218 CHAPTER12 DESIGNINGPRICINGSTRATEGIES ANDPROGRAMS
➤ Part of the cost is borne by another party,
➤ The product is used in conjunction with assets previously bought,
➤ The product is assumed to have more quality, prestige, or exclusiveness, and
➤ Buyers cannot store the product.^3
A number of forces, such as deregulation and instant price comparisons that are
available over the Internet, have turned products into commodities in the eyes of con-
sumers and increased their price sensitivity. More than ever, companies need to under-
stand the price sensitivity of their target market and the trade-offs that people are will-
ing to make between price and product characteristics. Even in the energy
marketplace, where you would think that a kilowatt is a kilowatt is a kilowatt, some util-
ity companies are buying power, branding it, marketing it, and providing unique ser-
vices to customers.
Vermont-based GreenMountain.com for example, is working hard to differenti-
ate its energy products. Through extensive marketing research, the energy firm
uncovered a large market of prospects who not only were concerned with the envi-
ronment, but also were willing to pay more to protect it. Because
GreenMountain.com is a “green” power provider—a large percentage of its power is
hydroelectric—customers can help ease the environmental burden by purchasing its
power. This differentiation helps the firm compete against “cheaper” brands that
focus on price-sensitive consumers.^4Estimating Demand Curves
Companies can use one of three basic methods to estimate their demand curves. The
first involves statistically analyzing past prices, quantities sold, and other factors to esti-
mate their relationships. However, building a model and fitting the data with the
proper techniques calls for considerable skill.
The second approach is to conduct price experiments, as when Bennett and
Wilkinson systematically varied the prices of several products sold in a discount store
and observed the results.^5 An alternative here is to charge different prices in similar
territories to see how sales are affected.
The third approach is to ask buyers to state how many units they would buy at dif-
ferent proposed prices.^6 One problem with this method is that buyers might under-
state their purchase intentions at higher prices to discourage the company from set-
ting higher prices.
In measuring the price-demand relationship, the marketer must control for vari-
ous factors that will influence demand, such as competitive response. Also, if the com-
pany changes other marketing-mix factors besides price, the effect of the price change
itself will be hard to isolate.^7Price Elasticity of Demand
Marketers need to know how responsive, or elastic, demand would be to a change in
price. If demand hardly changes with a small change in price, we say the demand is
inelastic.If demand changes considerably, demand is elastic.
Demand is likely to be less elastic when (1) there are few or no substitutes or
competitors; (2) buyers do not readily notice the higher price; (3) buyers are slow to
change their buying habits and search for lower prices; and (4) buyers think the
higher prices are justified by quality differences, normal inflation, and so on. If
demand is elastic, sellers will consider lowering the price to produce more total rev-
enue. This makes sense as long as the costs of producing and selling more units do not
increase disproportionately.^8