Demand - Demand Demand A key determinant of price....

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Unformatted text preview: Demand Demand A key determinant of price. Estimating demand Estimating demand The operating assumption is that if you lower the price you will sell more. The question is: How much more? The answer is: The demand curve. Demand curves: Demand curves: Elastic Inelastic Unitary Fixed Moving along a demand curve vs. shifting the curve. Most demand curves aren’t straight lines Elastic demand curve Elastic demand curve $3 $6.75 Inelastic demand curve Inelastic demand curve $4.50 $2.50 Unitary demand Unitary demand 2.50 2.00 Price 1.50 1.00 .50 0 20 $120 $120 D D 40 60 80 Quantity demanded 100 120 Fixed demand curve Fixed demand curve Price elasticity – the shape of the Price elasticity – the shape of the demand curve. What determines elasticity? Urgency Substitutability Size of price relative to income Other uses ◦ Demand curves become more elastic over time Time frame Product durability Yield management Yield management Continually adjust prices to maximize sales Note, these are all industries with lots ◦ Airlines ◦ Hotels (especially in Las Vegas) ◦ Cruise ships ◦ Car rental companies of competition. Demand oriented pricing Demand oriented pricing strategies Skimming Prestige Penetration Price lining Odd­even pricing Target pricing Bundle pricing Yield Management Skimming – taking the cream off the Skimming – taking the cream off the top. A high price designed to maximize revenue early in a product’s lifecycle. Appropriate when: ◦ Competition is limited or nonexistant You have legal protection on the product Your technical innovation clearly leads the market ◦ Demand is inelastic ◦ High price is seen as representing quality, not customer gouging. Penetration Pricing – Go for market Penetration Pricing – Go for market share. Appropriate when ◦ Demand is elastic ◦ Low price will discourage competition ◦ Unit production price will fall as production increases Prestige Pricing – When price equals Prestige Pricing – When price equals quality. – Which in turn can be influenced by advertising and promotion. Appropriate primarily for luxury products and highly innovative technical products. Depends entirely on public perception $449.00 $49.00 Single­malt Scotch Single­malt Scotch Odd­even pricing. (Who are they Odd­even pricing. (Who are they kidding?) Also know as A&P pricing (after grocery chain) Assumes people think $$29.95 is less than $30. Legend says it goes back to early days of J.C. Penny and was designed to reduce employee theft. More a tactic than a strategy. Target pricing Target pricing If you know (or think you know) what customers will pay, you can try to engineer the product to meet that price. Price lining Price lining Establishing a series of standard prices to mark differences in quality and features in a line of products. Example – A TV manufacturer may offer sets at $299, $399 and $599 and gradually add features and move products down the price ladder. Works only when there are products similar enough to meet the same needs. Bundle pricing Bundle pricing Price hotel nights and airline flights together. Fixed­price meals Car with extended warranty Gilette pricing Gilette pricing Price the razor at a very low price and make your money on the blades. ◦ TiVo­­ $300 for the box plus $10 a month for the rest of your life. ◦ XM radio ◦ Direct TV and cable TV – Free installation plus first three months free! ...
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This note was uploaded on 01/21/2011 for the course MSOM 303 taught by Professor Philpot during the Winter '10 term at George Mason.

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