The Marketing Mix Price

Price – Elasticity of Demand…

Today you will know what elasticity of demand means.

You will understand how to calculate price elasticity of demand

You will be able to apply your understanding to the case study.

Price Recap… Price is the money paid when goods or

services are exchanged. It is the only part of the marketing mix that

generates revenue (product, promotion and place are all about marketing costs).

Setting the right price is therefore an important part of effective marketing.

Many consumers are concerned about the price of products and services; as a result businesses must make sure that the

price they charge is at a level that the consumers are prepared to pay.

Influences on Price…

Price is effected by many factors, these include:

Market Conditions i.e. what is happening to influences consumers

Business Objectives Production Costs Market Structure

i.e. level of competition Taxes and Subsidies Marketing Mix

Case Study: Influences on Price…

Less than four years after the new Mini was launched, German car maker BMW has announced £100m of new investment. The investment aims to raise output by 20%: production could exceed 200,000 cars by

2007, from 189,000 last year. The increase is in response to rapidly-rising demand and could help wipe out waiting lists.

Raised targets The ‘Mini’ brand was one of the few parts of the former Rover group to be retained by BMW following its

takeover in 1994. The ‘Mini’ was seen as a valuable brand by BMW and they developed the brand following the introduction of the new mini in 2001.

Since its launch during summer 2001, the new Mini has gone from strength to strength. Last year, almost one in six cars sold by the BMW group was a Mini. The company admits that the success of the brand came

despite some reservations from those in the industry. BMW’s decision to produce a new Mini was not received well initially. They said they would produce 100,000 Mini models a year at the Cowley factory, but

the target was quickly reached, then raised, time and time again. "The risk is that after they've invested massively in the brand, demand tapers off like it did with the new VW Beetle," said Brad Wernle, from Automotive News Europe. "Of course the day will come," Mr Reithofer of BMW said. "But we will have

ideas.”Holding value

The price of the car has also gone up. When it was launched, the cheapest Mini cost just more than £10,000. These days, buyers will have to fork out almost £11,000 to own a new Mini One, or even more for the Cooper S which costs up to £17,730. The Mini Convertible, which was launched last spring, costs up to

£15,690 for the top model, and there is even a waiting list. Second-hand Minis are not cheap either. A Mini One bought when the model was launched should still fetch

at least £8,000 for the cheapest model, while a used Cooper S is likely to be priced from £12,556, according to the-car buying website Parker's. The consumers' association Which operates with slightly different numbers, yet it confirms that the Mini Cooper 1.6 depreciates more slowly than any other car, other than the Mercedes Benz C180 SE and the BMW 1 Series 116i SE. Adapted from BBC News 16th

February 2005.

Analyse the factors that influence the price of the BMW Mini. (8 marks)

Factors that influence Demand

Other then price the following factors also have an impact on demand:

Income The Price of other goods Advertising Tastes and customs The Law Government Polices Changes in population Attitudes and information

Price ElasticityThis measures the responsiveness (or sensitivity) of

demand to a change in price

PED = % change in quantity demanded% Change in price

Elastic goods = an answer greater than 1, where demand will change with a price change

Inelastic goods = Less than 1, where demand is relatively unresponsive to a change in price

Unit elasticity = an elasticity of 1, any price change is cancelled out by the demand change

Example - A product increases its price from

£100 - £110 and demand falls from 200 units to 180 units

To calculate % change in price: Find 1% of £100 = 100/100 = 1 Find the change in price: £100 - £110 = -£10 The the divide the price change by the value of 1% to find out

how many % the price has changed by: 10 / 1 = 10%

Then do the same for demand: 1%: 200/100 = 2 Change in demand: 200 - 180 = 20 % change: 20 / 2 = 10%

Therefore using the equation PED = 10% / 10% = 1 (Unit elasticity)

Number of customers -

Demand

Selling price of the product

An illustration of Price Elasticity

A PRICE ELASTIC GOOD

Number of customers -

Demand

Selling price of the product

An illustration of Price Elasticity

A PRICE ELASTIC GOOD

Number of customers -

Demand

Selling price of the product

An illustration of Price Elasticity

Number of customers -

Demand

Selling price of the product

A PRICE INELASTIC GOOD

InterpretingPrice Elasticity of Demand

Since there is an inverse relationship between price and quality the result of any PEd calculation will be negative. As such the negative sign is ignored.

Therefore there are 3 possible outcomes:

Ped > 1 = Elastic Demand – Quantity changes more than price Ped = 1 = unitary elastic demand Ped = < 1 = inelastic demand – Quantity changes less than price

The effect of changes in price can have an impact on total revenue

too. Therefore it is not always profitable to increase price.

Elastic or Inelastic…

If demand is not sensitive to price (price inelastic) the business is likely to increase its price to increase revenue because the

increase in price leads to a smaller decrease in quantity demanded.

Goods are likely to be inelastic if: Only a small amount of income is spent on them i.e. milk There are few substitutes i.e. they are innovative products or they

are protected by patents They are addictive goods i.e. cigarettes They are heavily branded with a strong loyalty They are paid for by someone else i.e. business travel

If demand is sensitive to price (price elastic) the business will lower the price to increase revenue, because a lower price will

lead to larger quantities demanded.

Price Elasticity Activity

Based on your knowledge of Price Elasticity of Demand complete the questions below:

Question 1:If price decreases from 25p to 20p and the demand

changes in response from 200 to 220 units, what is the price elasticity?

Question 2:

If the price increases from £11 to £13 and the demand then changes in response from 76 to 52 units what is the price elasticity?

Question 1. A change of -5p = 25p/100 =0.25, -5p/0.25 = -20% change A change of 20 units = 200/100 = 2, 20/2 = 10% change

PED = 10/20 = (-) 0.5 (Inelastic)

Question 2. A change of £2 = £11/100 = 0.11, 2/0.11 = 18.2% A change of -24 units = 76/100 = 0.76, -24/0.76 = -31.6%

PED = 31.6 / 18.2 = (-) 1.7 (Elastic)

Price Elasticity ActivityAnswers

Price Elasticity Activity

Based on your knowledge of Price Elasticity of

Demand complete the worksheet on the

cinema in Southampton.

Total Marks = 38

Time = 30 minutes