MARKETING
8.1 Marketing analysis
8.1.1 Elasticity
The concept of elasticity of demand: price, income and promotional,
Calculation of price, income and promotional elasticity, interpretation of
elasticity results, impact of elasticity measures on business decisions.
Elasticity is used to make marketing decisions about products, prices, promotions and
distributions.
Marketing departments will try to asses the impact on demand of three variables: price of the
product, promotional spending and consumer income levels:
Price elasticity of demand: this measures the responsiveness of demand for a product
following a change in the price of the product.
• If the product is elastic, with a change in price there will be a change in demand. This is
measured with a value of 1 or greater
• If the product is inelastic, with a change in price there will be no to little change in demand.
This is measured with a value between 0 and 1
• If the product is perfectly elastic (unitary elastic), with a change in price will lead to an equal
change in demand. This is measured with a value of 1
The PED of a product will be determined by a number of factors, these are:
1
, • How necessary the product is: the more necessary the product the less elastic it will
be, as individuals will buy it regardless, eg: cooking oil
• Number of substitutes: the more substitutes there are the more elastic a product will be,
consumers will switch to a cheaper brand if the other one increases.
• Consumer loyalty: the more consumer loyalty and stronger brand identity, the more
inelastic the product will be. Consumers will prefer or continue to buy that brand if it is
well known, eg: coca cola or designer clothes.
• Price in proportion to incomes: products which take a small proportion of consumers
incomes will very likely be inelastic. Consumers will be una ected by a change in price.
Eg matches
PED impacts on business in two ways, these are:
• Pricing decisions: Knowing the PED will help determining wether changing the price of a
product is a good or a bad idea. If a product is elastic, changing it may not be
reasonable, wether if it's inelastic it would be more reasonable.
• Wage increase decisions: If PED is inelastic, demand for wage increases will be
accepted as marketing can rise price with little impact on demand.
Income elasticity of demand: this measures the responsiveness of demand for a product
following a change in the incomes of consumers
• If the product is income elastic: (value will be greater than +1) as incomes rise the demand for
this product increases, this are superior/luxury goods (watches, branded products)
• If the product is Income inelastic: (value greater than 0, less than +1) as income rise demand
slightly increases. Percentage of income rise is bigger than percentage of increase in demand.
This are necessities (milk)
• If the product is an inferior goods: (value less than 0) as income rises consumers move away
from purchasing this product. This are supermarket brands, lower quality, cheaper substitutes
IED impacts on business decisions in two ways:
• During recessions businesses might opt for launching more cheaper versions of their
product, which can be sold at lower prices
2
ff
, • During economic growth businesses might opt for launching premium or luxury versions
of products, at higher price and higher quality.
Promotional elasticity of demand: this measures the responsiveness of demand for a product
following a change in promotional spending.
• If the product is elastic/responsive: (value greater than 1) an increase in promotional spending
leads to an increase in demand. Demand increases in more proportion than the increase of
promotional spending.
• If the product is Inelastic: (value less than 1) a change in promotional spending will result in little
to no change in demand.
• If the product is negatively elastic: (value lower than 0)an increase in promotional spending
leads to a decrease in quantity demanded. This could be the result of a scandalous/ o ensive
campaign.
Promotional elasticity on demand's impact on business decisions:
• The reason for low promotional elasticity must be investigated. As it is not the quantity spent
which matters for an advertising campaign, but the quality of the campaign, it should be
positively impactful targeting the right consumers, etc...
Limitations of the concept of elasticity in its various forms
There are various limitations to the concepts of price, income and promotional elasticity:
Price elasticity's limitations:
• PED, IED, Promotional elasticity assume nothing else has changed apart from the price of
the product. External factors can happen changing the demand such as competitors, consumer
incomes, etc...
• PED quickly becomes outdated. Business environment is dynamic, consumer tastes change
and new competitors might arise, meaning the PED calculated will now longer be objective.
• Data to calculate PED can be quite old. Past sales results will be used to calculate the PED,
this might not be relevant to the current market.
