Page 120 - Marketing the Basics 2nd

112 Marketing: the Basics
price levels. Tabulating the responses will yield the demand curve. It should be noted that consumers do not make a purchase purely based on price; they evaluate how much value they are offered from the entire marketing mix. As such, surveys tend to understate a consumer’s willingness to pay. An experienced manager will have a good idea by how much.
PRICE ELASTICITY OF DEMAND
The slope of the demand curve illustrates the market’s sensitivity to different prices. The more elastic the demand curve the more sensitive the market is to a price change. Visually speaking, the flatter the line the greater the effect a change in price will have on demand. Contrast this with an inelastic demand curve or steeper line, a small change in price will have a lower effect in magnitude on demand. Firms employ differentiation and branding strategies to transform their demand curve to become more inelastic. Once consumers are convinced of the differences they become less price sensitive. If branding or differentiation strategies cannot steepen the demand curve, lowering the price will result in higher revenues.
STEP 3. ESTIMATING COSTS
Once the demand curve is estimated, the firm gains an idea of how many units it could sell given a particular price. Estimating the cost of producing the product will allow the company to properly price the product such that the actual rate of return will equal or exceed the expected rate of return. Of course, as much as we would like to set our prices where we can achieve our target rate of return for our corporate masters, customers and competitors tend to provide a reality check for our pricing desires – they will only pay so much and only within a range of our competitors’ prices. Operating costs come in various forms, and we discuss a number of them in the following section.
TYPES OF COSTS
A company’s cost structure takes two forms: variable and fixed. Variable costs depend on the level of production, while fixed costs