week 5
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Using the same organization, you selected in Week 1 (Euro Car), imagine that you will be making a Microsoft Power Point presentation to the organization’s board of directors or other decision-making leaders (depending upon the type of organization you are using). Your work this week will consist of two parts for the presentation.
- First, you will synthesize the key insights you have learned during the past five weeks.
- Second, you will present an Integrated Marketing Communications (IMC) strategy, a pricing objective, and a pricing strategy to the board of directors. Because this second part involves new material in the project, it will probably require the most research and analysis to complete this week’s presentation.
The following sections provide greater detail about the two pieces of your presentation.
Note: The expectation for this project is a scholarly presentation. A scholarly presentation has two main distinctions:
- The notes sections of slides contain research citations, evaluation, and conclusions—just like in a good scholarly paper. In other words, a reader should be able to read your notes section as if he or she is reading an academic paper. The grading rubric suggests a level of critical thinking for the presentation (in the notes section particularly) that is on the level of a good academic paper.
- Key points and information on the slides are highlighted. A good slide contains no more than six lines of text. The slide should just contain the “big ideas” to help guide your reader through the main points.
In addition, for this project in particular, the first several sections of your presentation will use material you composed in the previous weeks of the project. However, use the slides and notes sections to show that you can do more than just copy from the previous weeks’ papers. Show that you can summarize the material and present the most important points to your audience.
Part 1: Summary of Key Insights from the Course Project to Date
Using course work (and feedback!) you have completed so far in the course project, summarize key points regarding the organizational mission and how the new product/service and your proposed service delivery enhancements contribute to the organization’s ability to complete the mission.
- New Mission; New Product/Service (2 slides)
- Provide a brief overview of the new/improved mission statement and the new/improved product or service you are proposing.
- Provide the board of directors with supported rationale for how the new product/service contributes to achieving the new/improved organizational mission.
- Service Delivery Enhancements (2 slides)
- Provide a brief overview of service delivery enhancements to improve efficiency and effectiveness.
- Provide the board of directors with supported rationale for how the service delivery enhancements contribute to achieving organizational mission.
Part 2: Communication Strategy
As new material for this week, you need to communicate to your “organization’s” market segment the key benefits that make the organization distinct from the competitors. In addition, you need to announce the improvements in the delivery of the services by the company. Justify an Integrated Marketing Communications (IMC) strategy that includes the following:
- Advertisement (5–7 slides)
- Propose an advertisement featuring the new (improved) services and containing the following elements:
- A headline
- A subhead line
- A brand–positioning statement
- An artwork
- A layout
- Justify traditional and nontraditional channels to carry the advertisement.
- In the notes section, justify your channel selection. Use research to support your work.
- Propose an advertisement featuring the new (improved) services and containing the following elements:
- Pricing (2–3 slides)
- Justify both a pricing objective and a pricing strategy for the company on the basis of the information gathered from the case study, an understanding of the competition, and the likely attitude of current customers.
- In the notes section, justify why the organization should adopt the pricing objective and follow your pricing strategy, using appropriate examples, research, and reasoning.
- Conclusion (1 slide)
- Conclude with a statement positioning the brand around the new service delivery.
- In the notes section, defend the statement. Support your work with research.
Submissions Details:
- The presentation should be 12 to 15 slides in length.
- Place any references on the last slide, using APA style.
Setting Prices and Break Even Prices.html
Setting Prices and Break Even Prices
The role of pricing objectives is to respond to the environmental factors influencing the company, whether internal (such as an increase in company productivity) or external (such as a rise in the inflation rate).
Pricing strategies are guided by pricing objectives.
Once price objectives and strategies have been established, the company should provide “rules of engagement” for the everyday operation of its business.
Pricing methods are used to set price for a product. One of the best- methods is break-even pricing.
A company reaches a break-even point (BEP) when it generates enough unit sales (or revenue) to cover all the costs necessary to run the business. Break-even pricing is calculated by determining fixed costs (FCs), variable costs (VCs), the revenue, and the contribution margin (CM).
- FCs, such as insurance, rent, and utilities, usually remain the same for varying sales volumes.
- VCs, on the other hand, change depending on the sales volumes; examples include overtime payments, wages of new hires, and cost of raw materials.
- Revenue is the money coming into the business from the sale of the product to customers.
- The CM is calculated by subtracting the VCs per unit (VCU) from the price of the product (P).
