MKT Module 7: Pricing
1. Understanding Price
Laws of Supply and Demand: In healthy markets, price goes up when
demand increases more than supply increases, or when supply decreases more
than demand decreases. Price goes down when demand decreases more than
supply decreases and when supply increases more than demand increases.
2. Price Sensitive
PriceSettingAnalysis estimates how much you would have to sell and what
market share you would have to achieve to meet your profit targets it is
assessed in the light of your distribution reach, overall environmental analysis,
and anticipated effectiveness of the proposed advertising and personal setting
Products are designed around price points and price points are designed
Established products with an existing price, the process and tool to use in the
pricing decision is the Price ChangeAnalysis worksheet where the decision to
raise or lower price is based on the effect of a price change on gross
Gross contribution is quantity sold times contribution and contribution is price
minus variable cost per unit. This price change analysis tool tends to
discourage price reductions and price promotions.
By studying these two spreadsheets, you will learn best practice in the two
most important pricing processes: how to set the initial price and how to fine
Constumers are sensitive to price.
Costumers are more price sensitive when:
Price is a larger part of the buyers income, such as mortgage interest
The targeted buyers have little money to spend, such as consumers in
poor countries buying cell phone service.
The whole economy is in a belt tightening crunch, a recession.
A whole product category becomes much more expensive then it use
There is little product differentiation and quality difference between
competitive products, thus the product has become a standardized
commodity. Think desktop PC’S compared to laptops.
The product model is at the economy rather than quality end of the
product line. Low end Mercedes and Porches are subject to more price
Major competitors feature price in their advertising, thus making price
more salient to consumers: e.g., Geico Insurance claiming. “Take 15
min to save 15 percent on your car insurance”. Retailers compete with each other to sell the same brand and model
and thus promote price: e,g., supermarkets promoting their low prices
for 32 oz bottles of coke.
It is easy for the buyer to learn about and switch to substitutes. This
means that price sensitivity likely has increased across many product
categories because of how incredibly easy it is to learn about
substitutes and find lowest prices through internet search.
3. Setting the price of quality
To price a product using quality added analysis, you present the new
alternative with its new quality added feature along with the product currently
used and then ask the consumer how much more they would be prepared to
pay for the produc