What is Price Elasticity of Demand?

Price Elasticity of Demand is an economic measure of how sensitive the quantity demanded of a good is to a change in its price. If a small change in price leads to a large change in quantity demanded, the product is "elastic." If a price change has little effect on demand, it is "inelastic."

For Startups: Understanding the price elasticity of their product is crucial for making effective pricing decisions. For products with high elasticity, a small price increase could lead to a significant drop in customers. For inelastic products (often those with a strong brand or high switching costs), a startup may have more pricing power.

Calculation: Price Elasticity = (% Change in Quantity Demanded) / (% Change in Price).

Example: A SaaS startup increases its price by 10% and sees its customer sign-ups drop by 20%. The demand is elastic, indicating that customers are highly sensitive to price changes.