Market Factors Affecting Price

ObjectivesDefine Price and PricingList the four market factors that affect priceIdentify and discuss each market factorDefine elastic demand and inelastic demandList the 5 factors that contribute to demand elasticityIdentify and discuss each factor

Price & PricingPrice: 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 PriceCosts and ExpensesSupply and DemandConsumer PerceptionsCompetition

1. Costs and ExpensesSales + Costs + Expenses = ProfitIncreasing costs and expenses lead companies to:Increase price of product or serviceReduce size of product or serviceDrop service that is not valuedAdd to their product or service

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

2. Supply and DemandWith most products:Demand increases with lower pricesDemand decreases with higher pricesThis does not apply to some productsDemand ElasticityThe degree to which demand for a product is affected by its priceProducts have either elastic or inelastic demand

Elastic DemandWhen a change in price creates a change in demand.Example: Price of SteakLaw of Diminishing Marginal UtilityConsumers will only buy so much of a product even if the price is low.Example: Price of Laundry Detergent

Inelastic DemandWhen a change in price has very little effect on demand for a productExample:MilkBread

Demand ElasticityThe demand elasticity depends on five factors:Brand Loyalty Availability of SubstitutesPrice Relative to IncomeLuxury vs. NecessityUrgency of Purchase.

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

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

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

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

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

3. Consumer PerceptionsPrice planning involves what the consumers perceiveSome consumers associate quality with priceHigh price equals high qualityHigh price equals status, prestige, and exclusiveness

3. Consumer PerceptionsBusinesses limit a supply on the market to make the consumer think that it is worth more.Example:Limited EditionPersonalized service can also add to a customers perception.

4. Competition2 Forms:Non-Price CompetitionPrice CompetitionNon-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. CompetitionCompanies 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.

SummaryDefined Price and PricingListed the four market factors that affect priceIdentified and discussed each market factorDefined elastic demand and inelastic demandListed the 5 factors that contribute to demand elasticityIdentified and discussed each factor