Factors determining the conditions for price planning
As well as decisions on commodity circulation, price decisions depend to a large extent on the elements external to the company, and this distinguishes them from decisions on elements of the marketing mix that are more closely controlled by the firm. In some cases, external factors significantly affect the firm's ability to set prices, in others they have little impact.
The marketer must understand the relationship between price, consumer purchases and their representations, using the law of demand and the price elasticity of demand, as well as the segmentation of markets.
The law of demand says: consumers usually purchase more goods at a lower price than high.
Price elasticity of demand determines the sensitivity of buyers to price changes in terms of the volume of goods that they acquire. Price elasticity is determined by the ratio of the change in demand (in%) to the change in prices (in%). And since demand usually decreases as prices grow, elasticity is measured by negative values.
Elastic demand occurs in cases where price elasticity is greater than one. Small changes in prices lead to large changes in demand. At the same time, the total revenue increases when prices decline, and decreases when prices grow.
Inelastic demand occurs in cases where price elasticity is less than one. In this case, price changes slightly affect demand. Total revenue increases when prices rise, and falls when prices fall.
Unitary demand exists in cases where changes in the chains are compensated by changes in demand, so that the total sales volume remains constant. Price elasticity here is equal to one.
The existence of a given type of demand is based on two criteria - the availability of replacement and the importance of the need. If the consumer believes that there is a choice among similar goods and services and there is no urgency in the purchase, then the demand is elastic and significantly depends on changes in prices. The increase in prices will lead to the acquisition of a substitute (substitute) or to the postponement of a purchase. Reduction in prices increases the volume of sales, distracts customers from competitors and forces them to make a purchase earlier.
Demand is inelastic when consumers believe that firm offers are unique or there is an urgent need to purchase, and changes in prices affect demand negligibly. Neither growth nor a fall in prices will significantly affect this demand.
Commitment to a certain brand also creates inelastic demand, as consumers view their brand as distinctive and may disagree with the substitution. Finally, the inelasticity of demand increases the extraordinary circumstances.
It should be noted that the elasticity of demand varies in the range of price changes for the same product or service. At very high prices, the sale of necessary goods falls. At very low prices, demand can not be stimulated further, as the market is saturated and consumers begin to consider the quality level offered to them as low.
It is also necessary to understand the importance of prices for different market segments, because not all consumers perceive them equally. Consumers depending on the perception of their purchases can be divided into four categories (segment):
1) Economical buyers. They are mostly interested in the purchase of goods, they are highly sensitive to prices, quality and assortment of goods;
2) personalized buyers. They emphasize the image of the product, the service and the attitude of the firm to them, and pay less attention to prices;
3) ethical buyers. They are willing to sacrifice low prices and a large assortment to support small firms;
4) apathetic buyers. They focus on the convenience of buying, regardless of its price.
Research confirms that not all consumers view price as a decisive factor in making purchases. It is established that buyers prefer stores with a wide range of goods to shops with low prices and a similar range. They are attracted by the variety of products, the level of service and the possibility of returning goods. It is noted that the growth of advertising activity reduces sensitivity to prices, the demand becomes inelastic due to greater adherence to trademarks. The strongest advertising affects the price-sensitive buyers. Research reveals that consumer perceptions of high and low prices are subjective, and prices may have more significance than it really is. For example, a consumer may believe that a low price characterizes a successful purchase or a low quality of the product, and a high price indicates the status of the purchase or its non-conformity with the price of the product.
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