The following formula is used to compute the P when the revenues are just large enough to cover the total costs (FCs + VCs) but don’t offer any profit (Pr).
BEP = FC/P – VCU = FC/CM
In a variation of the previous formula, Pr is added to the BEP calculation.
BEP = (FC + Pr)/ (P – VCU)
P = (FC + Pr/BEP) + VCU
Break-even price is the price a company must sell its product at given a particular volume of production. Calculating the break-even price helps the company determine the price it will need to charge for its products. It also helps the company plan its future production. To calculate break-even price, the company needs to know its total fixed costs, the volume of production and the variable costs per unit. The total fixed costs are costs that do not change with the level of production. Variable costs, on the other hand, do change with the level of production.
Additional Materials
View the PDF transcript for
Setting Prices and Break Even Prices
media/transcripts/SUO_MBA6011 W5 L3.pdf
Setting Prices and Break Even Pricing
© 2016 South University
Page 2 of 2
Strategic Marketing
©2016 South University
2 Setting Prices and Break Even Prices
MBA6011 Week 5 Lecture 3
When setting prices, it is important to differentiate among pricing
objectives, strategies, and policies because they play different
roles. Pricing policies are laid down after the pricing strategy is
established, which is guided by the pricing objectives.
When setting prices, it is important to differentiate among pricing
objectives, strategies, and policies because they play different
roles. Pricing policies are laid down after the pricing strategy is
established, which is guided by the pricing objectives.
Pricing Objectives
The role of pricing objectives is to respond to the environmental
factors influencing the company, whether internal (such as an
increase in company productivity) or external (such as a rise in the
inflation rate). Pricing objectives must be closely aligned with the
company’s marketing objectives and take into consideration the
impact of the price on the sales volume, the sales revenue, the
market share, the competitive position, and profits.
Pricing Strategies
Pricing strategies are guided by pricing objectives. The pricing
strategy is more specific to the industry or the product category to
which the product (or brand) belongs. This explains why so many
types of pricing strategies have developed over the years.
Pricing Policies
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Once price objectives and strategies have been established, the
company should provide “rules of engagement” for the everyday
operation of its business. Establishing pricing policies is particularly
important for an organization with a large number of operating units
spread over a large geographic area. The purpose of creating
pricing policies is to bring about internal consistency and harmony
in the overall functioning of the organization.
Pricing methods are used to compute the price for a product. One
of the best-known and most widely used methods is break-even
pricing.
A company reaches a break-even point (BEP) when it generates
enough unit sales (or revenue) to cover all the costs necessary to
run the business. Break-even pricing is calculated by determining
fixed costs (FCs), variable costs (VCs), the revenue, and the
contribution margin (CM).
• FCs, such as insurance, rent, and utilities, usually remain the
same for varying sales volumes.
• VCs, on the other hand, change depending on the sales
volumes; examples include overtime payments, wages of new
hires, and cost of raw materials.
• Revenue is the money coming into the business from the sale
of the product to customers.
• The CM is calculated by subtracting the VCs per unit (VCU)
from the price of the product (P).
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The following formula is used to compute the P when the revenues
are just large enough to cover the total costs (FCs + VCs) but don’t
offer any profit (Pr).
BEP = FC/P – VCU = FC/CM
In a variation of the previous formula, Pr is added to the BEP
calculation.
BEP = (FC + Pr)/(P – VCU)
P = (FC + Pr/BEP) + VCU
Scenario
The owner of a newly established mall kiosk believes that he
needs to sell refrigerator magnets for under $2.50 to be
competitive with other kiosks and gift shops. More importantly, he
believes that at this price, he can sell about 2,000 magnets. By the
same token, he believes that even if the price was to fall
significantly, he could not sell more than 3,000 magnets in a given
month because of the amount of foot traffic at the mall.
The monthly FC, including rent and wages, is $4,500. The average
cost per unit when 2,000 magnets are sold at retail is $0.50; for
each additional 1,000 magnets sold, the cost to the owner per unit
is 5 cents less, until it reaches 5,000 units, at which point, the
average cost of buying the magnets from the manufacturer stays
the same (at $0.35). The kiosk owner receives the refrigerator
magnets on consignment from a local manufacturer, which means
that the owner does not have to pay for the magnets until he sells
them. However, the owner needs to sell a minimum number of
magnets to cover his FCs.
