Setting the Price 217
ignoring the effects of other marketing-mix variables, competitors’ reactions, and
legal restraints on price.
➤ Maximum market share.Firms such as Texas Instruments choose this objective
because they believe that higher sales volume will lead to lower unit costs and
higher long-run profit. With this market-penetration pricing,the firms set the lowest
price, assuming the market is price sensitive. This is appropriate when (1) the
market is highly price sensitive, so a low price stimulates market growth;
(2) production and distribution costs fall with accumulated production experience;
and (3) a low price discourages competition.
➤ Maximum market skimming.Many companies favor setting high prices to “skim” the
market. This objective makes sense under the following conditions: (1) A sufficient
number of buyers have a high current demand; (2) the unit costs of producing a
small volume are not so high that they cancel the advantage of charging what the
traffic will bear; (3) the high initial price does not attract more competitors to the
market; and (4) the high price communicates the image of a superior product.
➤ Product-quality leadership.Companies such as Maytag that aim to be product-quality
leaders will offer premium products at premium prices. Because they offer top
quality plus innovative features that deliver wanted benefits, these firms can charge
more. Maytag can charge $800 for its European-style washers—double what most
other washers cost—because, as its ads point out, the appliances use less water and
electricity and prolong the life of clothing by being less abrasive. Here, Maytag’s
strategy is to encourage buyers to trade up to new models before their existing
appliances wear out.^2
Nonprofit and public organizations may adopt other pricing objectives. A uni-
versity aims for partial cost recovery, knowing that it must rely on private gifts and pub-
lic grants to cover the remaining costs, while a nonprofit theater company prices its
productions to fill the maximum number of seats. As another example, a social ser-
vices agency may set prices geared to the varying incomes of clients.
Step 2: Determining Demand
Each price will lead to a different level of demand and, therefore, will have a different
impact on a company’s marketing objectives. The relationship between alternative
prices and the resulting current demand is captured in a demand curve.Normally,
demand and price are inversely related: The higher the price, the lower the demand.
In the case of prestige goods, however, the demand curve sometimes slopes upward
because some consumers take the higher price to signify a better product. Still, if the
price is too high, the level of demand may fall.
Price Sensitivity
The demand curve shows the market’s probable purchase quantity at alternative
prices, summing the reactions of many individuals who have different price sensitivi-
ties. The first step in estimating demand is to understand what affects price sensitivity.
Nagle says there is less price sensitivity when:
➤ The product is more distinctive,
➤ Buyers are less aware of substitutes,
➤ Buyers cannot easily compare the quality of substitutes,
➤ The expenditure is a lower part of buyer’s total income,
➤ The expenditure is small compared to the total cost of the end product,