Marketing analysis

Elasticity of demand
Marketing decisions about prices, products, promotions and distribution should be based on as much
up-to-date and relevant information as possible.

How useful would it be for marketing managers to know:

• How much will demand change if we raise prices by 10%?
• How much will sales increase if we raise promotion spending by $1m a year?
• How much will demand for our products be affected by changes in consumer incomes?

Marketing departments try hard to assess the impact on demand of these three variables:
the price of the product,
promotional spending
consumer income levels.

A form of measurement has been developed to help in this assessment- Elasticity of demand

Price elasticity of demand

What impact does the slope or gradient of the curves have on the demand
levels for these two products when prices are changed?

When the price of both products is increased by the same amount, the
reduction in demand is greater for product B than it is for product A- Very
important information for the marketing manager- total revenue for product A
has actually increased, but for product B it has fallen, as can be seen by the
size of the shaded areas

Relationship between price changes and the size of the resulting change in
demand is known as price elasticity of demand (PED)

Price elasticity of demand- A measure of the responsiveness of demand for

a product following change in its price.
The value of PED is normally negative because a fall in price (–ve) usually results in a rise in demand
(+ve). Similarly, a rise in price (+ve) results in a fall in demand (–ve). This is called an inverse relationship.
It is quite common to ignore the negative sign of the PED result, as it is the numerical value of the result
that is important.
Factors that determine price elasticity of demand

Impact of price elasticity of demand on business decisions:

Ways PED could impact business decisions:
1. Pricing decisions- This kind of analysis also underpins the pricing strategy known as price
discrimination.

2. Wage increase decisions- If the PEd for the products of a business is low (inelastic), then a
demand for wage increases from employees is more likely to be accepted than if PED was high-
Business increases wages, costs will rise but the marketing manager could increase product
prices with little impact on demand. If PEd was high (elastic), then a wage increase could not
easily be passed on in the form of higher prices.

Income elasticity of demand

The same elasticity principle can be applied to changes in
variables other than price.

When consumer incomes change, for example, the demand for

most products will increase.

Interpreting income elasticity of results

Inferior good- superior branded alternative. Quantity of demand for these rise as income falls and falls
when income rises.
Expensive branded product has positive income elasticity. It is referred to as a normal good.

Income elasticity of demand

A measure of how the responsiveness of demand for a product
following a change in consumer incomes.

Interpreting income elasticity results:

Inferior good- a superior branded alternative.
The quantity of demand for inferior goods rises as income fall as and falls when incomes rise.
Income elasticity for these is negative.

For expensive branded products they have a positive income elasticity- Normal good.
Demand for these to fall if consumers had less income to spend and would rise if incomes increased.

Elasticity- Above 1 - Demand is income elastic

Suggests the product is a luxury and has inferior substitutes
Demand changes by a higher proportion than any change in income.

Salt necessity-low positive income elasticity- demand income is inelastic

Impact of income on business decisions:

During a period of economic growth and rising consumer incomes- business focus on increasing output of
income-elastic products (Luxuries). New product launches should be for products that will have a high
income elasticity of demand.

During a recession when consumer incomes fall, the reverse happens. Businesses focus of producing
more basic versions of their products that can be sold at a lower price. Businesses that sell inferior goods
may have to increase output to cope with expected demand.

Promotional elasticity demand

A measure of the responsiveness of demand for a product
following a change in the amount spent on promoting it.

Promotional elasticity of demand is measured by

Greater than 1- demand for the product is responsive or elastic following a change in promotional
spending.

Less than 1- demand is inelastic following a change in promotional spending.

● Little point in increasing promotional expenditure when promotional elasticity of demand is low.

Interpreting promotional elasticity of demand

Increased promotional spending always results in increased demand for the product- promotional
elasticity of demand is positive.

