Price Elasticity of Demand
B2B SaaS Pricing Glossary
Price Elasticity of Demand: Price elasticity of demand measures how sensitive customer demand is to changes in price, expressed as the percentage change in quantity demanded divided by the percentage change in price. A product is elastic when small price changes cause large demand shifts, and inelastic when demand remains relatively stable despite price changes.
Definition
In B2B SaaS, price elasticity tells you how much pricing power you have. A product with inelastic demand (elasticity between 0 and -1) can raise prices with minimal customer loss — this is typical for deeply embedded workflow tools, products with high switching costs, and solutions where the buyer is not the budget holder. A product with elastic demand (elasticity below -1) will lose significant volume from price increases — common in competitive categories with low switching costs and readily available alternatives.
Measuring elasticity in SaaS requires deliberate research because you cannot easily observe demand at different price points simultaneously. Methods include Van Westendorp price sensitivity analysis, conjoint studies, A/B testing different prices on the pricing page (with caution), and analyzing conversion rate changes after historical price adjustments. The goal is not a single elasticity number but an understanding of which segments are price-sensitive and which are not.
Why It Matters for B2B SaaS
Understanding price elasticity directly determines whether you should raise prices (and by how much) or lower them. Most B2B SaaS products are more inelastic than founders assume — Price Intelligently's data across 10,000+ SaaS companies shows that a 1% price increase yields an average 11% profit improvement with minimal churn impact. Companies that measure elasticity before making pricing changes make better decisions and avoid the common mistake of underpricing out of fear.
FAQs
How do you measure price elasticity for a SaaS product?+
The most common methods are Van Westendorp price sensitivity surveys, conjoint analysis, and analyzing historical conversion data after price changes. For self-serve products, you can also run controlled pricing experiments. Each method has tradeoffs between accuracy, cost, and implementation complexity.
Is SaaS pricing generally elastic or inelastic?+
Most B2B SaaS products exhibit inelastic demand, especially those that are deeply embedded in workflows, have high switching costs, or serve mission-critical functions. This means most SaaS companies have more room to raise prices than they think. The exception is commoditized tools in crowded categories with easy migration paths.
Deep Dives on Price Elasticity of Demand
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