What Is Price Elasticity in eCommerce?
Price elasticity measures how much demand changes when you change price. Essential for pricing strategy and margin optimisation.
Key Takeaways
- Elastic demand: a price increase causes a large drop in demand
- Inelastic demand: a price increase causes little change in demand
- Luxury and differentiated products tend to be more price-inelastic
- Test price elasticity with A/B price experiments before making permanent changes
What price elasticity is
Price elasticity of demand measures how sensitive demand for your product is to a change in price. If you raise price by 10% and sales fall by 30%, demand is highly elastic. If sales fall by only 2%, demand is inelastic — customers will pay the higher price without much resistance.
The maths
The elasticity coefficient is percentage change in quantity demanded divided by percentage change in price. Greater than -1 (e.g. -0.3) means inelastic — demand barely changes. Less than -1 (e.g. -2.5) means elastic — demand is very sensitive to price.
What drives inelasticity
Products with few close substitutes, strong brand loyalty, or high switching costs tend to be price-inelastic. If you sell a product with a unique formulation customers trust, they will absorb a modest price increase. If you sell a commodity available from dozens of competitors, any price increase above market rate will send customers elsewhere.
Testing price elasticity
A/B price testing — showing different prices to different cohorts of visitors — measures actual purchase behaviour rather than surveys. Start with small price variations (5-10%) and measure conversion rate, revenue per visitor, and absolute revenue. Run tests long enough to achieve statistical significance.
Using elasticity to optimise revenue
If demand is inelastic, a price increase raises revenue. If demand is elastic, a price decrease might increase revenue. Most eCommerce operators find their pricing is conservative — they can raise prices by 5-15% with minimal volume impact, which is a significant margin improvement.