Above 1- Demand increased by a higher proportion than the increase in promotional spending.
Demand elasticity is following increased promotion.
Below 1- Demand is inelastic following increased promotion.
The promotional elasticity of demand could be negative, although this would be very rare. If the campaign
uses images or slogans that cause great offence to many people, then demand could fall following these
promotions.
Impact of promotional elasticity on business decisions
More effective for a business to increase spending on products with a high promotional elasticity of
demand and to cut back promotional spending on those with low elasticity.

The promotional elasticity of demand depends greatly on the effectiveness of a promotional campaign.
More effective promotional campaigns could increase sales by a larger amount.

Reasons for a low promotional elasticity of demand should be investigated before final decisions can be
made about how much to spend on promoting each product.

Limitations of the measures of elasticity:

1) PED assumes that nothing else has changed. Calculating PED accurately in these, and similar,
situations, where other changes occur is almost impossible.

2) A PED calculation, even when nothing but price changes, quickly becomes outdated-
recalculated often, because consumer tastes change over time and new competitors will
introduce new products. Last year’s PED calculation may be very different to the one calculated
today, if market conditions have changed in the meantime.

3) Not always easy or possible to calculate PED. The data needed for working it out might have
come from past sales results following previous price changes- data could be quite old and
market conditions might have changed. New products- market research will have to be relied
upon to estimate PED- identify the quantities that a sample of potential customers would
purchase at different prices.

Income elasticity of demand limitations: Results can be affected by other variables changing at the
same time as consumer incomes rise or fall. An increase in consumers’ incomes might not lead to an
expected increase in demand for a brand of mobile (cell) phone if, during the same period, a competitor
launches a superior product

Promotional elasticity limitations: Changes ins ales may have been due to other factors changing. This
influenced slides during the same period as a new promotional campaign.

New product development

● Fast-changing markets have a constant need to develop new products.
● A business will find itself trying to market products that are perceived as being out-of-date, based
on technology that has been overtaken by products marketed by other businesses.
● New product development is equally vital for a business to maintain its competitiveness.

NPD- The design, creation and marketing of new goods and services

For new products to succeed they would need:

 1. Desirable features that consumers are prepared to pay for
2. Be sufficiently different from the other products to make it stand out and offer a unique selling
point.
3. Marketed effectively to consumers

The process of new product development

1) Generating new ideas
● Company's own research and development department- expensive
● Adaptation of competitors' ideas- not to infringe the copyright or patent laws
● Market research (Focus groups)- What consumers would like to have on the market.
● Employees- Encouraging them to create ideas while increasing motivation
● Sales employees- Close contact with the final consumers may suggest improvements to existing
products
● Brainstorming in groups- Generate new ideas and propose development ideas

Research and development (R&D)- The scientific research and technical development of new products
and processes

2) Idea screening
Eliminates ideas that stand the least chance of being commercially successful.
● How will consumers in the target market benefit from the product
● Is it technically feasible to manufacture the product
● Will the product be profitable enough at the price likely to be charged to customers.

3) Concept development and testing

Asking key questions about what features the product should have and the likely cost of manufacture and
to the consumers.
● Who are the most likely consumers of the product?
● What product features should be incorporated?
● What specific benefits will this product provide?
● How will consumers react to it? This might be tested by using market research and asking a
sample of prospective customers what they think of the product idea, or whether they would be
likely to buy it as a replacement for their current brand.
● What are the most cost-effective methods of manufacture?
● What will it cost to produce

4) Business analysis
The impact the new product would have on the company's costs, sales and profits,
Estimated prices set for the product based on customer feedback from concept testing and competitors'
data. Expected sales volume and market share can be estimated, as can the expected break-even level
of production
● Is finance available to develop the product
● Can it be patented
● WIll it fit in with the existing product mix
● How will changes in economic environment likely affect sales in the future?
 5) Product testing
Technical performance of the product and whether it is likely to meet consumer expectations.
● Developing a prototype of the product, or working model of it
● testing the product in typical-use conditions (e.g. a car will be tested in hot and cold countries to
test performance under different conditions)
● using focus groups to gather opinions about the product
● adapting the product as required after testing or focus group feedback. The final version should
take into account the views of potential customers at this stage

