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AL Chapter 12 - Marketing analysis - Coggle Diagram
AL Chapter 12 - Marketing analysis
Elasticity
Elasticity of demand
Measures the effect of a change in a variable on demand
The variable could be price, income, promotional spending or the price of another product
The sign shows the direction of movement
If variable and demand move in different directions then the sign is negative
If variable and demand move together the sign is positive
The size of the number
If the number if 2, then percentage change in demand is 2x the variable
If the number is bigger than 1, demand changes more than the variable = elastic
If the number is less than 1, demand changes less than the variable = inelastic
Percentage change in demand / Percentage change in variable
Income elasticity of demand
Measures the degree of responsiveness of demand for a good to change in consumers income, with all other factors unchanged
YED = % Change in quantity demanded / % Change in income
A positive sign shows that demand and income are moving in the same direction, a normal product
A negative sign shows that demand and income are moving in different direction, an inferior product
Size of the number shows how sensitive demand is to income, this is the elasticity
If demand is income elastic, a change in income results in more than proportionate change in demand (value of YED of income elastic goods is greater than 1)
If demand is income inelastic, a change in income results in a smaller than proportionate change in demand (the YED of income inelastic goods is less than 1)
Using income elasticity of demand
If income levels are changing, a business can use income elasticity of demand to predict what will happen to its sales, and can forecast the effect of this for other areas of the business, such as production and cash flow
If income is growing, then demand for income-elastic products will grow more than proportionately
Promotional elasticity of demand
Measures the degree of responsiveness of demand for a good to a change in promotional spending with all other factors unchanged
PrED = % change in quantity demanded / % change in promotional expenditure
A positive sign shows that changes in promotional spending and demand move in the same direction (usual)
A negative sign shows that changes in promotional spending and demand move in different directions
Promotional elastic goods are sensitive to changes in promotional spending (the value is more than 1)
Promotional inelastic goods are not sensitive to changes in promotional spending (value is less than 1)
Cross price elasticity of demand
Measures the degree of responsiveness of demand for a product to a change in the price of another product, with all other factors unchanged
XED = % change in quantity demanded / % change in price of another good
A positive value indicates that the two goods are substitutes for each other, this is because an increase in the price of one product leads customers to switch to the other
A negative value indicates that 2 goods are complementary, increase in the price of one leads customers to buy fewer of the other
The size of the value of cross price elasticity shows the strength of the relationship between the 2 products, a low value means that the 1 products are not closely related
Limitations in the concept of elasticity in its various forms
Values of elasticity need to be treated with some caution
Different elasticities are calculated assuming that one variable changes, but everything else stays the smae
The elasticities will usually be calculated based on what has happened, conditions may have changed, and the value may now be different
Product development
Product development involves creating products that are new or different and that provide customers with new benefits and added value
Sources of new product ideas
Customer complaints
Research and development
Employees
Universities
Existing patents
Market research
Importance of research and development
R&D refers to the generation and application of scientific knowledge to create a new product or develop a new production process
Important because it improves existing products, leads to new products to generate more sales
Protecting ideas for new products
Patents: provides legal protection for an innovative product idea, rights to be the sole user for 20 years after it is registered
Copyrights: automatically protects the work of artists, writers and musicions
Trademarks: designs and logos can be protected by trademarks
Sales forecasting
Impact of sales forecasting on business decisions
Important to estimate required production levels, staffing requirements, cash flows and profits
Impacts all other functions of a business: investments, recruitment, dividends
Moving average method
Time series analysis examines data over time to identify meaningful data that can inform decisions
Moving average takes account of regular variations in sales by averaging the values of a set of data over time
Trend is the average change for each time period , shows the overall pattern of movement
Trend analysis assumes that the patterns or ternds of the past, will continue to the future
Cycling or seasonal variation is the regular variation from the trend, value for each time period - the trend
For products affected by regular change, time series analysis combines the moving average of past data in order to extrapolate to arrive at a forecast for the next few time periods
Moving average calculations
The data is inspected to see if there are regular pattern of changes over time, and often the moving average is chosen accordingly
3 Year Totals = Add each year, place answer next to the second year
3 Year moving average = Three year totals / 3
Cyclical variation = yearly sales - trend
Average cyclical variation = average cyclical variation for the periods in each stage of the cycle
4 month moving average = added 4 quarters / 4
Centered moving average = 2 above 4 quarter totals / 2
Use of moving average method and cyclical variations
Produces a sales forecast for a future time period that takes account of regular variations so is more reliable than simply projecting a trend line
Accuracy of data used
Future behaves in a similar way
Correlation
Correlation occurs when there are apparent links between variables
Positive correlation means there is a direct link between the variables
Negative correlation means 2 factors are inversely related
Other ways of estimating future sales
Market research
Used to try and identify future trends rather than assuming it will be the same as the past
Value of this research depends on whether it is primary or secondary, and the quality of the information
Test marketing is a representative selection of consumers who the firm uses to try out a new product, you can estimate how the product might sell, and gives customers reactions
Competitors see what you are launching, misleading results
Qualitive sales forecasting
Estimates what sales will be by using expert judgement, rather than numerical data
In the Delphi technique, managers assemble a group of experts who are all asked individually for their views, the views are analysed and key areas extracted, these findings circulated against for experts to feedback
Reliability of Sales forecasts
Trend has to be extrapolated and market conditions continue as before
Test market used has to be a true representative of the target population
Forecast made by experts and they have good insight into the market and future trends
Firm is forecasting for the near future, easier to predict the next week rather than 5 years time