell's assumes that competing brands will not immediately match its price increases, making its products relatively more expensive. If competitors also raise prices, Campbell's could lose fewer customers than its forecast predicts. Cunfer acknowledged that the company is using different elasticity estimates across its product lines and has deliberately chosen conservative assumptions. That is, Campbells appears to be making relatively sophisticated use of elasticity concepts.