3
ff
8.1 Marketing analysis
8.1.1 Elasticity
The concept of elasticity of demand: price, income and promotional,
Calculation of price, income and promotional elasticity, interpretation of
elasticity results, impact of elasticity measures on business decisions.
Elasticity is used to make marketing decisions about products, prices, promotions and
distributions.
Marketing departments will try to asses the impact on demand of three variables: price of the
product, promotional spending and consumer income levels:
Price elasticity of demand: this measures the responsiveness of demand for a product
following a change in the price of the product.
• If the product is elastic, with a change in price there will be a change in demand. This is
measured with a value of 1 or greater
• If the product is inelastic, with a change in price there will be no to little change in demand.
This is measured with a value between 0 and 1
• If the product is perfectly elastic (unitary elastic), with a change in price will lead to an equal
change in demand. This is measured with a value of 1
The PED of a product will be determined by a number of factors, these are:
1
, • How necessary the product is: the more necessary the product the less elastic it will
be, as individuals will buy it regardless, eg: cooking oil
• Number of substitutes: the more substitutes there are the more elastic a product will be,
consumers will switch to a cheaper brand if the other one increases.
• Consumer loyalty: the more consumer loyalty and stronger brand identity, the more
inelastic the product will be. Consumers will prefer or continue to buy that brand if it is
well known, eg: coca cola or designer clothes.
• Price in proportion to incomes: products which take a small proportion of consumers
incomes will very likely be inelastic. Consumers will be una ected by a change in price.
Eg matches
PED impacts on business in two ways, these are:
• Pricing decisions: Knowing the PED will help determining wether changing the price of a
product is a good or a bad idea. If a product is elastic, changing it may not be
reasonable, wether if it's inelastic it would be more reasonable.
• Wage increase decisions: If PED is inelastic, demand for wage increases will be
accepted as marketing can rise price with little impact on demand.
Income elasticity of demand: this measures the responsiveness of demand for a product
following a change in the incomes of consumers
• If the product is income elastic: (value will be greater than +1) as incomes rise the demand for
this product increases, this are superior/luxury goods (watches, branded products)
• If the product is Income inelastic: (value greater than 0, less than +1) as income rise demand
slightly increases. Percentage of income rise is bigger than percentage of increase in demand.
This are necessities (milk)
• If the product is an inferior goods: (value less than 0) as income rises consumers move away
from purchasing this product. This are supermarket brands, lower quality, cheaper substitutes
IED impacts on business decisions in two ways:
• During recessions businesses might opt for launching more cheaper versions of their
product, which can be sold at lower prices
2
ff
, • During economic growth businesses might opt for launching premium or luxury versions
of products, at higher price and higher quality.
Promotional elasticity of demand: this measures the responsiveness of demand for a product
following a change in promotional spending.
• If the product is elastic/responsive: (value greater than 1) an increase in promotional spending
leads to an increase in demand. Demand increases in more proportion than the increase of
promotional spending.
• If the product is Inelastic: (value less than 1) a change in promotional spending will result in little
to no change in demand.
• If the product is negatively elastic: (value lower than 0)an increase in promotional spending
leads to a decrease in quantity demanded. This could be the result of a scandalous/ o ensive
campaign.
Promotional elasticity on demand's impact on business decisions:
• The reason for low promotional elasticity must be investigated. As it is not the quantity spent
which matters for an advertising campaign, but the quality of the campaign, it should be
positively impactful targeting the right consumers, etc...
Limitations of the concept of elasticity in its various forms
There are various limitations to the concepts of price, income and promotional elasticity:
Price elasticity's limitations:
• PED, IED, Promotional elasticity assume nothing else has changed apart from the price of
the product. External factors can happen changing the demand such as competitors, consumer
incomes, etc...
• PED quickly becomes outdated. Business environment is dynamic, consumer tastes change
and new competitors might arise, meaning the PED calculated will now longer be objective.
• Data to calculate PED can be quite old. Past sales results will be used to calculate the PED,
this might not be relevant to the current market.
3
ff
