Review Slide

Selected Review of Exam 1 Questions

Forms of Price Promotion

1. Special Package: price incentive to induce trial

offer in a form that minimize initial outlay Criterion

benefit the end user, not distributor's margin end user perceive price cut as a special offer to first time buyer, not repeat buyers

Forms of Price Promotion

2. Free sample/sampling Good for products that are frequently purchased,

high margin, benefit can be realized after one usage

Soaps, cigar, software Advantages

Induce trial quickly and broadly 70% gain rate

Forms of Price Promotion

3. Coupon Advantages

Most popular “Coupon Mom” Go to ultimate customer, maintain price

image, can be directed to first time buyers Disadvantages

Inconvenient, costly, retailer fraudulent

Fact: about 25% of coupon redeemed do not have purchase ($250M)

Forms of Price Promotion

4. Rebate Advantages

avoid coupon counterfeiting and fraudulent redemption by retailers

limit the offer to one per family lower administration cost multiple products: help develop a list a deal prone consumers many consumers fail to redeem it

Forms of Price Promotion

5. Reward program

6. Refund

7. Buy-now-pay-later

8. Price matching

9. be creative!!!

Lecture 9 Demand Curve, Elasticity and Consumer Surplus

Demand Curve

A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.

Three factors effecting demand: Consumer tastes – These include culture,

demographics, and technology. Price and availability of similar products – As the price

of substitutes fall or their availability increases, the demand for a product will fall.

Consumer income – As income increases so will demand for certain products.

Demand Curve Is Useful

Ups and downs of U.S. gas prices

Demand Curve and the Consumer Surplus

Price ($)

0

The demand curve is an aggregation of the demands of individual or segment, who have different reservation prices (max. willingness to pay)

Ideally, charge each customer their reservation price (as long as it is above c) – (i) no profitable customer is excluded from buying and (ii) no money left on table.

Demand

Illustrative Demand Curves for Newsweek

Demand curve underinitial conditions

The demandcurve with more

favorable conditions

Price Elasticity of Demand (effects demand)

Marketers are especially interested in how sensitive consumer demand and the firm’s revenues are to changes in the product’s price.

This is measured by price elasticity of demand, the percentage change in quantity demanded relative to a percentage change in price.

A product with elastic demand is one in which a slight decrease in price results in a relatively large increase in demand, or units sold. The reverse is also true

A product with inelastic demand is one in which a slight increase in price results in a steady or increased demand, or units sold.

Price Elasticity of Demand

Many firms seek to maximize profits through building sales. This approach is called demand-oriented pricing.

Demand-oriented pricing is sensitive to the notion of customer value and setting prices to match the benefits of the product as perceived by customers.

Demand-Oriented Pricing

Understanding the concept of Elasticity of Demand is necessary to successfully apply demand-oriented pricing

Elasticity = Q2 - Q1 (P1 + P2)

P2 - P1 (Q1 + Q2)

where P = price per unitQ = quantity demanded in units1,2 = time periods

Price Elasticity of Demand

Price Elasticity of Demand (E)

E measures the responsiveness of customer demand to changes in the service’s price.

Elastic demand = % change in demand > % change in price

Inelastic demand = % change in demand < % change in price

-1.0

Elastic demand Inelastic demand

0

Buyers are price sensitive Buyers are price insensitive

-2 -.8-3-4 -.4-.6

Consumers have lots of choice (substitutes) when products are elastic.

Measuring Elasticity of Demand

Dell Computers recently cut the price of a poor selling notebookfrom $1599 to $1399. Sales averaging 14,000 units in the first period rose to $20,000 in the second period.

1. What is Ep for the notebook?

2. Interpret the E.

3. Did revenues rise or fall after the price cut?

Elasticity State Pricing Action Revenue

Price Elasticity of Demand

demand is elastic a price increase decreases (higher marginscan’t offset lower sales)

demand is elastic

demand is inelastic

demand is inelastic

a price decrease

a price increase

a price decrease

increases (higher salesoffset lower margins)

increases (higher marginsoffset slightly lower sales)

decreases (slightly higher sales can’t offset lower margins)

Next Lecture

Cross Price Elasticity and Empirical Estimation of Demand Curve