Market Factors Affecting Price

MKT-FMRE-7
Utilize pricing strategies to maximize return on merchandising efforts and
meet customers’ perception of value.
 Terms

 Price  Odd/even pricing

 Couture  Inelastic demand
 Bridge lines  Elastic demand
 Better garments  Revenue
 Moderate lines  Variable costs
 Budget lines  Fixed costs
 Markup  Penetration pricing
 Break even point  Price fixing
 Terms

 Price – the amount the consumer pays for

merchandise.
 Couture

 – custom made designs

– Highest priced category

 Elie Saab
 Bridge lines
 Secondary lines of well-known designers priced
between couture and better categories.
 Also known as diffusion line

Zac Posen collection for

David’s Bridal
Better garments

 Reasonably priced garments that maintain

high quality.
– Found in specialty stores and department stores
like Chaps by Ralph Lauren.

– Michael Kors @ macys.com

Moderate Lines

 Medium priced garments with well-known

brand names like Levi’s and private brands in
department stores.

INC international concepts

Budget lines

 Least expensive category

– Knockoffs
– Downscaled duplications

Target - Sweater Back Vest Navy

Xhilaration
Markup

 It’s the difference between the cost of a good

or service and its selling price.
 A markup is added onto the total cost
incurred by the producer of a good or service
in order to cover the costs of doing business
and create a profit.
Break even point

 The point at which cost or expenses and

revenue are equal: there is no net loss or
gain, and one has "broken even."
 Odd/even pricing

 A psychological pricing strategy used to

attract a price conscious and prestiguous
market.
 $299 – odd
 $300 - even
Inelastic demand

 A situation in which the demand for a product

does not increase or decrease
correspondingly with a fall or rise in its price.

 An example of a product with inelastic

demand is gasoline.
Elastic demand

 Demand that increases or decreases as

the price of an item goes down or up.

 clothing
 Revenue

Money that is made by or paid to a business or

an organization.
Fixed costs

 Fixed costs remain constant throughout the

given time period. It often includes rent,
buildings, machinery, etc.
Variable costs

 Variable costs are costs that vary with

output.

 Variable costs may include wages, utilities,

materials used in production, etc.
 Penetration pricing

 The practice of offering a low price for a new

product or service during its initial offering in
order to attract customers away from
competitors.
 Price fixing

 Price fixing is an agreement among

competitors that raises, lowers, or stabilizes
prices.

 The antitrust laws require that each

company establish prices and other terms on
its own, without agreeing with a competitor.
 EQ:

 What is price (selling price, retail 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. Costs and Expenses

2. Supply and Demand
3. Consumer Perceptions
4. Competition
 1. Costs and Expenses
 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
Costs and Expenses contd.
 Lower costs and expenses lead
companies to:
– Decrease prices of products and services
 Improved technology and less
expensive materials help companies
produce better-quality 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 customer’s 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
customer’s 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.
 Benefit: 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