Transcript Price Elasticity of Demand (PED)


Change in price has two effects:
◦ 1. Change in the quantity sold
◦ 2. Change in sales revenue

Marketing Managers must consider:
◦ Price sensitivity of the market
◦ Impact of price changes on the sales revenue
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
Price sensitivity
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Price elasticity of demand(PED)
◦ How much does a change in price affect quantity sold?
◦ measures the impact of price change on total revenue
◦ Is the percentage change in quantity divided by the
percentage change in price.
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PED =change in Qd (as %) / change in P (as %)
Change in Qd = (Q2- Q1) / ((Q1+Q2) x 0.5) ( as %)
Where Q1 = start price and Q2 = final price
Change in P = ((P2 – P1) / ((P1+P2) x 0.5) ( as %)
Where P1 = start price and P2 = final price
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PED
term
effects
PED<1
inelastic P change
increase price
greater than Q
change ( as %)
PED = 1 unitary
P change = Q change hold price
elasticity (as %)
PED>1
elastic
P change
less than Q
change(as %)
to max revenue
reduce price
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Elastic
Low price = high revenue
Q change > P change (as%)
Inelastic
High price = high revenue
P change > Q change (as %)
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
Market elasticity
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Company elasticity
◦ How total primary demand responds to a change in the
average price of all competitors
◦ Useful when implementing primary demand strategies
◦ Shows how much buyers will change brand/supplier due
to price changes/differences.
◦ Useful when implementing selective demand strategies.
◦ Need to understand the price sensitivity of different
buyers groups based on different determinant attributes.
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
1 Historical ratios from sales data
◦ Multiple regression models are often used.
◦ Need to consider the company’s relative price and market
share when assessing company elasticity.
◦ Managers need to consider competitive prices and the
changes in other marketing or environmental variables.
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2 Experimentation
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Field experiments
◦ Manipulate actual retail price while holding others constant
◦ Costly and time consuming
◦ Need the cooperation of retailers
◦ Competitors may confuse findings
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3 Survey - ‘Buy response surveys’
◦ Product is shown to a group of potential buyers along
with the price and asked if they would buy
◦ Process repeated with additional groups. Find the % of
consumers who say yes at each price
◦ Identify the level at which there is a substantial price
sensitivity.
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4 Judgmental Estimates
◦ Useful in estimating demand at different prices
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Factors that suggest elasticity of market demand
◦ Many alternative (substitute) products
◦ Small percentage of potential buyers use product due to
high price (discretionary product)
◦ Rate of purchase (consumption or replacement) can be
increased through lower price
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
Factors suggesting elastic company demand
◦ Buyers are knowledgeable about alternatives
◦ Quality differences do not exist or are not perceived
◦ The supplier or the brand could be easily changed with
minimal effort or cost to customer
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Useful general insights into judgmental assessment
of price elasticity
◦ All other things being equal, price change will have no
impact on demand unless it is large enough to be
noticeable
◦ Higher the price the larger the price change must be to be
noticed
◦ Highly differentiated products can have prices far from the
average market price, and also have low elasticity
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Useful general insights into judgmental assessment of
price elasticity
◦ The lower the brand market share the greater the price elasticity
◦ Market elasticity of demand is highest in the early stages of the
product life cycle.
◦ Company or brand elasticity is highest in the later stages of the
product life cycle.
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Competitors reactions to price changes must be
considered
Analyse the historical patterns of competitive
behaviour
Analyse the influence of non price actions on price
elasticity
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