Product type and elasticity of demand
The specifics of the production and consumption of goods, the duration of manufacture, its intended purpose and stage of the life cycle have a significant impact on commodity prices on the market.
For their intended use , products are divided into:
• for consumer goods purchased for personal (family) consumption;
• goods for production and technical purposes, purchased by organizations for further processing or use in business.
Depending on the specific behavior of customers, consumer products are divided into the following groups:
1. Commodities are consumer products and services that are usually bought without hesitation, with minimal comparison to other products. The goods of daily demand are classified additionally to the basic goods bought by the consumer on a regular basis, the goods of the impulse purchase, purchased without preliminary planning and searches on the basis of the suddenly arisen desire, and emergency goods purchased in the event of acute need in them.
2. Pre-selection products are consumer goods that the buyer compares in terms of fitness, price, quality, and appearance with each other.
3. Special demand goods are consumer products with unique characteristics and brands, for which significant groups of consumers are willing to spend extra effort.
4. Goods of passive demand are consumer goods, which the buyer usually does not think about buying, regardless of whether he knows or does not know about their existence. The implementation of such products requires significant marketing efforts.The following groups are distinguished in the composition of production and technical goods: raw materials and materials, semi-finished products, component parts, complementary parts, equipment, capital construction objects, industrial services.
It should be noted that over time, the position of the product and the company offering a specific product to the market are changing. Similar changes in the position of the product on the market are generally represented in the product life cycle concept . The concept is that each product is on the market for a limited time due to moral aging, and the price strategies at each phase of the life cycle are different.
The life cycle of a product (the time from the "birth" of a product as a commodity to its commercial "burial") is different in duration for different commodity types, depends on its purpose, mode, scientific and technological progress, etc. The most common the product life cycle model looks like a normal curve (Figure 2.3).
This concept involves the consideration of a number of factors in pricing. This change in costs as a result of expanding the volume of production of goods, a change in customer demand, depending on the degree of novelty of the goods, accounting for the time of finding the goods on the market.
Fig. 2.3. Product life cycle phases
Source: Neagle T. Strategy and pricing tactics. 3rd ed. St. Petersburg: Peter, 2004. P. 269.
The possibility of using the price at different stages of the product's life cycle is different. The characteristics of the various phases of the product life cycle are shown in Table. 2.1.
For development stages and entry into the market, the following strategies are typical: "skimming cream", neutral pricing, penetration price (not recommended in price lists in its pure form). The level of price differentiation is either high or low, depending on the chosen strategy. The main task of the enterprise is to inform customers about the value of the goods.
At growth stages leadership strategies are widely used in terms of costs, differentiation, penetration prices, neutral pricing, following the leader. If the price is higher than the prices of competitors, the company works with a separate market segment; when using the strategy of average market prices, it is oriented to the mass consumer, i.е. the whole market; at a low price - works with the most sensitive to the price segment of the market.
Characteristics of price strategies for various phases of the product life cycle
The ratio of buyers to the price of goods
Product development and introduction to the market
The product is new or requires the consumer to change his views and habits, which is innovation: a significant research, development and experimental development. Absence of actual competitors
Buyers are insensitive to the price, because they do not yet realize the value of the goods. The first 2-5% of buyers adapt to the new product
The product becomes more famous in the market. The price decreases compared to the previous phase, but still quite high. It should correspond exactly to the quality of the consumer value that the buyer is waiting for
Buyers own information about the product, become sensitive to the price, an important factor in making a purchasing decision is the cost-benefit ratio of using alternative brands
The market is saturated with a product, competition weakens due to the dropout of a part of firms that did not sustain it, some of the companies start creating a new product. The price level is low. For a company, its market share is important, since its reduction at a low price and impossibility to increase the price leads to an inability to recoup costs. The possibilities for the firm to make price decisions are significantly limited
Due to the active use of the product, the degree of brand loyalty is reduced. The sensitivity of buyers to the price is very high
Buyer demand is declining, there are excessive production capacities. Production becomes less effective. If most of the costs are variable costs or the funds can be redistributed to more profitable industries, prices should decrease slightly, which will give an impetus to a reduction in production capacity in other firms
Reduction in customer demand, in some cases, on the contrary, increase due to the appearance of "lagging" buyers
At the maturity stage the price level is generally low, so the company's market share is important, since otherwise it will not pay back the costs. The price varies depending on the volume of sales and the pressure of competitors. Widely used are the following price strategies: price discounts, non-price strategies related to product modification, or various ways to attract buyers (contests, auctions, lotteries, gifts). This phase is characterized by the use of the following ways to overcome the buyers' attitudes toward prices: the unpacking of goods and services, the expansion of the commodity line, the reassessment of commodity circulation channels.
