What is price elasticity?
Price elasticity is the measurement of how the quantity demanded of a good will be affected by changes in its price. In other words, it’s a way to figure out how purchasing decisions are affected by fluctuations in price. To add some context, here’s a representation of what the equation looks like.
Price Elasticity of Demand (E) = (% Change in Quantity Demanded) * (% Change in Price)
In a perfect world, you want your SaaS product to be inelastic. The demand for an inelastic product withstands the evolving landscape of pricing changes. The demand for a highly elastic product will not sustain itself and eventually will lose steam as a result. What does the equation above mean for your product? Let's take a look at the different outcomes:
E = 1: In this scenario the product is unitarily elastic and small changes in price will not affect the total revenue.
E > 1: In this scenario the price change will cause a substantial change in the quantity demanded. This product is elastic. Products having high elasticity will yield decreases in profit due to the decrease in units being sold.
E < 1: In this scenario a change in price won't cause as much of a change in demand. The product is relatively inelastic. If E = 0 then the product is perfectly inelastic.
"Measuring price elasticity of demand = Better economic decisions for your business"