BUS M300 1nd Edition Lecture 10 Outline of Current Lecture I. PriceII. Price SettingIII. Elasticity of DemandIV. Elasticity Impact on Revenue/SalesV. Optimal Places to be with ElasticityVI. Measuring ElasticityVII. Elasticity to Set Prices for SegmentsCurrent Lecture I. Pricea. A product’s price should be viewed from the customer’s perspective.b. Customer: could be a consumer or a channel intermediary, like a retailer or wholesaler.c. Customer value = product’s benefits / priced. What impacts price?i. Qualityii. Perceived valueiii. Costiv. Supplyv. Demandvi. CompetitionThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.vii. Urgency of need (if your thirsty you will pay more money for convenience)II. Price Settinga. To effectively set pricing one must consider all of these 4 factors.i. 1. Customer price sensitivity (Elasticity)ii. 2. Product Costsiii. 3. Value of Product to the Customeriv. 4. Competition’s PricesIII. Elasticity of Demanda. Sensitivity/elasticity: the degree to which pricing influences demand. i. Helps us understand what the price should be.ii. If it is elastic it fluctuates a lot, responds easily.iii. If it is inelastic, it is fixed. iv. Gas = inelastic, people will continue to buy if the price goes up.b. Elastic demand = % change in demand > % change in pricec. Inelastic demand = % change in demand < % change in priced. Elastic demand < -1.0 > Inelastic demand < 0e. Examplei. Current price is 5, current units sold is 10. Test price is 4, test units sold is 15.ii. Elasticity = % change in demand / % change in priceiii. Change in price: -1/5 iv. Change in unit: +5/10v. -1/5 divided by +5/10 = -2.5vi. -2.5 is elasticIV. Elasticity Impact on Revenue/Salesa. What factors cause demand for a product to be elastic/inelastic?i. Necessity (gas) vs. unnecessary (new car)ii. Importance (chocolate) vs. unimportance (clothing)iii. Substitutes (Applebees 2 for $20) vs. No substitutesiv. Availability vs. Not available (iPad / limited editions)b.V. Optimal Places to be with Elasticitya. If Elastici. Better to have Bargain Priceii. #1 price, price is reason for purchase (Wal-Mart)b. If Inelastici. Better to have Premium PriceType of DemandPrice Revenue ImpactUnit sales ImpactElastic Increase Down DownElastic Decrease Up UpInelastic Increase Up Slightly DownInelastic Decrease Down Slightly Upii. Inelasticity built through non-pricing actionsiii. Vigilance used to detect market shifts.VI. Measuring Elasticitya. E = points of elasticityb. Qs = unit sales at different weeks, months, etcc. Ps = unit prices at different timesd. 1s = olde. 2s = newf. (Q2 – Q1)/(Q1) divided by (P2 – P1)/(P1) equals EVII. Elasticity to Set Prices for Segmentsa. Consumers’ response to marketing stimuli is not uniform.b. Consumers in different segments respond to a product’s price in different waysc. This formula helps you calculate what price a different segment (geographical region) should charge. d. P = pricee. E = elasticityf. (P1/P2) equals (E1(E2) + E1) divided by (E1(E2) + E2) g. Multiply this by P1/x to get x = unknown