A marketer for manufactured products needs to assess price elasticity of demand. Price elasticity of demand refers to the changes in demand in response to price changes. Specifically, this price elasticity of demand is given by the following formula:
Price elasticity = Percent change in quantity demanded / Percent change in price
For example, if the firm is to consider changing the price of its product by 5%, and the demand for its product is likely to go down by 10% then, the price elasticity of demand for this product is -2. In assessing the price elasticity of demand, the marketer has to consider the following factors.
Availability of substitutes and/or competitor
If there are substitutes or competitors which are perceived by the customer to be identical or comparable, then the price elasticity of demand will be high. It is important to note that the customersâ€™ perception of compatibility of competing products to satisfy the need is more relevant here than the compatibility on tangible features. For example, if the customer perceives that he or she can quench thirst by either a soft drink or a fruit juice, then, any change in price of any of these products is bound to affect its demand. The other side of this coin is that lack of substitutes or competitor products will mean low price elasticity of demand. Again, the price elasticity of food products like wheat, rice, edible oil, etc. is lower than manufactured products like soft drinks, television, etc.
Customer resistance to change
If the customer is resistant to new product ideas and generally does not go shopping for prices, then the price elasticity of demand for such a product is going to be low. Mail orders and teleshopping today is built around this assumption and its aim is to motivate customers against price shopping.
Generally the quality of a product is associated with its price. The thumb rule is that customers perceive premium quality in the product if it is priced at a higher level. If the target customer group has this perception of the product, then its price elasticity of demand is going to be low. Many marketers seek to change a customerâ€™s attitude towards this direction.
Buyers do not perceive or notice higher prices
If the buyers are willing to buy the product ignoring its prices, then the price elasticity of demand for such a product is going to be low. Thus the nature of the product, competition and buyersâ€™ value perception play an important role in shaping the elasticity of demand for the product at different price levels.