6) Test marketing
Representative of the main market in terms of consumer profiles.
● Actual consumer behaviour can be observed and measured.
● Feedback from consumers will enable a final decision to be made about investing capital in a
fullscale launch.
● The risks associated with a product failing after a full-scale launch are reduced and the
associated poor publicity avoided.
● Any weaknesses in the product identified by consumer feedback can be addressed in the final
version of the product.
However:
● Can be expensive.
● Competitors are able to observe a firm’s intentions and react accordingly, perhaps rushing out a
copy, before a full-scale launch of the original product can be put into effect.
● New products are withdrawn at this stage if the sales results of the test market are disappointing.
● There are cheaper alternatives to test marketing- free-sample strategy

Test marketing- The launch of a product on a small-scale market to test consumers' reactions to it.

7) Commercialisation:
● Full-scale launch of the product
● Introduction phase of a product life cycle
● Promotional strategy -advertisements to inform the market of the new product’s arrival.
● Distribution channel will be filled up with stocks of the product to make sure it is available when
consumers want to buy it.

Research and development

Essential if a business wants to keep at the forefront of its market to retain or rapture competitive
advantage.

Importance:
● Inventions generate new product possibilities- Profitable and successful product innovations
● Innovative products may give considerable USP over rivals so that the business may charge
premium prices and earn high profit margins.
● Expenditure on R&D can be risky and success is not guaranteed.
● Adopting the strategy of no R&D forces businesses to license other businesses’ new ideas or to
make very similar ‘lookalike’ products to follow the market leaders- follow-the-leader strategy.
Other business strategies regarding R&D include offensive and defensive approaches.
● An offensive R&D strategy is to lead the rest of the industry with innovative products. The aim of
these businesses is to gain market share and, possibly, market dominance.
 ● Success can lead to further successes as the profits made on a lucrative new product can be
re-invested into further R&D.
● A defensive strategy is to attempt to learn from the initial innovators’ mistakes and weaknesses-
not lead the field, but it suggests that the business does not want to be left behind. Aims to
improve on the original products or develop slightly different types of goods, which might appeal
to other market segments

R&D: An evaluation
● Doesnt always lead to breakthroughs
● Not all innovative inventions become products that can be marketed successfully
● New ideas may fail if there's defects in design and manufacture, competitors and higher expected
costs.
● Take a long-term view
● Costs and inevitable short-term failures will be compensated for outstanding success.

Reasons why products may reach the commercialisation stage and fail:
1. Inaccurate market research
2. Poor marketing support or inappropriate pricing
3. Changes in technology make the product outdated
4. Competitors release a product that consumers prefer

Sales forecasting
Predicting future sales levels and sales trends.
If marketing managers were able to predict the future accurately, the risks of business operations would
be much reduced.

● Operations department would know how many units to produce, how many materials to order
and would hold the correct level of inventories.
● Marketing department would be aware of how many products they would need to sell and
distribute.
● Human resources workforce plan would be more accurate, leading to the appropriate number of
employees with the right skills.
● Cash flow forecasting would be much more accurate

Many external factors that can lead to the impact on future sales.
Changes in consumer incomes caused by economic factors (demand is likely to be income elastic) and
new developments by competitors, changes in pricing and any promotional offers will also have a
significant effect on future sales levels.

Sales forecasts are produced to reduce unforeseen nature or future demand changes to an acceptable
minimum.
The need to forecast sales

Time Series Analysis:

Method of sales forecasting that
is entirely based on past sales
data.
Sales records are kept over
time and when they are presented in date order, there are
referred to as time series

1) Extrapolation
Predicts sales based on past results- extrapolation.
Basing future predictions of past results

2) Moving averages
More complex
Allows the identification of underlying factors that are
expected to influence future sales:
● The trend
● Seasonal fluctuations
● Cyclical fluctuations
● Random fluctuations

Questions are usually concerned with the

identification of the trend and seasonal
fluctuations.

Once identified, the short-term sales forecast can

be made.

Trend- The underlying movement in a series of

data over time.

