PART 3: IMPLEMENTING THE MARKETING MIX
CHAPTER 7: PRICING & VALUE CREATION
Price Elasticity of Demand
Three Price Elasticity of Demand Extremes:
1. Unit price elasticity of demand, (ŋ =-1). In this case, a 10% increase
(decrease) in price produces a 10% decrease (increase) in quantity
demanded.
2. Zero price elasticity of demand, (ŋ=0). In this situation, any change in price,
either positive or negative, has absolutely no or an infinitesimal impact on
quantity sold. Such a situation is highly unlikely ever to occur.
3. Infinite price elasticity of demand, (ŋ=∞). In this case, changes in quantity
sold have no or an infinitesimal impact on price. This situation is also highly
unlikely to occur.
The Relationship between Pricing and Proposition Costs
The price at which a proposition is set is important because increases in price have a
disproportionately positive effect on profits and decreases in price have a
disproportionately negative effect on profits.
A study identified that a:
• 1% improvement in price achieves an 8.7% improvement in operating profit;
• 1% improvement in variable costs only achieves a 5.9% improvement in
operating profit;
• 1% improvement in volume sales achieves a 2.8% improvement in operating
profit;
• 1% improvement in fixed costs achieves only a 1.8% improvement in
operating profits
, PART 3: IMPLEMENTING THE MARKETING MIX
CHAPTER 7: PRICING & VALUE CREATION
Customer Perceptions of Price, Quality and Value
Perceived quality: one person might be very dissatisfied and another highly satisfied
with the same offering.
The Relationship Between Quality and Pricing Levels
There is an assumption that as price increases, so does quality and that, in general,
price reflects quality.
The idea that price indicates quality assumes that prices are objectively determined
by market forces.
Value = Perceived benefits – Perceived profit
Influences on Customer Price Perceptions
Reference price = the price band against which customer judge the purchase price
of goods and services.
Key elements within price perception process:
1. Willingness to Pay
2. Price Consciousness
3. Pricing Cues (= proxy measures used by customers to estimate a product or
service's reference price, such as quality, styling, packaging, sale signs and odd-
number endings).
a. Sale Signs
b. Odd-number pricing ( €249,99)
c. Purchase context
CHAPTER 7: PRICING & VALUE CREATION
Price Elasticity of Demand
Three Price Elasticity of Demand Extremes:
1. Unit price elasticity of demand, (ŋ =-1). In this case, a 10% increase
(decrease) in price produces a 10% decrease (increase) in quantity
demanded.
2. Zero price elasticity of demand, (ŋ=0). In this situation, any change in price,
either positive or negative, has absolutely no or an infinitesimal impact on
quantity sold. Such a situation is highly unlikely ever to occur.
3. Infinite price elasticity of demand, (ŋ=∞). In this case, changes in quantity
sold have no or an infinitesimal impact on price. This situation is also highly
unlikely to occur.
The Relationship between Pricing and Proposition Costs
The price at which a proposition is set is important because increases in price have a
disproportionately positive effect on profits and decreases in price have a
disproportionately negative effect on profits.
A study identified that a:
• 1% improvement in price achieves an 8.7% improvement in operating profit;
• 1% improvement in variable costs only achieves a 5.9% improvement in
operating profit;
• 1% improvement in volume sales achieves a 2.8% improvement in operating
profit;
• 1% improvement in fixed costs achieves only a 1.8% improvement in
operating profits
, PART 3: IMPLEMENTING THE MARKETING MIX
CHAPTER 7: PRICING & VALUE CREATION
Customer Perceptions of Price, Quality and Value
Perceived quality: one person might be very dissatisfied and another highly satisfied
with the same offering.
The Relationship Between Quality and Pricing Levels
There is an assumption that as price increases, so does quality and that, in general,
price reflects quality.
The idea that price indicates quality assumes that prices are objectively determined
by market forces.
Value = Perceived benefits – Perceived profit
Influences on Customer Price Perceptions
Reference price = the price band against which customer judge the purchase price
of goods and services.
Key elements within price perception process:
1. Willingness to Pay
2. Price Consciousness
3. Pricing Cues (= proxy measures used by customers to estimate a product or
service's reference price, such as quality, styling, packaging, sale signs and odd-
number endings).
a. Sale Signs
b. Odd-number pricing ( €249,99)
c. Purchase context
