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Price
Sacrific
e
Benefits
Price is a Signal
Alex Segre/Alamy.
PriceGrabber.com
Website
Lets Go to Costco!
The 5 Cs of Pricing
Profit Orientation
Target
return
pricing
Target
profit
pricing
Profit
Orientati
on
Maximizi
ng
profits
Sales Orientation
Focus on
increasing
sales
Does not
More
always
concerned
imply
with overall
setting low
market
prices
share
Firms that want to attain market leadership set prices at less profitable levels to gain
market share.
to establish a position in the market by getting the most price sensitive consumers to
change brands.
Competitor Orientation
Competitive parity
Status quo pricing
Value is not part of this pricing strategy
This strategy is particularly common among smaller firms that lack knowledge
or experience in setting prices.
Non-market leader firms also use it to signal they are similar to the market
leader
What are the benefits of a competitor strategy?
For example, can a new hotel chain indicate its level of service through price?
yes.
In many instances new brands will set price equal to the competitors they wish
to be compared with knowing that consumers use reference prices to indicate
quality
Customer Orientation
=
C Borland/PhotoLink/Getty Images
E-book Prices
Demand Curves
Not all are
downward sloping
Prestigious
products or
services have
upward sloping
curves
Inelastic
(price insensitive)
PhotoLink/Getty Images
Price Elasticity
Most customers in most markets are
sensitive to the price of a product or
service, and the assumption is that
more people will buy the product or
service if its cheaper and less will
buy it if its more expensive.
Price Elastic
Some products have a much more
immediate and dramatic response to
price changes, usually because
theyre considered nice-to-have or
non-essential, or because there are
many substitutes available.
Beef: When the price dramatically
increases, demand may go way down
because people can easily substitute
chicken or pork.
Perfectly Elastic
Perfectly elasticwhere any very
small change in price results in a very
large change in the quantity
demanded. Products that fall in this
category are mostly pure
commodities, says Avery. Theres no
brand, no product differentiation, and
customers have no meaningful
attachment to the product.
Commodities
Relatively Elastic
Relatively elastic where small
changes in price cause large
changes in quantity demanded
(the result of the formula is greater
than 1). Beef, as discussed above,
is an example of a product that is
relatively elastic.
Relatively Inelastic
Relatively inelasticwhere large changes
in price cause small changes in
demand (the number is less than 1).
Gasoline is a good example here because
most people need it, so even when prices
go up, demand doesnt change greatly.
Also, products with stronger brands
tend to be more inelastic, which makes
building brand equity a good
investment.
Price Inelastic
Perfectly Inelastic
Perfectly inelastic: Where the
quantity demanded does not
change when the price changes.
Products in this category are things
consumers absolutely need and
there are no other options from
which to obtain them. We tend to
see this only in cases where a firm
has a monopoly on the demand.
Even if I change my price, you still
Company Standing
When, through branding or other
marketing initiatives, a company
increases consumers desire for the
product and their willingness to pay
regardless of price, its improving the
companys standing compared with
competitors.
Factors Influencing
Price Elasticity of Demand
Crossprice
elasticity
Income
effect
Substitution
effect
Cross-Price Elasticity
A price change in one good might
effect the quantity demanded in
another good.
Cross-Price Elasticity
3rd C: Costs
Variable Costs
Vary with production
volume
Fixed Costs
Unaffected by
production volume
Total Cost
Sum of variable and
fixed costs
Michael Rosenfeld/Stone/Getty Images
4th C: Competition
Less Price Competition
Monopoly
Brand X Pictures/PunchStock.
Monopolistic Comp.
Oligopoly
Fewer
Firms
Ingram Publishing/SuperStock.
Pure Competition
Many
Firms
Manufacturers,
wholesalers and
retailers can have
different perspectives
on pricing strategies
Manufactures must
protect against gray
market transactions