Seasonal fluctuation- The regular and repeated

variations that occur in sales data within a period of
12 months.
Cyclical fluctuations- Variations in sales over periods of time of much more than a year which are due to
the business cycle.

Random fluctuations- Variations that occur at any time and cause unusual and unpredictable sales
figures, due to events (negative public image or exceptionally poor weather)

Forecasting using the moving average method:

Evaluation of the moving average method

Benefits are:
● Method is useful for identifying the seasonal variation and applying it to predictions.
● Reasonably accurate for short-term forecasts in reasonably stable economic conditions
● Identifies the average seasonal variations for each time period and this can assist in panning for
each quarter in the future.

Limitations:
● Forecasts further into the future become less accurate as the projections made are entirely based
on past data. External environmental factors can change so that past results become an
unreliable indicator of the future.
● The moving average method does not take qualitative factors into account. Forecasting for the
longer term may require the use of more qualitative methods that are less dependent on past
results

Quantitative sales forecast methods:

1) Sales force composite
● Sales force representatives have the task of keeping in contact with customers.
 ● Frequent contact with customers means sales representatives are able to develop a real insight
into market trends and potential future demand.
● An overall sales forecast can be obtained by asking all sales staff for their individual estimates of
future sales to their customers and then adding these estimates together.
● Method has the advantage of being quick and cheap to administer.
● However, sales representatives may not be aware of macroeconomic developments or
competitors’ actions, which could have a substantial impact on future sales.
● Customers may overestimate the number of products that they hope to sell in the future in the
hope of gaining a more favourable arrangement with the supplying business.

2) Delphi method
● A facilitator collects opinions from a panel of experts who are sent detailed questionnaires asking
for their judgement about possible future events, such as demand levels or technology changes
that could affect consumer taste and demand levels.
● Experts do not meet and they are anonymous to each other.
● After each round of questionnaire results have been collected-summarised and sent back to all
the experts on the panel.
● Further questionnaire is then sent out to see if the experts have changed their minds after reading
the results of the first round of questionnaires.
● Any extreme responses from the experts are often amended and moderated so that, eventually, a
consensus is reached that represents the most accurate forecast-take several rounds of
questionnaires to achieve.
● Tests have proven that the Delphi method is more accurate than an unstructured group of experts
giving their opinions and forecasts.

3) Jury of experts (Jury of executive opinion)

The jury of experts uses senior managers within the business, who meet and develop forecasts based on
their knowledge of their specific areas of responsibility.
Quicker and cheaper than the Delphi method.
Lacks the external view of market conditions and consumer trends that the Delphi method offers.

Impact of sales forecasting on business decisions

Main purpose of sales forecasting is to enable a business to make better-informed business decisions
and plans for growth. Decisions within all major functional areas can be improved by detailed sales
forecasts. For example, assume sales forecasts are showing a downturn or downward trend in sales. The
following decisions could be based on this prediction:

• Marketing – reduce price, increase promotional spending, widen and extend channels of distribution,
new product development, or undertake market development in countries with more positive sales
forecasts.
• Operations – reduce the risk of excess capacity by rationalisation, keep inventory levels low, or aim for
flexible operations to switch to other products.
• Finance – seek short-term financing if net cash flows become negative, reduce cash outflows where
possible, or seek long-term finance to develop new products.
• Human resources – make plans for flexible employment contracts, plan for redundancies or cut back
on recruitment for vacant posts.
The limitations of sales forecasting methods mean that the predicted data should not be the only
factor that determines these decisions. However, when sales forecasts indicate a sharp increase or
decline in sales, the benefits of operating a flexible and adaptable organisation, which is able to
make speedy decisions, become clear.

Quantitative sales forecasting- Predictions about future sales which use expert judgement instead of
numerical analysis.

Sales force composite- A method of sales forecasting that adds together the individual predictions of
future sales from all the sales representatives working for a business.

Delphi method- A long-range qualitative forecasting technique that obtains forecasts from a panel of
experts.

Jury of experts- A method that uses the specialists within a business to make forecasts for the future.