By students, for students.

Pricing strategy in B2B markets: Demand (1/3)

In Informatics, Management on April 16, 2013 at 3:50 pm

1956_The Price is Right

The price is right

Price is an essential component of marketing and revenue generation which cuts to the heart of the purpose of modern enterprise. Businesses address customer needs through the provision of goods and services. However, this is not an end to itself. Primarily, firms exist to increase the wealth of their owners. To do this they engage in revenue and profit generating activities.

Revenue = price of good x quantity of good sold

Profit = total revenue – total costs

The profitability of a business can be increased by selling more, decreasing costs or raising prices. Although most obviously involved in the latter option, price strategy is an element of all of these methods. Enterprises can alter price to maximise profits, penetrate or skim markets, reduce inventories or encourage up- or cross-selling. Typical objectives include getting a return on investment and increase market share.

Businesses do not operate in a vacuum, however. Only certain pricing decisions will be viable for any one market situation. This article separates the relevant factors into demand, product and competitive conditions.

Demand

In neoclassical economics, lowering prices increases demand and adding to buyer costs reduce the number of potential customers willing to buy. However, more sophisticated models differentiate between inelastic and elastic demand.

Price elasticity refers to the percentage change in the quantity of a good demanded resulting from a 1% price change. If demand is inelastic, price alterations have a rapid effect. On the other hand, customers who are slow to be discouraged from buying as prices increase demonstrate elastic demand. The second scenario occurs when a product cannot be easily substituted or provides value through high quality. Similarly, buyers who are not attentive spenders or find searching for lower prices challenging are flexible in the prices they will pay.

CONTINUED IN PART 2.

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