Price elasticity and sensitivity

Price elasticity measures how demand changes when prices shift. Products with high elasticity see big demand swings from small price changes, while inelastic products maintain steady demand regardless of price.^[1] Understanding your product's elasticity guides strategic pricing decisions.

Luxury goods and products with many substitutes tend to be elastic. Necessities and products with strong network effects show inelastic demand. For example, SaaS tools with high switching costs often display inelastic properties once customers integrate them into workflows. In contrast, entertainment streaming services with many competitors display highly elastic demand, as customers can easily switch between providers when prices change.

Testing elasticity requires careful experimentation. A/B test different price points with similar customer segments. Track not just conversion rates but also customer lifetime value and churn. Sometimes higher prices attract better-fit customers who stick around longer.