Business Corner
STRATEGIES & ANALYSIS
BY PHIL PHILLIPS, PH.D.
CONTRIBUTING EDITOR
PHILLIPS@CHEMARKCONSULTING.NET
You better watch those curves...
demand curves that is!
A look at how
understaning
the demand
environment
is imperative
to create
business
opportunities.
When considering any business oppor- tunity it is imperative to understand the demand environment within all
parts of that opportunity. Each segment normally has sub-segments that demand very specific unique performance characteristics as well
as requirements of lesser demand. The former
usually has fewer qualified suppliers than that
of the latter, where many suppliers can meet the
performance demand.
When contemplating entering a new market,
to that particular supplier, or a company is
introducing a new product into their existing
market, in either case, it will be necessary to
understand this performance segmentation
demand first and then apply the law of demand
in setting its’ entrance pricing strategy.
For example, in our ongoing study of coatings opportunities that are unfolding within
the confines of the U.S. Stimulus Plan, we are
finding, despite the fact that most opportunities are requiring suppliers to meet an existing specification, segments that vary in numbers of sources available to serve each.
Numbers of suppliers is just one of the elements that determine price demand and
therefore, profits in many cases.
LAW OF DEMAND—THE PRICE
ELASTICITY OF DEMAND
The law of demand simply means that buyers
usually purchase more units of goods at a low
price than at a high price. The price elasticity
of demand indicates the sensitivity of buyers
to price change in terms of the quantities they
will purchase in a given time frame. The price
elasticity of demand represents the percentage change in the quantity demanded relative
to a specific percentage change in the price
level charged.
Therefore, each price will lead to a different
level of demand and have a different impact on
a company’s marketing objectives. This rela-
tionship between alternative prices and the
resulting current demand is illustrated in the
demand curves on the next page.
DEMAND ELASTICITY IS BASED ON TWO
CRITICAL CRITERIA—AVAILABILITY OF
SUBSTITUTES AND, URGENCY OF NEED
When buyers believe there are many similar
products/services from which to choose or,
have no urgency to buy, demand is elastic and
greatly influenced by price changes. Price
increases lead to purchases of substitutes or
delayed purchases, and decreases expand
sales as customers are drawn from competitors or move up the date of their purchases.
The latter, moving their date of purchase condition is not normally the case in industry
where deadlines are usually fixed.
If buyers believe a company’s offering is
unique or there is an urgency to buy, demand
is inelastic and little influenced by price
changes. A striking example is when heating
oil prices go up or down, demand remains relatively constant because there is often no feasible substitute and homes and offices must be
properly heated.
Brand loyalty and emergency conditions
also generate inelastic demand. Buyers feel
their brands are distinctive and do not accept
substitutes. An example of an emergency condition where price is a low priority consideration would be an emergency vehicle driver
with a flat tire.
SUMMARY OF PRICE SENSITIVITY
CONSIDERATIONS
1. Unique-value effect: Buyers are less price
sensitive when the product is more distinctive.
2. Substitute awareness effect: Buyers are
less price sensitive when they are less aware
of substitutes.
3. Difficult-comparison effect: Buyers are
less price sensitive when they cannot easily