Many authors also highlight the saturation stage, which is characterized by the saturation of the market, the emergence of the need for a new product. In this description, this phase is the final phase of maturity.
The decline phase is characterized by the fact that production becomes inefficient, and prices are reduced to a very low level. For the enterprise it is possible to use the following price strategies at this stage: reduction of production in favor of the strongest trade mark, setting prices protecting the market share, removing the "harvest" by assigning prices that maximize cash flows, consolidating market positions by lowering prices and getting rid of weak players.
The firm should understand the relationship between the price and purchases of consumers and their representations. This relationship is explained by two economic principles (the law of demand and price elasticity of demand) and market segmentation.
The law of demand states that consumers usually purchase more goods at a lower price than on high. Price elasticity of demand determines the sensitivity of buyers to changes in prices in terms of the volume of goods that they purchase.
Price elasticity is determined by the ratio of the change in demand (in percent) to price changes (in percent):
where p 1 - the initial level of the price; p 2 - the final price level; q 1 - the initial level of the volume of demand; q 2 - the final level of the volume of demand.
The point elasticity coefficient is calculated as the limiting form of the expression of the arc elasticity coefficient.
This formula shows the percentage change in the demand for each percent change in price. Due to the fact that demand usually decreases as prices grow, elasticity is measured by negative values. However, to simplify the calculation of elasticity in this section are expressed in positive numbers.
Elastic demand occurs in cases where price elasticity is greater than 1: small changes in prices lead to large changes in the size of demand. At the same time, total revenue increases when prices decline, and decreases when prices rise. Inelastic demand occurs when the price elasticity is less than 1: price changes slightly affect the volume of demand. Total revenue increases when prices rise, and falls when prices fall. Unitary demand exists in those cases when changes in prices are compensated by changes in the amount of demand, so that the total volume of sales remains constant. Price elasticity is equal to 1.
The availability of this or that type of demand is based on two criteria: the availability of substitutions and the importance of the need. If the consumer believes that there are many similar goods and services from which one can make a choice and there is no urgency in making a purchase , demand is elastic and significantly depends on changes in price. Increase in prices will lead to the purchase of a substitute or deferred purchase. Reducing prices will increase sales, divert buyers from competitors or force them to make a purchase earlier. Highly elastic for many consumers is the price of the air ticket when traveling on vacation. If prices rise, consumers can go on cars or postpone the trip.
In those cases where consumers believe that firm offers are unique, or there is an urgent need for a purchase, demand is inelastic and price changes do not significantly affect it. Neither increase nor decrease in prices will not have a significant impact on demand in the case, for example, when in most areas, regardless of the price of heating oil, the demand is relatively constant, since there is no real alternative and people need to heat their homes properly.
Commitment to the brand also creates inelastic demand, as consumers view their brand as distinctive and may disagree with the substitution. Finally, extraordinary circumstances increase the inelasticity of demand.
It should be noted that the elasticity of demand varies depending on the range of price changes for the same product or service. At very high prices, the sale of necessary goods falls (for example, trips in public transport will decrease, if payment grows, this will make cars a more reasonable alternative). At very low prices, demand can not be stimulated further, as the market is saturated and consumers begin to regard the quality level as low.
It is also necessary to understand the importance of prices for different market segments, because not all consumers perceive them equally. According to the study, consumers can be divided into four categories or segments depending on the orientation of their purchases:
• thrifty buyers : the main interest in purchases concerns their value, high sensitivity to prices, quality and assortment of products
• personalized buyers : the emphasis is on product image, service and the firm's attitude, less attention is paid to prices;
• ethical buyers : willing to sacrifice low prices and breadth of range to support small firms;
• apathetic buyers : the focus is on convenience, regardless of price.
Research confirms that not all consumers view price as a decisive factor in making purchases. It was found that buyers prefer department stores with a wide range of discounted stores with a similar assortment. They are attracted by a variety of products, service and the ability to return goods. In another study, it was noted that advertising growth reduces sensitivity to prices, demand becomes inelastic due to greater adherence to trademarks. The strongest of advertisements affect buyers who are price sensitive. In the third case, it is concluded that consumer perceptions of high and low prices are subjective. They can have more significance than real ones. For example, a consumer may believe that a low price is a successful purchase or characterizes a low quality, or that a high price indicates a status or a discrepancy between the value of a product and its (or its) representations.
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