Ever wondered why a small price tweak sends clients running, or sometimes it doesn’t seem to make a dent at all? That’s the power of price elasticity of demand. In plain terms, it’s about understanding how much your clients’ buying habits shift when prices do. For accountants and bookkeepers, knowing this can be the difference between pricing smart and pricing yourself out of work.
At Surplus Pricing we help firms like yours cut through the guesswork. Our pricing tools and frameworks are built around real demand behaviour, ensuring your strategy works with your clients, not against it.
Understanding Price Elasticity of Demand
Let’s break down the price elasticity of demand. It’s the measure of how much the quantity demanded of your services changes when there’s a change in price. If a slight increase causes demand to nosedive, it’s considered elastic demand. If demand barely budges, it’s inelastic.
There are a few key types of price elasticity to be aware of:
- Perfectly elastic: Prices go up a touch, and demand disappears.
- Perfectly inelastic: Demand stays the same, no matter what you charge.
- Unit elastic: The percentage change in quantity demanded matches the percentage change in price exactly.
Service industries often see a mix. Some offers are relatively elastic, while others are relatively inelastic, depending on how unique the service is or how many substitutes are out there.
For accountants and bookkeepers, this can mean that compliance work stays steady even with price changes, while advisory or consulting services might be more price sensitive. When you understand these price elasticities, you’re better equipped to tweak pricing in a way that boosts revenue without losing clients.
How to Calculate Price Elasticity of Demand
Here’s a simple formula for working out Price Elasticity of Demand (PED):
PED = % Change in Quantity Demanded% Change in Price
Let’s say you bump your hourly consulting rate from R100 to R110 (a 10% price increase). If your billable hours drop from 50 to 45 hours, that’s a 10% decrease in quantity demanded. Your PED is -1. That’s called unitary elasticity.
So what does this tell you? If your PED is:
- Greater than one: Highly elastic—price matters a lot.
- Less than one: More inelastic—you’ve got room to move.
- Exactly one: Price and demand move in perfect sync—raise your prices by 10%, and demand drops by 10%. You earn the same overall revenue, just from fewer sales.
Figuring out how to calculate price elasticity of demand helps you predict whether a price change will lead to more sales, fewer clients, or no noticeable effect at all. To start, track your change in price and compare it to shifts in your quantity demanded.
If you’re not sure how to find price elasticity of demand for your services, try looking at past trends or experimenting with things like limited-time offers or tiered pricing options. This kind of hands-on testing gives you practical insight. Surplus Pricing can support this process with flexible pricing templates and frameworks designed to help you assess which strategies are actually working.
How Are Prices Determined in a Free Market Economy
In a free market, prices are driven by supply and demand. When demand goes up and supply is limited, prices rise. When demand falls or competition increases, prices drop.
This basic price movement is what makes understanding the price elasticity of demand so important. It shows how sensitive clients are to price changes and helps you adjust your service pricing before revenue or retention takes a hit.
Key Factors That Influence Price Elasticity
Why are some services more elastic than others? Here are a few things that influence whether demand for a product rises, falls, or holds steady:
- Substitutes available: If there are lots of substitutes, demand becomes elastic.
- Necessity vs luxury: Essentials (like compliance services) tend to have inelastic demand.
- Time frame: Over time, clients may adjust their behaviour, leading to a change in demand.
- Brand perception: Strong brands often face less demand after a price increase.
Understanding these drivers helps you shape a smarter pricing strategy. For example, if your offer has few competitors and solves an urgent need, you may have more flexibility when adjusting pricing.
Real-World Examples of Elasticity in Action
Let’s take two service businesses:
- Inelastic example: An accountancy firm increases its monthly retainer fee by 5%. Clients continue with their services without hesitation. This reflects perfectly inelastic demand.
- Elastic example:A bookkeeping consultant raises project rates by 15% and sees a 25% drop in client sign-ups. Here, the service is clearly price elastic.
In both cases, the price change affected the quantity demanded. Understanding this lets you make informed decisions to either protect or maximise revenue.
Pricing Strategies Based on Demand Elasticity
Now that you know your price elasticity of demand, how do you use it? Here are some tactics for accountants and bookkeepers:
- Value-based pricing: Ideal for services with inelastic demand—where clients are willing to pay more for trusted expertise. This approach works particularly well when your offer is tailored, specialised, or difficult to substitute. Surplus Pricing supports value-based pricing by helping firms define service scope, prevent scope creep, and ensure that fees reflect real client value.
- Tiered pricing:Useful when serving a mix of price-sensitive and premium clients. Surplus Pricing supports this model by letting you build service-level packages within a single pricing framework—making it easier to present scalable options based on budget or need.
By understanding types of price elasticity, firms can fine-tune pricing methods that suit different service types and client profiles. These insights help accountants and bookkeepers make more confident, flexible pricing decisions.
Conclusion
In short, price elasticity of demand helps you anticipate how your pricing will land. Whether you’re facing perfectly elastic demand or a more stable response, using elasticity data means you won’t have to guess.
Want to see how elasticity insights can transform your pricing? Surplus Pricing gives accountants and bookkeepers the tools to turn pricing theory into revenue with confidence and precision.
