Let’s be honest. You’re not reading about price elasticity because you love economics. You’re reading this because you need to raise your prices, and you’re terrified everyone will leave. I get it. Pricing is scary. It’s the difference between “we’re growing” and “we’re closing.” So let me cut through the economic theory and tell you what price elasticity actually means for your business.
What Price Elasticity Really Is
Price elasticity is just a fancy way of asking: “If I raise my price by 10%, how many customers will tell me to get stuffed?”
That’s it. That’s the whole concept.
The economists will give you formulas and graphs and talk about “quantity demanded” versus “price points.” But really, you’re just trying to figure out if you can charge more without going broke.
The Only Three Scenarios That Matter
There are only three ways this plays out:
1. Elastic (You’re Screwed If You Raise Prices)
Your product is elastic when customers have options. Raise your price by 10%, lose 20% of your customers. They’ll switch to a competitor faster than you can say “value proposition.”
Examples: TVs, basic web hosting, commoditised services, anything sold on price alone.
2. Inelastic (You Can Probably Raise Prices)
Your product is inelastic when customers need it and don’t have great alternatives. Raise your price by 10%, and lose maybe 3% of customers.
Examples: Petrol, specialised software, your plumber when a pipe bursts at 2 am.
3. Unit Elastic (Theoretical BS)
This is where economists tell you that demand changes exactly proportionally to price. A 10% increase = 10% fewer customers.
Real talk: This doesn’t exist in the real world. Markets are messy. Customer behaviour is unpredictable. If someone tells you their product is unit elastic, they’re guessing.
The Formula (Because Apparently We Need One)
Here’s the formula: (% Change in Demand) ÷ (% Change in Price)
If the answer is greater than 1, you’re elastic (bad news for price increases). If it’s less than 1, you’re inelastic (good news for your bank account).
But here’s the problem: You can’t use this formula until AFTER you change your price. It’s like a weatherman telling you yesterday’s forecast.
What You Should Actually Do Instead
Forget the formula for a minute. Here’s how to figure out if you can raise prices:
1. Ask Yourself Why Customers Buy From You
If the answer is “because we’re cheapest,” you’re elastic. Don’t raise prices.
If the answer is “because we solve a specific problem nobody else can solve,” you’re inelastic. Raise prices.
If the answer is “I don’t know,” you have a bigger problem than pricing.
2. Look at Your Churn When You Last Raised Prices
Did 5% of customers leave? 20%? 50%?
That’s your price elasticity, right there. No formula needed.
If you’ve never raised prices, congratulations on leaving money on the table for however long you’ve been in business.
3. Check If Customers Actually Have Alternatives
Not “could they theoretically find an alternative if they spent three months evaluating options.”
Can they switch next week?
If yes: You’re elastic. If no: You’re inelastic.
Most businesses lie to themselves about this. “Sure, they could switch, but we have better customer service!” Nobody cares about your customer service enough to pay double.
The Substitution Test
Here’s the fastest way to know if you’re in trouble.
Your product is elastic if someone can replace you with:
- A direct competitor
- A cheaper alternative that’s “good enough”
- Nothing at all (they just stop buying)
Your product is inelastic if:
- Switching would cost them more than your price increase
- There literally aren’t other options
- Not having your product creates an immediate crisis
Most businesses THINK they’re inelastic. Most businesses are WRONG.
Why Most Pricing Strategies Are Backwards
Everyone obsesses over finding the “optimal price point.”
Here’s the dirty secret: There is no optimal price point. There’s only “what can we charge before too many customers leave.” And you can’t calculate that. You have to test it. The only way to know your price elasticity is to change your price and watch what happens. Everything else is academic circle-jerking.
The Real Strategy for Raising Prices
Step 1: Raise prices for new customers first.
If you lose them, you never had them anyway. No harm done.
Step 2: Watch your conversion rate.
If it drops by 50%, you’ve gone too far. If it drops by 10%, you’re probably fine. If it doesn’t drop at all, you didn’t raise prices enough.
Step 3: Wait three months.
You need real data, not knee-jerk reactions. Some customers complain about everything. That doesn’t mean they’ll actually leave.
Step 4: Raise prices for existing customers.
Start with the customers who get the most value. They’re least likely to churn. If that works, roll it out to everyone else.
Step 5: Stop apologising for it.
“We’re sorry, but we have to raise prices due to increased costs…”
No. Stop that.
“Our prices are increasing to reflect the value we deliver.”
If you can’t say that with a straight face, you don’t deserve the price increase.
When You Absolutely Cannot Raise Prices
You’re elastic (and stuck) if:
- You compete on price and nothing else
- Your customers can easily switch
- You offer the same thing as everyone else
- You’re in a race to the bottom
In that case, raising prices isn’t your problem. Your entire business model is your problem.
Fix that first. Then worry about pricing.
When You Should Have Raised Prices Yesterday
You’re inelastic (and leaving money on the table) if:
- Customers rarely complain about price
- Your close rate is above 50%
- People say “yes” without negotiating
- You’re turning away customers because you’re at capacity
If any of these are true, you’re undercharging. Possibly by a lot.
The Truth About Price Sensitivity
Your customers are less price-sensitive than you think.
But only if you’re actually solving a real problem.
If you’re not solving a real problem, no amount of pricing strategy will save you. You could charge $1, and customers still wouldn’t buy.
That’s not an elasticity problem. That’s a product problem.
Stop Overthinking It
Price elasticity sounds complicated because economists need to justify their jobs.
But for you, it’s simple:
Can you raise prices without losing too many customers?
There’s only one way to find out.
Test it. Track it. Adjust.
Everything else is just theory.
Keith Nallawalla runs Good Bad Marketing, where he tells you what actually works instead of what sounds good in a business school case study.