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Estimate the price of the magnets using the following formula:
P = [(FC + Pr)/BEP] + VCU
You may manipulate the values of the BEP (the quantity of
magnets sold) and the Pr.
You may choose one of the following:
• Make less profit (lower Pr).
• Sell more units of the refrigerator magnet (a higher BEP).
• Choose a combination of the two.
Solution
Click here to view the calculations. According to the information
given in the scenario and the manipulation of prices in the
spreadsheet, it seems that the kiosk owner’s price for the magnets
ranges from $2.28 to $1.95. Because the lower price would not
provide the owner any profits, he might want to start the month with
the higher price and then lower it as needed to ensure the required
sales of 3,000 units to meet his FCs and to obtain the discount
($0.05) from the manufacturer.
Pricing and Breakeven Analysis Excel, a tool available online, can
determine the impact of a price change on a business. It calculates
current BEPs using revenue, VC, and FC inputs. These are
combined with estimates for price and sales volume variations to
produce revenue and surplus (profit or loss) forecasts by price. The
model also determines the optimum pricing to maximize the
surplus and can be applied to new or established businesses,
product or service lines, or individual items.
The tool is compact and easy to use and requires minimal inputs.
Outputs include break-even charts for current, increased,
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6 Setting Prices and Break Even Prices
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decreased, and optimum pricing. In addition to determining the
optimum price to maximize the business surplus, the tool also
calculates the revenue, the surplus, and the volume of sales for
prices ranging from –50 percent to +50 percent of the current price.
Different Pricing Objectives, Strategies, and Policies
Pricing Objectives:
• Target return: This is a profit-oriented objective and used during
pricing in order to make a specific amount of profit for a specific
purpose.
• Profit maximization: This is a profit-oriented objective that can be
used in markets where the competition for the product is little to
none.
• Sales growth: This is a sales-oriented objective that aims to
maximize sales by increasing the sales volume.
• Growth in market share: This is a sales-oriented objective that
highlights the fact that lower prices can translate into a larger
percentage of market share.
• Meeting competition: This is a status-quo approach to ensure that
the company just survives in the market amid stiff competition.
• Nonprice competition: This objective aims to differentiate the
product in terms of attributes other than its price.
• Breakeven pricing: The objective is to arrive at the point where
total cost equals total revenue.
Pricing Strategies:
• Penetration pricing: In this strategy, a product is introduced into a
market at a much lower price than that of the competition in order
to quickly gain market share. The strategy is used in highly
competitive markets.
• Price skimming: In this strategy, high prices are charged for a
product so that profits can be maximized in the short term. The
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7 Setting Prices and Break Even Prices
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strategy is used when new products are introduced in
technologydriven industries.
• Product-line pricing: In this strategy, the products within a line are
priced according to their relative values and segmented on price-
point perceptions, for example, a manufacturer of men’s suits
offering different qualities and price points.
• Product-bundle pricing: In this strategy, several products (whether
complementary or not) are combined and offered at a reduced
price.
• Promotional pricing: In this strategy, the price of a product is
reduced to attract customers. Sales promotions are used along
with these prices.
• Psychological pricing: Because this is a pricing approach that
considers the perceived value that the buyer attaches to the
product, the seller has to gauge this perceived value and price the
product accordingly.
• Loss leader pricing: In this strategy, a particular product is sold at
a price lower than regular prices in order to attract customers into a
store. This strategy is preferred in retail or convenience store
settings.
Pricing Policies:
• Price changes: Whenever price changes are required, companies
should have a protocol or procedure to follow for implementation.
• Price discount: The company has stated (or fixed) percentage
discounts based on the type of customer or the quantity
purchased.
• Price promotion: Some retail stores accept as a matter of policy
the sales promotions issued by competitors as a way to steer
customers to their product or services. Examples of sales
promotions include coupons, rebates, and price-off discounts.
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• Price standardization: The price of the product is uniformly
applied across company stores, districts, or regions, for example,
the cost of standard overnight shipping within national borders.
• Price customization: The value of the product varies from market
to market, from one customer segment to another, from one
situation to another, or over time. For example, soft drinks cost
more when bought at a stadium instead of a supermarket.
• Markup pricing: A constant percentage is added to the cost of the
product in order to get the selling price. This pricing policy is
common among retailers.
• Price warranty: The tendered price is warranted by the company
over a specific period of time,
during which the price remains fixed.
