jump to navigation

Pricing decision June 12, 2009

Posted by mariobarreiro in Marketing.
trackback

When companies take decisions about pricing, there is always some uncertainty about the effect on customers, competitors and distribution channels. Thus, to reduce this uncertainty they have to analyse the effects of new prices in this communities (Brassington & Pettitt, 2003: 392). Authors do not share the whole list subjects included in these external influences on pricing. However, they agree that demand and price stability should be studied before define any price, and this reflective journal will focus on them.

Demand

The theories of demand explain how changes in prices affect the sales (demand by customers), and help marketers to estimate demand for new products. Brassington & Pettitt (2003: 393-397) find the following shapes in the demand curve: classic, boomerang and parallel.

classicdemandcurve
The classic demand curve
Brassington & Pettitt (2003: 393) Fig. 10.3

The classic demand curve shows what is logical for most of products: if prices go up the demand falls. For instance, with a weak pound, travel overseas for British is more expensive than ever.

britishpound
British Pound to Euro Exchange Rate
Source:
http://uk.ichart.yahoo.com/z?s=GBPEUR=X&t=1y (Accessed 10 April 2009)

At the end of December 2008 the number of British families travelling to Spain felt by 22 per cent, due to the falling value of the pound and the credit crunch (Mail Online, 2008). Therefore, the tourists willing for holydays are more likely to travel to other destinations.

However, the shape of the demand curve can be affected by other factors than price, such as substitute products or economic conditions. In the previous example, the demand of holydays in Spain felt also because of the credit crunch, so probably the changes are deeper than with only a decline in the value of the pound.

Not all products keep the classic demand curve. Some products have a deep psychological relationship with the customer, and as a result, there can be a reverse price-demand curve in which the higher the price, the higher the demand.

boomerangcurve
The boomerang demand curve
Brassington & Pettitt (2003: 394) Fig. 10.4

This phenomenon is found in products perceived as high status, where if everyone can have them the demand falls. Examples are products in the medium-high price range, such as fragrances or fashion restaurants, where the customer spends occasionally a large sum of money to feel closer to a world of luxury and sophistication.

The parallel demand curve shows how the demand curve can be shifted upwards or downwards.

paralleldemandcurve
The parallel demand curve
Source:
http://bp1.blogger.com/_b-jw0MlcPlg/RndGEYNH1_I/AAAAAAAAAhY/CaE3acj-HPQ/s1600-h/demand_curve_prius2.jpg

Khengsions (2007) found that the Toyota Prius, a fuel efficient hybrid vehicle, is more likely to be sold better when petrol price is higher, creating a new curve with the same shape but different position.


Price stability

The price elasticity of demand explains the relation between changes in price and quantity demanded. There are two possible forms of elasticity: elastic demand and inelastic demand. When there is not elasticity and changes in percentage are equal, the concept what Brassington & Pettitt (2003: 395-397) entitle is unitary demand.

Elastic demand happens when a small percentage variation in price produces a large variation in quantity demanded.

elasticdemand
Elastic demand
Brassington & Pettitt (2003: 395) Fig. 10.6

In this case, the market is very price sensitive. Normally, the customer has easy options to switch and the competition is high, such as in convenience foods.

On the other hand, when a large change in price leads only to a small variation on quantity demanded there is inelastic demand.

inelasticdemand
Inelastic demand
Brassington & Pettitt (2003: 395) Fig. 10.7

There are several examples of inelastic demand, such as petrol and electricity or fruits and vegetables, where the customer cannot find substitutes in the short term and the demand keeps stable.

Web Articles:

Books:

  • F. Brassington and S.Pettitt. 2000. Principles of Marketing. 2nd ed. Prentice Hall
Advertisements

Comments»

No comments yet — be the first.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: