Market Factors Affecting Price

Objectives Define Price and Pricing List the four market factors that affect price Identify and discuss each market factor Define elastic demand and inelastic demand List the 5 factors that contribute to demand elasticity Identify and discuss each factor

Price & Pricing Price: the money a customer must pay for a product or service. Part of the Marketing Mix Pricing: establishing and communicating the value of products and services to potential customers.

Four Major Market Factors That Affect Price Costs and Expenses Supply and Demand Consumer Perceptions Competition

1. Costs and Expenses Sales + Costs + Expenses = Profit Increasing costs and expenses lead companies to: Increase price of product or service Reduce size of product or service Drop service that is not valued Add to their product or service

1. Costs and Expenses Lower costs and expenses lead companies to: Decrease prices of products and services Improved technology and less expensive materials help companies produce better-quality products at lower prices. Example: the price of computers

2. Supply and Demand With most products: Demand increases with lower prices Demand decreases with higher prices This does not apply to some products Demand Elasticity The degree to which demand for a product is affected by its price Products have either elastic or inelastic demand

Elastic Demand When a change in price creates a change in demand. Example: Price of Steak Law of Diminishing Marginal Utility Consumers will only buy so much of a product even if the price is low. Example: Price of Laundry Detergent

Inelastic Demand When a change in price has very little effect on demand for a product Example: Milk Bread

Demand Elasticity The demand elasticity depends on five factors: Brand Loyalty Availability of Substitutes Price Relative to Income Luxury vs. Necessity Urgency of Purchase.

Brand Loyalty When a customer will not buy a substitute product over a brand name of their choice. In this case brand is inelastic.

Availability of Substitutes When there are a variety of substitutes that will do the same job, the demand becomes elastic. Example: Laundry Detergent

Price Relative to Income If a price increases dramatically and it is beyond a customer’s budget, they are less likely to buy it. In this situation the demand will be elastic. Example: A diamond ring

Luxury vs. Necessity When a consumer feels that a product is a necessity, the demand becomes inelastic. Example: medicine When a consumer feels that a product is a luxury, the demand becomes elastic. automobile

Urgency of Purchase If a purchase must be made immediately then the demand will be inelastic. Example: Running out of gas

3. Consumer Perceptions Price planning involves what the consumers perceive Some consumers associate quality with price High price equals high quality High price equals status, prestige, and exclusiveness

3. Consumer Perceptions Businesses limit a supply on the market to make the consumer think that it is worth more. Example: Limited Edition Personalized service can also add to a customer’s perception.

4. Competition 2 Forms: Non-Price Competition Price Competition Non-price competition minimizes price as a reason for purchase. The more unusual a product, the greater the freedom to set prices above those of competitors. Price competition allows a company to gain target market appeal by lowering prices.

4. Competition Companies are constantly watching each other. If one lowers their price, their competitors will lower their price too. The benefit is lower prices for consumers. Price Wars: When a company lowers their price to the point that they lose profits. Can cause financial trouble.

Summary Defined Price and Pricing Listed the four market factors that affect price Identified and discussed each market factor Defined elastic demand and inelastic demand Listed the 5 factors that contribute to demand elasticity Identified and discussed each factor

References Boone, Louis E. & Kurtz, David L. (2001) Contemporary Marketing (10th Edition). USA: South-Western Thomason Learning. Burrow, James L. (2002). Marketing (Instructor’s Wraparound Edition). USA: South-Western Thomason Learning. Farese, L.S, Kimbrell, G. & Woloszyk, C.A (2002). Marketing Essentials (3rd Edition). New York: McGraw-Hill.