Transcript Pricing the Product: Supply and Demand

PRICING – SUPPLY and
DEMAND
MARKETING 360
Brian Gillespie
Price
The assignment of value, or the amount the consumer must
exchange to receive the offering
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Money
Goods
Services
Favors
Votes
Anything that has value to the other party
Price is a marketing tool and a key element in marketing promotions
(the easiest P to change). Most retailers highlight product pricing in
their advertising campaigns.
Pricing Views
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Customers view
 what must be given up to obtain the benefits. Customers buy based on
value and valued benefits, not price
Sellers view
 Price reflects the revenue generated for each product sold and, thus, is
an important factor in determining profit
Steps in Pricing
Develop Pricing Objectives
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Sales/market objective
 Reach a certain level of sales or market share
Profit objective
 Make as much money as possible
 Best strategy for fads
Competitive effect objective
 Have an impact on competition
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Cut into their market share
Release a competing product before they do
Customer satisfaction objective
 Price transparency
Image enhancement objective
 Prestige products priced higher
Estimate Demand
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Demand
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Demand curves
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Graphs that show impact of price on demand
Normal products
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Customer’s desire for a product
As price increases, demand decreases
Prestige products
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Curvalinear in design
 As price increases, demand increases to a maximum point
 Eventually demand decreases as price increases
Demand Curves
Shifts in Demand Curves
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Price remains
constant while
demand shifts (up
or down)
May be due to
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Advertising
Product introduction
Global event
Etc…
Estimating Pullman Thai Food Demand
# People in Market
25,000
Avg. # Thai Dinner/Year
5
Total Annual Demand
125,000 = (25,000 x 5)
Predicted Share of Market
4%
Estimated Annual Demand
5,000 = (125,000 x .04)
Estimated Monthly Demand
~ 417 = (5,000 / 12)
Estimated Weekly Demand
~ 104 = (417 / 4)
Certain Dri Deodorant
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You are interested in calculating demand for
Certain Dri in Spokane.
Spokane has 250,000 residents.
You expect the average person uses 1 stick of
deodorant a month.
Certain Dri has a 4% share of the market.
What is the total annual demand for deodorant in
Spokane, and what are the annual, monthly and
daily demands for sticks of Certain Dri?
Price Elasticity
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The percentage change in unit sales that results
from a percentage change in price
% Change in Quantity Demand
Price Elasticity =
% Change in Price
Demand up by 30%
= 3.0
Elastic Demand =
Price down by 10%
Demand up by 10%
= 0.25
Inelastic Demand =
Price down by 40%
Price Elasticity
Cross-Elasticity of Demand
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When changes in price for one product affects
changes in demand for a different product
 Substitute
products
 Complementary products
Psychological Issues in Pricing
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Internal reference price
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Price-quality inferences
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Greater price equals greater quality
Odd-even prices
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Set price or range of prices consumers think are reasonable
Odd prices sell more
For some products, this conveys low quality
Price lining
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Develop a variety of products at different price points
Pricing and Placebo
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MIT study on “Veladone”
 FDA
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approved drug used in dental surgery
Price conditions
 10
cents per pill
 $2.50 per pill
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Effectiveness
 In
low price point
 61%
 In
reported decrease in pain
high price point
 85%
reported decrease in pain