Channels of Distribution and the Communication Mix.html
Channels of Distribution and the Communication Mix
The communication mix refers to the blending of promotional elements, also known as media types, into the right combination. Examples of media types include advertising, personal selling, sales promotion, public relations, publicity, and the Internet. Some of these media types are more complex than others.
Advertising is the most widely used and well-developed of all media types. Advertising messages can be expressed in many forms and through many mediums, such as television, newspapers, radio, magazines, billboards, and the Internet. This makes advertising the most flexible and prolific type of communication tool.
In designing a channel of distribution, several managerial decisions concerning the channel objectives, the channel structure, types of channel members, and strategic relationships (within the channel) need to be made.
Generally, channel objectives are formulated on the basis of the needs of customers and the organization. Regardless of whether a consumer, commercial, or service channel is designed, customers’ needs revolve around four types of utilities: place, time, form, and ownership.
The structure of a channel refers to the combination of two things—the number of channels of distribution the organization needs to have between it and consumers (or business customers) and the number of channel members in each of the channels. Overall, the greater the intensity of business, the larger the number of channels and channel members involved.
The types of channel members vary with the length of the channel and the types of customers. For example, to distribute sweet potatoes to consumers in remote geographical areas of the United States, a producer’s cooperative, a product distributor, two levels of wholesalers, and a retailer will be needed. The process may also involve making decisions concerning the relative importance of wholesaling functions in various channels of distribution.
A marketing channel is a collection of organizations that perform the functions necessary to move a product or service from its source to a user, whether the user is a business or an individual.
Organizations that assist in the movement can be intercompany or intracompany. Companies that perform these functions within their own organizations are considered intercompany. These companies perform the functions necessary to move a product or service from its source to a user within the resources of the company. For example, the Firestone Tire and Rubber Company® manufactures, distributes, and sells tires through its own retail stores as well as through other channels.
An increasing number of companies are relying on other companies that specialize in several of the product/service movement functions to assume some part of the responsibilities concerning product/service movement. In this case, the movement is considered intracompany and the outside companies are called channel members. For example, General Mills® manufactures food products and uses grocery distributors and retail grocery stores to sell its merchandise.
In many cases, the term marketing is used interchangeably with the term sales. Some companies refer to sales representatives as marketing representatives. In fact, marketing and sales are substantially different functions, albeit intertwined. In general, marketing staff focuses on product, packaging, pricing, distribution models, advertising, service, and a variety of other functions that include designing, implementing, and managing the channel. The sales staff focuses on selling the product or service by convincing a targeted market segment to buy it for a fee. If multiple companies are involved in a channel, there may be a sales function at each layer or level of distribution within the channel.
The use of multiple functional organizations within the same company to move products and services from origination to the consumer is itself a channel.
Channel management is the process of putting all this together and managing the effectiveness and efficiency of this movement or channel flow.
Channel management has as its objective the coordination of the flow within the channel to achieve maximum potential.
Additional Materials
View the PDF transcript for
Channels of Distribution and the Communication Mix
media/transcripts/SUO_MBA6011 W5 L1.pdf
Channels of Distribution and the Communication Mix
© 2016 South University
Page 2 of 2
Strategic Marketing
©2016 South University
2 Channels of Distribution and the Communication Mix
MBA6011 Week 5 Lecture 1
In designing a channel of distribution, several managerial decisions
concerning the channel objectives, the channel structure, types of
channel members, and strategic relationships (within the channel)
need to be made.
Channel Objectives
Generally, channel objectives are formulated on the basis of the
needs of customers and the organization. Regardless of whether a
consumer, commercial, or service channel is designed, customers’
needs revolve around four types of utilities: place, time, form, and
ownership.
Examples of channel objectives based on customers’ utilities
include:
• Making the product widely available
• Expediting the transaction time
• Maintaining the brand’s image
• Physically protecting the product
From the organizational standpoint, channel objectives may
include:
• Estimating distribution costs
• Developing new accounts
• Building distributor support
• Penetrating the market
Channel Structure
The structure of a channel refers to the combination of two
things—the number of channels of distribution the
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Strategic Marketing
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3 Channels of Distribution and the Communication Mix
MBA6011 Week 5 Lecture 1
organization needs to have between itself and consumers (or
business customers) and the number of
channel members in each of the channels. Overall, the greater the
intensity of business, the larger the
number of channels and channel members involved.
