Price Elasticity: How Much Would Revenue Change If You Raised Prices?

You’re currently charging $100/month.

You’re thinking about raising prices to $120/month.

But you’re scared. What if customers leave?

Here’s the question: How many customers would you lose if you raised prices 20%?

This is price elasticity: How demand changes when price changes.

If demand is elastic (price-sensitive), raising prices loses many customers.

If demand is inelastic (not price-sensitive), raising prices loses few customers.

Understanding Elasticity

Elastic demand: Small price increase = large drop in demand

Example:

Current: $100/month, 1,000 customers, $100k MRR
Raise to $120/month (+20%)
Demand drops 30% (to 700 customers)
New MRR: $120 × 700 = $84k
Result: Revenue down 16%

Price increase hurt you. You lost revenue.

Inelastic demand: Small price increase = small drop in demand

Example:

Current: $100/month, 1,000 customers, $100k MRR
Raise to $120/month (+20%)
Demand drops 5% (to 950 customers)
New MRR: $120 × 950 = $114k
Result: Revenue up 14%

Price increase helped you. You gained revenue.

Factors That Affect Elasticity

1. How much choice do customers have?

Many alternatives (SaaS note-taking): Elastic (customers switch easily)
Few alternatives (specialized enterprise software): Inelastic (customers stick)

2. How critical is your product?

Nice-to-have (productivity tool): Elastic (customers cut spending)
Must-have (payment processing): Inelastic (customers pay)

3. How much do customers spend on you?

Small % of their budget (SaaS at $100/month): More elastic (they notice)
Large % of their budget (SaaS at $50k/year): More inelastic (it’s built into their decision)

4. Are there switching costs?

High switching costs (CRM with 5 years of data): Inelastic (hard to switch)
Low switching costs (note-taking app): Elastic (easy to switch)

5. Are you raising prices on existing customers or new ones?

Existing customers (they’re used to old price): More elastic to price increase (they notice and resent it)
New customers only: More inelastic (don’t know the old price)

Measuring Price Elasticity

The formula: Price Elasticity = % Change in Demand / % Change in Price

Example:

Price increased 20%
Demand decreased 10%
Elasticity = -10% / 20% = -0.5

An elasticity of -0.5 means a 1% price increase causes a 0.5% decrease in demand.

Interpreting elasticity:

-0.1 to 0: Almost perfectly inelastic (raising prices barely affects demand)
-0.5: Moderately inelastic (1% price increase = 0.5% quantity decrease)
-1.0: Unit elastic (1% price increase = 1% quantity decrease—revenue stays same)
-2.0: Elastic (1% price increase = 2% quantity decrease—revenue drops)
-3.0 or worse: Very elastic (price-sensitive customers, raise price = lose lots)

Most SaaS products have elasticity between -0.5 and -1.5.

Testing Price Changes

You can’t just guess elasticity. You need to test.

Method 1: Time-based test

Raise prices on January 1. Compare to last year.

Jan 1-31, 2023 (old price $100): 100 new customers
Jan 1-31, 2024 (new price $120): 95 new customers
Demand dropped 5% from 20% price increase
Elasticity: -0.25 (inelastic)

Limitations:

A year is a long time (market conditions change)
Might have other variables (marketing spend, seasonality, competitors)

Method 2: Segment-based test

Raise prices for new customers only. Keep existing customers at old price.

Month 1:

Existing customers (old price): 50 sign up
New customers (new price): 45 sign up
Demand dropped 10% from 20% price increase
Elasticity: -0.5

This isolates the price effect because you’re not changing anything else.

Limitations:

Takes time to see results (need weeks of data)
Have to maintain two price tiers (confusing)

Method 3: Cohort-based test

Split new customers into two groups randomly:

Group A (50% of signups): $100/month
Group B (50% of signups): $120/month

Track who converts:

Group A: 100 signups, 50 convert (50% conversion)
Group B: 100 signups, 47 convert (47% conversion)
Demand dropped 6% from 20% price increase
Elasticity: -0.3 (inelastic)

This is the most rigorous test but requires splitting traffic.

Method 4: Survey or pre-announcement

Before you change prices, ask customers:

“If we increased prices to $120, would you stay?”
Track responses

Limitations:

People say they’d stay but don’t (say vs. do gap)
Self-selection bias (people invested in your product respond differently)

The Pricing Tiers Effect

If you have multiple pricing tiers, elasticity varies by tier:

Starter tier ($50/month):

Elasticity: -1.5 (elastic, price-sensitive customers)
Raise to $60: Lose 15% of customers, revenue up 2%

Professional tier ($200/month):

Elasticity: -0.5 (inelastic, less price-sensitive)
Raise to $240: Lose 5% of customers, revenue up 14%

Enterprise tier ($5,000+/month):

Elasticity: -0.1 (very inelastic, barely price-sensitive)
Raise 10%: Lose 1% of customers, revenue up 9%

Lower-priced tiers are more elastic. Higher-priced tiers are less elastic.

This means:

Raise prices on premium tiers first (less damage)
Raise prices on starter tier cautiously (more customers leave)
Consider raising starter tier more modestly (5-10% instead of 20%)

Optimal Pricing = Revenue Maximization

The goal isn’t to charge the highest price. It’s to maximize revenue.

Revenue = Price × Quantity

If you raise price but lose too many customers, revenue drops.

Example:

Price point 1: $100, 1,000 customers, $100k revenue

Price point 2: $110, 960 customers (4% drop from 10% price increase), $105.6k revenue ✓ Better

Price point 3: $120, 910 customers (9% drop from 20% price increase), $109.2k revenue ✓ Best

Price point 4: $130, 850 customers (15% drop from 30% price increase), $110.5k revenue ✓ Slightly better

Price point 5: $140, 770 customers (23% drop from 40% price increase), $107.8k revenue ✗ Worse

Your optimal price is somewhere between $130-140. Beyond that, you lose revenue because elasticity kicks in.

The Timing Question: When to Raise Prices

Best time to raise prices:

Annual renewal (existing customers expect it)
After product improvement (more value justifies higher price)
During growth (confidence attracts new customers despite higher price)

Worst time:

During recession (customers cutting budgets)
After churn spike (customers already unhappy)
Without product improvement (looks like a cash grab)

The Announcement Strategy

How you communicate price changes affects churn:

Bad announcement: “We’re raising prices from $100 to $120 effective immediately.”

Customers are shocked. They resent it. Churn spikes.

Good announcement: “We’ve added [3 major features] this year. We’ve also invested heavily in support and infrastructure. Starting [date], new prices will be $120. Existing customers have until [date] to lock in current pricing.”

This:

Justifies the increase (value added)
Gives warning (not a surprise)
Offers grandfather pricing (loyalty reward)
Limits churn (people lock in old prices)

The Rule of Thumb

For most SaaS:

Elasticity of -0.5 to -1.0 is typical
This means 10% price increase = 5-10% customer loss
Revenue impact: +5% to break-even

So raising prices 10-15% annually is sustainable.

Raising prices 30%+ is risky (you’ll likely lose revenue).

The Takeaway

Price elasticity measures how price-sensitive your customers are.

Test price changes before committing (use cohort tests or time-based tests).

Understand that elasticity varies by:

Tier (cheaper tiers are more elastic)
Customer type (SMB more elastic than Enterprise)
Market (competitive markets more elastic)

Optimize for revenue, not price. Sometimes a lower price generates more revenue.

Communicate price increases thoughtfully. Justify the increase and offer grandfather pricing.

We help you measure price elasticity, test price changes, and find your optimal pricing point.