Market Factors Affecting Price

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

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.

Four Major Market Factors

That Affect Price
1.
2.
3.
4.

Costs and Expenses

Supply and Demand
Consumer Perceptions
Competition

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

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 betterquality products at lower prices.
Example: the price of computers

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

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

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

Demand Elasticity
The demand elasticity depends on five
factors:

Brand Loyalty
Availability of Substitutes
Price Relative to Income
Luxury vs. Necessity

Urgency of Purchase.

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

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

Price Relative to Income

If 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. 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

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

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, and
exclusiveness

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

customers perception.

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.

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.

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