Types of Channel Members
The types of channel members vary with the length of the channel
and the types of customers. For example,
to distribute sweet potatoes to consumers in remote geographical
areas of the United States, a producer’s
cooperative, a product distributor, two levels of wholesalers, and a
retailer will be needed. The process may
also involve making decisions concerning the relative importance
of wholesaling functions in various
channels of distribution.
The communication mix refers to the blending of promotional
elements, also known as media types, into the right combination.
Examples of media types include advertising, personal selling,
sales promotion, public relations, publicity, and the Internet. Some
of these media types are more complex than others.
Advertising is the most widely used and well developed of all
media types. Advertising messages can be expressed in many
forms and through many mediums, such as television,
newspapers, radio, magazines, billboards, and the Internet. This
makes advertising the most flexible and prolific type of
communication tool.
Page 4 of 2
Strategic Marketing
©2016 South University
4 Channels of Distribution and the Communication Mix
MBA6011 Week 5 Lecture 1
When creating a message for the audience, marketers need to
choose a compatible media type or vehicle. Generally, advertising
agencies perform this job for most medium-sized and large
organizations. These agencies specialize in presenting a message
in such a manner that it gets the attention and interest of the target
audience.
When choosing the media type or vehicle, advertising agencies
make decisions regarding the reach, frequency, and timing of the
exposure (or impression) for the target audience. In Week 4, you
learned about JELL-O®, a hugely successful product sold by Kraft
Foods. Its marketing strategy included aggressive advertising of
the product by enlisting celebrities to endorse it. Moreover, the
message that eventually built brand recognition was dispersed
simultaneously through various advertising media.
IMC and The Role of Pricing.html
IMC and The Role of Pricing
Integrated marketing communication (IMC) is a comprehensive strategy created to reach the organization’s internal (employees) and external markets (customers). Employees are included in IMC because they too need to understand and embrace the core strategy established by the company for the product.
The primary corollary of the IMC campaign is that the message (or the advertisement) should be standardized to the point where it can be used and simultaneously delivered across all media types or vehicles. This brings consistency to the message being communicated and eliminates possible confusion for the final audience.
Failure to create an effective IMC strategy may result in the derailment of other strategies in the marketing mix. For example, if the IMC message does not successfully convey the right core strategy—value proposition and positioning—to the target market, diminishing perceptions of the value of the product will creep into consumers’ minds. This situation will render the already established price ineffective in pulling customers toward the brand. As a result, distribution costs will be affected because the intermediaries will demand higher slotting fees to carry the product, not to mention the higher inventory and warehousing costs because of unfulfilled sales projections.
Of all the elements of the marketing mix, price is the only one that allows the organization to generate immediate revenues. All the other elements—product, place, and distribution—are considered either investments or expenditures for the organization. Regardless of the nature of a product, its price and demand are closely related.
Pricing influences the value of a product. Value positively influences the willingness to buy and, hence, the demand for the product. The following formula recognizes that changes in prices play a critical role in influencing purchase decisions.
The integrated marketing communication approach is the latest strategy used by marketing managers to promote their brand in the target market. The strategy basically combines the different elements of the promotion mix under a common theme, which is focused on a specific market. When all the elements of the promotion mix send the same message, they reinforce each other and the message in the minds of the target market.
Additional Materials
View the PDF transcript for
IMC and The Role of Pricing
View the PDF transcript for
A Scenario
View the PDF transcript for
The Relationship between Price and Demand
media/transcripts/SUO_MBA6011 W5 L2.pdf
IMC and The Role of Pricing
© 2016 South University
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Strategic Marketing
©2016 South University
2 IMC and The Role of Pricing
MBA6011 Week 5 Lecture 2
IMC is a comprehensive strategy created to reach the
organization’s internal (employees) and external markets
(customers). Employees are included in IMC because they too
need to understand and embrace the core strategy established by
the company for the product.
The primary corollary of the IMC campaign is that the message (or
the advertisement) should be standardized to the point where it
can be used and simultaneously delivered across all media types
or vehicles. This brings consistency to the message being
communicated and eliminates possible confusion for the final
audience.
Failure to create an effective IMC strategy may result in the
derailment of other strategies in the marketing mix. For example, if
the IMC message does not successfully convey the right core
strategy—value proposition and positioning—to the target market,
diminishing perceptions of the value of the product will creep into
consumers’ minds. This situation will render the already
established price ineffective in pulling customers toward the brand.
