Page 414 - Marketing Management

DEVELOPING PRICING STRATEGIES AND PROGRAMS | CHAPTER 14 391

(a) Inelastic Demand (b) Elastic Demand |Fig. 14.1|

Inelastic and Elastic
Demand
$15 $15
Price
$10 $10

100 105 50 150
Quantity Demanded per Period Quantity Demanded per Period

notice the higher price; (3) they are slow to change their buying habits; (4) they think the higher
prices are justified; and (5) price is only a small part of the total cost of obtaining, operating, and
servicing the product over its lifetime.
A seller can successfully charge a higher price than competitors if it can convince customers that
it offers the lowest total cost of ownership (TCO). Marketers often treat the service elements in a
product offering as sales incentives rather than as value-enhancing augmentations for which they
can charge. In fact, pricing expert Tom Nagle believes the most common mistake manufacturers
have made in recent years is to offer all sorts of services to differentiate their products without
charging for them. 35
Of course, companies prefer customers who are less price-sensitive. Table 14.3 lists some
characteristics associated with decreased price sensitivity. On the other hand, the Internet has the
potential to increase price sensitivity. In some established, fairly big-ticket categories, such as auto
retailing and term insurance, consumers pay lower prices as a result of the Internet. Car buyers use
the Internet to gather information and borrow the negotiating clout of an online buying service. 36
But customers may have to visit multiple sites to realize these savings, and they don’t always do so.
Targeting only price-sensitive consumers may in fact be “leaving money on the table.”
ESTIMATING DEMAND CURVES Most companies attempt to measure their demand curves
using several different methods.
• Surveys can explore how many units consumers would buy at different proposed prices.
Although consumers might understate their purchase intentions at higher prices to discourage
the company from pricing high, they also tend to actually exaggerate their willingness to pay
for new products or services. 37

TABLE 14.3 Factors Leading to Less Price Sensitivity
• The product is more distinctive.
• Buyers are less aware of substitutes.
• Buyers cannot easily compare the quality of substitutes.
• The expenditure is a smaller part of the buyer’s total income.
• The expenditure is small compared to the total cost of the end product.
• 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.
• Buyers cannot store the product.
Source: Based on information from Thomas T. Nagle, John E. Hogan, and Joseph Zale, The Strategy and Tactics of Pricing, 5th ed. (Upper Saddle
River, NJ: Prentice Hall, 2011). Printed and electronically reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.