Download Price Elasticity of Demand (PED)

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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
Price sensitivity
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.
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
inelastic P change
increase price
greater than Q
change ( as %)
PED = 1 unitary
P change = Q change hold price
elasticity (as %)
P change
less than Q
change(as %)
to max revenue
reduce price
Low price = high revenue
Q change > P change (as%)
High price = high revenue
P change > Q change (as %)
Market elasticity
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.
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.
2 Experimentation
Field experiments
◦ Manipulate actual retail price while holding others constant
◦ Costly and time consuming
◦ Need the cooperation of retailers
◦ Competitors may confuse findings
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
4 Judgmental Estimates
◦ Useful in estimating demand at different prices
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
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
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
◦ Higher the price the larger the price change must be to be
◦ Highly differentiated products can have prices far from the
average market price, and also have low elasticity
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.
Competitors reactions to price changes must be
Analyse the historical patterns of competitive
Analyse the influence of non price actions on price