As a result, distribution costs will be affected because the
intermediaries will demand higher slotting fees to carry the product,
not to mention the higher inventory and warehousing costs
because of unfulfilled sales projections.
Possible barriers to the effective implementation of an IMC strategy
are:
• Poor definition of the external (audience) market: This
occurs when marketing managers don’t take the time to
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MBA6011 Week 5 Lecture 2
segment and specify their market in terms of the
circumstances surrounding the use of the product or the
service.
• Exclusion of the internal market: This happens when the
organization eliminates the internal market because
management thinks it is not significant enough to help the
bottom line.
• Limited budget: A limited budget may force the organization
to pick communication vehicles that may not necessarily be
the most effective in delivering the standardized message.
Of all the elements of the marketing mix, price is the only one that
allows the organization to generate immediate revenues. All the
other elements—product, place, and distribution—are considered
either investments or expenditures for the organization. Regardless
of the nature of a product, its price and demand are closely related.
Pricing influences the value of a product. Value positively
influences the willingness to buy and, hence, the demand for the
product. The following formula recognizes that changes in prices
play a critical role in influencing purchase decisions.
The formula shows that there is an indirect relationship between
value and prices and a direct relationship between value and
quality. “Value” refers to the worthiness the consumer attaches to a
product (what he or she gets) because of the price to be paid (what
he or she gives up); it is the net outcome of a financial trade-off.
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“Perceived quality” refers to what the consumer believes he or she
is getting in the way of attributes and benefits, including the brand’s
reputation. Price is the tendered numerical value in currency units
offered for the product.
In other words, everything else (e.g., perceived quality) being
equal, if we increase price, the value of the product will go down;
similarly, if we decrease the price, the value of the product will go
up.
Notice that the value of a product and the quantity demanded are
strongly correlated. This is so because the value attached to a
product influences the consumer’s willingness to buy the product.
So a consumer’s perception of the value of a product is a viable
predictor of the quantity of the product that will be in demand.
media/week5/SU_MBA6011_W5_L4_S1_G1.pdf
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MBA6011_Strategic Marketing
© 2011South University
A Scenario
It is the first quarter of the year 2009 and Slater, a popular Jeans brand, announces a revolutionary
design for women. The new design, to be sold under the brand name SHE, is touted as the most
comfortable pair of jeans ever made. With a casual design, the selling points for this new product line
are its accentuated cut and stitching, a slimmer belt design, and bold new colors.
Slater begins the promotion of its new product line well before the actual release of the product.
Commercials, print ads, and online ads are all conceptualized and standardized to deliver the SHE
message. The commercials highlight that a wearer can’t own a more perfect pair of jeans than SHE. A
SHE woman is showcased as a classy, yet casual, lady who is comfortable in her own skin whether
she is at work, at a party with friends, or alone at home.
The campaign builds up the required anticipation in the market and consumers eagerly await the
perfect jeans.
The brand SHE is released in the market in early May. There is a rush of customers in the first few
weeks, but the sales drop down quickly over the next couple of months. The product falls short of
expectations. The verdict is that although the product is good, the overall quality does not justify its
exorbitant price.
Ultimately, the product is removed from store shelves, resulting in a huge loss to the producer.
Which stage of the new product development process does SHE fail? Did the IMC strategy adopted by
the company have any bearing on the price of the product? If yes, how? How else do you think the IMC
strategy lets the product down?
Note: Please go to the next page to know how the expert answers these questions.
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MBA6011_Strategic Marketing
© 2011South University
SHE fails at the introduction stage of the new product development process. The IMC strategy adopted
by Slater obviously involves the company spending a huge amount on advertising and promotion
before the release of the product. To recover the advertising and promotion costs and the cost involved
in development, the company prices the product outrageously high. This obviously turns the market
away from the product.
Slater celebrates its product, no matter how amazing, even before it is available in stores. This strategy
not only proves expensive but also overplays the quality of the product. Because the SHE brand is so
overhyped, customer expectations are very high.
media/week5/SU_MBA6011_W6_L2_S1_G1.pdf
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MBA6011_Strategic Marketing
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The Relationship between Price and Demand
Metalix, a manufacturer of storage equipment, is launching its new product Ultralite—a lightweight display
stand for commercial and retail usage. The pricing of the new product needs to be done keeping in mind the
law of demand, illustrated here.
The horizontal axis depicts the number of stands in demand while the vertical axis depicts the price per stand
in dollars. The line between the two is called the demand curve.
