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E-commerce Price Elasticity
pricingA measure of how sensitive customer demand is to changes in price. Elastic demand means small price changes cause large shifts in quantity sold; inelastic demand means quantity barely changes.
Definition
Price elasticity of demand (PED) quantifies the relationship between price changes and changes in quantity demanded. An elasticity of -2 means a 10% price increase causes a 20% drop in sales. An elasticity of -0.5 means a 10% increase only reduces sales by 5%. Products with elasticity between 0 and -1 are considered inelastic; beyond -1 they are elastic.
Understanding your product's price elasticity is critical for revenue optimization. If demand is inelastic (essentials, addictive products, products with no close substitutes), raising prices increases total revenue because the volume drop is small. If demand is elastic (luxury goods, products with many competitors), lowering prices can increase total revenue because the volume gain outweighs the per-unit reduction.
Elasticity is not fixed; it varies by customer segment, price range, and market conditions. A product might be inelastic at low prices but elastic at high prices. Subscription services often have low short-term elasticity (switching costs keep customers) but high long-term elasticity (customers eventually leave if the value-price ratio deteriorates).
Formula
Price Elasticity = % Change in Quantity Demanded / % Change in Price Example
A SaaS product raises its price from $50/month to $55/month (10% increase). Subscriptions drop from 1,000 to 920 (8% decrease). Price elasticity = -8% / 10% = -0.8, meaning demand is inelastic. Revenue actually increased from $50,000 to $50,600.
Related Terms
Value-Based Pricing
pricingA pricing strategy that sets prices based on the perceived or measured value a product delivers to customers, rather than on the cost of production.
Penetration Pricing
pricingA market entry strategy where a product is priced significantly below competitors to rapidly gain market share, with the intention of raising prices once a customer base is established.
Price Skimming
pricingA strategy of launching a product at a high price and gradually lowering it over time, capturing maximum revenue from each customer segment's willingness to pay.
Margin
pricingThe percentage of the selling price that represents profit. Unlike markup, margin is calculated as a percentage of revenue, not cost.
Put It Into Practice
Use these calculators to apply price elasticity to your own numbers.
Price Elasticity Calculator
See how price changes affect demand, revenue, and find the optimal price point.
Open calculator →SaaS Pricing Calculator
Calculate MRR, ARR, and optimize your SaaS subscription pricing.
Open calculator →Discount Impact Calculator
See how much more volume you need to compensate for a price discount.
Open calculator →