Price elasticity of demand measures how much the quantity bought changes when the price changes: the percentage change in quantity divided by the percentage change in price. If a 10% price rise cuts sales by 8%, elasticity is −0.8 and demand is inelastic. For a distributor pricing quotes, the same idea shows up in a different form: how much the chance of winning a quote changes when the price on the line moves.
The price elasticity formula
Elasticity is almost always negative, because higher prices sell less, so it is often quoted as an absolute value: 0.8. When the price change is large, economists use the midpoint method, which divides each change by the average of the old and new values, so the answer is the same whether the price goes up or down. To run it on your own numbers, or fit a curve to a list of prices and units sold, use the price elasticity of demand calculator.
The five types of elasticity
- Perfectly elastic
Any rise loses all demand. A theoretical limit.
- Elastic, above 1
Quantity moves more than price. Common for commodities.
- Unit elastic, exactly 1
Quantity moves in proportion, so revenue stays flat.
- Inelastic, below 1
Quantity moves less than price. Raising price raises revenue.
- Perfectly inelastic
Quantity never changes. Also a theoretical limit.
What makes demand elastic or inelastic
- Substitutes. A bearing size every competitor stocks is elastic. A part only you hold is not.
- Urgency. A breakdown order is far less sensitive to price than a planned reorder.
- Share of the buyer's cost. A $4 fitting inside a $40,000 machine barely matters. A large share of a contractor's bid matters a lot.
- Time. Buyers react little to a price rise this week and more over a year, as they find alternatives.
- Who decides. A purchasing department comparing quotes is more sensitive than an engineer who specified the part.
In distribution, the same item can be elastic for one customer and inelastic for another, which is why one price for everyone rarely fits.
How elasticity changes revenue
When demand is inelastic, a price rise increases revenue, because the quantity lost is smaller than the price gained. When it is elastic, a price rise reduces revenue. For a distributor the question is usually about gross profit rather than revenue, which makes price rises look better still, since the cost of the units not sold is saved too.
Elasticity in B2B quotes
The classic method needs many sales of the same item, to the same kind of buyer, at different prices, and enough time to see quantities change. Distributors rarely have that. Prices are negotiated per quote, each customer buys a different mix, and the same item may sell only a few times a month.
What distributors do have is quotes, won and lost at known prices. That gives a version of elasticity built for B2B: how the chance of winning changes with the price on the line. Using the example from the win rate guide, moving from list price to 4% above it cut the win rate from 62% to 49%, a fall of about 21% for a 4% price change. That is a quote-level sensitivity of roughly 5, far higher than market demand for bearings, because on a single quote the buyer can easily go elsewhere.
Measure sensitivity per segment and category. An average across all customers hides the ones you can price differently.
How to measure price sensitivity in your business
- Record every quote outcome
Won or lost, with the price on each line.
- Group what is alike
Segments of customers and categories of items that behave similarly.
- Band the prices
Group quote lines by how far above or below the normal price they were.
- Read the slope
How fast the win rate falls as price rises, for each group.
Cross-price elasticity, how demand for one item changes when another's price moves, matters too: a cheaper house brand bearing takes sales from the premium one. Most distributors start with own-price sensitivity per segment and add cross effects later.
AI pricing models do this measurement continuously: they learn price sensitivity for each segment and category from your won and lost quotes, and use it to recommend the price on each line, with the reasons shown.
See price sensitivity on your own quotes
Common questions
Inelastic. Elasticity is usually reported as an absolute value, and anything below 1 means quantity changes less than price. With an elasticity of 0.5, a 10% price rise reduces quantity by about 5%, so revenue goes up.
Demand is inelastic: buyers keep buying even when the price rises, usually because there are few substitutes, the item is urgent, or it is a small part of their total cost. Raising the price increases revenue, as long as the elasticity stays below 1 at the new price.
Perfectly elastic, where any price rise loses all demand; elastic, above 1; unit elastic, exactly 1; inelastic, below 1; and perfectly inelastic, where quantity does not change at all. Real products sit in the middle three.