Price Elasticity

Definition

A measure of how sensitive demand is to price changes. “Price elasticity of -1.5” means a 10% rate increase produces a 15% decrease in demand. Different segments and periods have different elasticities.

What it tells you

Elasticity is the foundational concept in pricing optimization — it tells you whether raising rates increases or decreases revenue. Inelastic demand (close to 0) means you can raise rates without losing volume; elastic demand (large negative) means small rate increases cost you significant volume.

How to track it

Computed from historical price/volume data. Most RMSes estimate elasticity implicitly; explicit measurement requires statistical modeling on past pricing decisions.

Where it fits

Elasticity informs whether the optimal pricing strategy is to push rates higher or hold them — the answer depends on whether your customers are rate-sensitive (high elasticity) or rate-insensitive (low elasticity).