Price Elasticity: Understanding How Price Changes Affect Demand

Price elasticity measures how much demand changes when you change price. If you raise your price by 10% and unit sales fall by 5%, your product is price inelastic — demand is relatively insensitive to price. If unit sales fall by 20%, it is price elastic — demand is sensitive to price.

Elasticity = % change in quantity ÷ % change in price

An elasticity of −0.5 means a 10% price increase leads to a 5% volume decline. An elasticity of −2 means a 10% increase leads to a 20% volume decline. Most products fall between −0.5 and −2.

Price elasticity determines whether a price increase improves or damages profit:

• Inelastic product (elasticity −0.5 to −1): a 10% price increase with 5% volume decline improves revenue and margin — raise prices.
• Elastic product (elasticity −2 or below): a 10% price increase with 20% volume decline destroys revenue — you cannot raise prices without significant volume loss.

Knowing your elasticity prevents both under-pricing (leaving money on the table on inelastic products) and over-pricing (destroying volume on elastic ones).

You can estimate elasticity informally by reviewing price change history in AskBiz:

1. Go to Products → [Product] → Price History

2. Identify historical price changes (from promotions, price increases, or repricing events)

3. Look at the unit sales trend in the 2–4 weeks before and after each price change

4. Calculate: (% change in units) ÷ (% change in price) for each event

5. Average the results

Caveats: other factors (seasonality, competitor activity, marketing spend) can confound results. The more price change events you can analyse, the more reliable the estimate.

More inelastic (less price-sensitive):

• Unique or differentiated products with few substitutes
• High perceived quality or strong brand
• Products the customer needs urgently
• Low share of total household spending
• Habitual/repeat-purchase products where switching is inconvenient

More elastic (more price-sensitive):

• Commodity products with many identical alternatives
• High-ticket purchases where customers research extensively
• Products with an obvious, cheap substitute
• First-time buyers who have no loyalty

Use this framework to estimate elasticity for products where you don't have historical price change data.