Price Elasticity

Price elasticity measures how much a price increase will decrease overall revenue.

If an increase in price results in no reduction in revenue then the price is considered inelastic.

Test your product’s price elasticity by increasing the price by 10% then measure the overall revenue after a month.

If the overall revenue has gone down then the price is elastic which means the market is sensitive to price changes.

On the other hand, if the overall revenue goes up, the price is inelastic.

To calculate the price elasticity metric consider the following:

Price elasticity is calculated as the percentage of overall revenue increase divided by the price increase.

If in our example our overall revenue goes up by 15% from a 10% price increase then the price elasticity is 1.5.  

This means the price is inelastic.

If in our example our overall revenue goes up by 5% from a 10% price increase then the price elasticity is 0.5.

This means the price is elastic

This indicates how sensitive customers are to price increases and what latitude you have in moving the price to account for inflation and other factors.

It’s important to understand the price elasticity of your product as it shows how a price increase will impact overall revenue.

 

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