What does the movement along the demand curve correspond to?
a. Change in the pattern of demand for Ultralite
b. Change in the quantity of demand for Ultralite
Correct answer: b
Feedback for correct answer:
A movement along the demand curve of a product indicates a change in the quantity of demand as the
product’s price varies. According to the law of demand, the price of a product and the demand for it are
inversely related. This means the lower the price of a product, the more it is in demand and vice versa.
A change in the demand pattern for a product will be reflected by a shift in the demand curve. This means
that at each price point, the demand will have increased (or decreased). For example, for an increase in
demand at every price point, the curve will shift to the right.
Feedback for incorrect answer:
A movement along the demand curve indicates a change in the quantity of demand as the product’s price
varies. According to the law of demand, the price of a product and the demand for it are inversely related.
This means the lower the price of a product, the more it is in demand and vice versa.
How will an increase in demand at every price point affect the demand curve?
a. The demand curve will shift to the right.
b. The demand curve will shift to the left.
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MBA6011_Strategic Marketing
© 2011 South University
Correct answer: a
Common feedback for both options a and b:
A change in the demand pattern for a product is reflected by a shift in the demand curve. This means that
at each price point, the demand will have increased (or decreased). So, for an increase in demand at
every price point, the curve will shift to the right.
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MBA6011_Strategic Marketing
© 2011 South University
Several factors can lead to a change in the demand pattern for Ultralite.
Which of the following factors can cause the demand to shift?
a. Consumer income, expectations, and preferences
b. Industry growth or shrinkage
Correct answer: a
Feedback for correct answer:
Changes in consumers’ incomes influence the demand for a particular product. Usually, as incomes rise,
the demand also increases at all price points and the curve shifts to the right. Changes in consumer
expectations and preferences over time also lead to corresponding shifts in the demand curve.
Another factor that needs to be considered is the change in the prices of related products. If a product is a
competitor in the same product category, then an increase in its price will lead to an increase in the
demand for your product. Similarly, if the product is complementary to your own, then an increase in its
price will lead to a decrease in the demand for your product as well. So an increase in steel prices will
cause the demand curve for Ultralite to shift to the left.
Feedback for incorrect answer:
Industry changes usually affect the supply and not the demand for a product. Typically, industries grow
when there is abundance of an important factor of production, such as capital (e.g., borrowed money). On
the other hand, industries shrink when there is a shortage of an important factor of production, such as
raw materials (e.g., crude oil).
The price of related products can also affect the demand pattern for your product.
How will the increase in prices of steel (used in the manufacture of Ultralite) affect the demand curve for
Ultralite?
a. An increase in steel prices will result in an overall decrease in industry demand.
b. An increase in steel prices will not affect the demand curve for Ultralite.
Correct answer: a
Feedback for correct answer:
An increase in steel prices will decrease the demand for Ultralite as well as the demand curve for all its
direct competitors. In other words, at the same price points, the industry demand curve will shift to the left.
Feedback for incorrect answer:
An increase in steel prices will decrease the demand for Ultralite as well as the demand curve for all its
direct competitors. In other words, at the same price points, the industry demand curve will shift to the left.
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MBA6011_Strategic Marketing
© 2011 South University
Metalix would like to lower its product line’s prices as much as possible so as to maximize demand.
Will lowering of prices induce customers to buy more of Ultralite’s products?
a. No, since customers require only a fixed quantity of the product
b. Yes, since there are many direct competitors in the market
Correct answer: b
Feedback for correct answer:
It is the price elasticity that determines the extent to which demand changes with price. For inelastic
products, the demand is more or less fixed and not affected much by pricing. These are essential
commodities used in fixed quantities. One example is gasoline. However, the demand for elastic products
like Ultralite will definitely be affected by pricing, albeit to a limited extent. Customers may prefer to buy
from a manufacturer offering a less expensive alternative.
Feedback for incorrect answer:
It is the price elasticity that determines the extent to which demand changes with price. For inelastic
products, the demand is more or less fixed and not affected much by pricing. One example is gasoline.
Which category does Ultralite fit?
a. Elastic product
b. Inelastic product
Correct answer: a
Common feedback for both options a and b:
Demand for elastic products like Ultralite will definitely be affected by changes in prices, albeit to a limited
extent. Customers may prefer to buy from a manufacturer offering a less expensive alternative.
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