Market Factors Affecting Price

1. Market Factors Affecting Price Natalie Hall EMKT 4110 October 22, 2003

2. 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

3. 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.

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

5. 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

6. 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

7. 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

8. 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

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

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

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

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

13. 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

14. 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. • Example: • automobile

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

16. 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, andexclusiveness

17. 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.

18. 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.

19. 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.

20. 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

21. 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.