final notes for qtm

7/30/2019 Final Notes for Qtm

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Elasticity of Demand refers to the degree of responsiveness of quantity demanded to the

changes in the determinants of demand

There are mainly three quantifiable determinants of demand:-

1. Price of the Good

2. Income of the Consumer

3. Price of the Related Goods

Types of Elasticity Of Demand

As we have seen above there are three quantifiable determinants of demand, Hence elasticity of

demand can be ofthree types

1. Price Elasticity of Demand

2. Income Elasticity of Demand

3. Cross Elasticity of Demand

Definition

Price Elasticity of demand is the degree of responsiveness of demand to a change in its price.In

technical terms it is the ratio of the percentage change in demand to the percentage change in

price.

Thus,

Ep = Pecentage change in quantity demanded/Percentage change in price

In mathematical terms it can be represented as: Ep =(q/p) (p/q)

From the definition it follows that

1. when percentage change in quantity demanded is greater than the percentage change in

price then, price elasticity will be greater than one and in this case demand is said to be

elastic.2. when percentage change in quantity demanded is less than the percentage change in price

then, price elasticity will be less than one and in this case demand is said to be inelastic.

3. when percentage change in quantity demanded is equal to the percentage change in price

then price elasticity will be equal to one and in this case demand is said to be unit elastic.


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Income elasticity of demand

Income elasticity of demand measures the relationship between a change in quantity demandedfor good X and a change in real income. The formula for calculating income elasticity is:

% change in demand divided by the % change in income

Normal Goods

Normal goods have a positive income elasticity of demand so as consumers income rises moreis demanded at each price i.e. there is an outward shift of the demand curve

Normal necessities have an income elasticity of demand ofbetween 0 and +1 for example, ifincome increases by 10% and the demand for fresh fruit increases by 4% then the incomeelasticity is +0.4. Demand is rising less than proportionately to income.

Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises more

than proportionate to a change in income for example a 8% increase in income might lead to a10% rise in the demand for new kitchens. The income elasticity of demand in this example is+1.25.

Inferior Goods

Inferior goods have a negative income elasticity of demand meaning that demand falls asincome rises. Typically inferior goods or services exist where superior goods are available if theconsumer has the money to be able to buy it. Examples include the demand for cigarettes, low-priced own label foods in supermarkets and the demand for council-owned properties.

The income elasticity of demand is usually strongly positive for

Fine wines and spirits, high quality chocolates and luxury holidays overseas.

Sports cars

Consumer durables - audio visual equipment, smart-phones

Sports and leisure facilities (including gym membership and exclusive sports clubs).

In contrast, income elasticity of demand is lower for

Staple food products such as bread, vegetables and frozen foods.

Mass transport (bus and rail).

Beer and takeaway pizza!

Income elasticity of demand is negative (inferior) for cigarettes and urban bus services.

Product ranges and longer term trends

Income elasticity of demand will vary within a product range. For example the Yed forown-labelfoodsin supermarkets is less for the high-value finest food ranges.
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There is a general downward trend in the income elasticity of demand for many basicproducts, particularly foodstuffs. One reason is that as a society becomes richer, therearechanges in tastes and preferences. What might have been considered a luxury goodseveral years ago might now be regarded as a necessity? How many of you regard a Skysports subscription or an iPhone5, an iPad2 or a new Blackberry as a necessity?

Income elasticity of demand is a measure of how much demand for a good/service

changes relative to a change in income, with all otherfactorsremaining the same.

How It Works/Example:

The formula forincome elasticityis:

Income Elasticity = (% change in quantity demanded) / (% change inincome)

An example of a product with positive income elasticity could be Ferraris. Let's saytheeconomy is booming and everyone's income rises by 400%. Because people have

extra money, the quantity of Ferraris demanded increases by 15%.

We can use the formula to figure out the income elasticity for this Italian sports car:

Income Elasticity = 15% / 400% = 0.0375

An example of a good with negative income elasticity could be cheap shoes. Let's again

assume the economy is doing well and everyone's income rises by 30%. Because people

have extra money and can afford nicer shoes, the quantity of cheap shoes demanded

decreases by 10%.

The income elasticity of cheap shoes is:

Income Elasticity = -10% / 30% = -0.33

Cross Elasticity of demand

This measures the % change in QD for a good after the change in price of another.

XED = % change in QD good A% change in price good B

for example if there is an increase in the price of tea by 10% and QD of coffee increases by 2%,

then XED = +0.2

Substitute goods are alternative. There XED will be positive,

The weak substitutes like tea and coffee will have a low XED.

Tesco bread and Sainsburys bread are close substitutes so XED is higher
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Complements goods, these are goods which are used together, therefore XED is negative.

If the price of DVD players fall, then there will be a increase in demand for DVD disks,

When setting prices firms will have to look at what alternatives the consumer has, if there are no

close substitutes they will be able to increase the price. For this reason firms spend a lot of money

on advertising to differentiate their products.

Definition of 'Elasticity'

A measure of a variable's sensitivity to a change in another variable. In economics, elasticityrefers the degree to which individuals (consumers/producers) change their demand/amountsupplied in response to price or income changes.

Calculated as:

Investopedia explains 'Elasticity'

Elasticity is used to assess the change in consumer demand as a result of a change in the good'sprice. When the value is greater than 1, this suggests that the demand for the good/service is

affected by the price, whereas a value that is less than 1 suggest that the demand is insensitive toprice.

Businesses often strive to sell/market products or services that are or seem inelastic in demandbecause doing so can mean that few customers will be lost as a result of price increases.

Definition of 'Inelastic'

An economic term used to describe the situation in which the supply and demand for a good areunaffected when the price of that good or service changes.

Investopedia explains 'Inelastic'

When a price change has no effect on the supply and demand of a good or service, it is consideredperfectly inelastic. An example of perfectly inelastic demand would be a life saving drug thatpeople will pay any price to obtain. Even if the price of the drug were to increase dramatically,the quantity demanded would remain the same.

Inelastic demand

A situation in which thedemandfor aproductdoes not increase ordecrease correspondingly witha fallorrise in itsprice. From thesupplier'sviewpoint, this is a highlydesirable situation becauseprice andtotal revenue aredirectlyrelated; an increase in priceincreasestotalrevenue despite afall in the quantity demanded. An example of a product with inelastic demand is gasoline.
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Usage Examples

Additionally, these infrastructure components generally have low operating

costs, inelastic demand, and high barriers of market entry.

There are three types of data analysis:

Predictive (forecasting)Descriptive (business intelligence and data mining)Prescriptive (optimization and simulation)

Predictive Analytics

Predictive analytics turns data into valuable, actionable information. Predictive analytics usesdata to determine the probable future outcome of an event or a likelihood of a situationoccurring.

Predictive analytics encompasses a variety of statistical techniques from modeling, machine

learning, data mining and game theory that analyze current and historical facts tomake predictions about future events.

In business, predictive models exploit patterns found in historical and transactional data toidentify risks and opportunities. Models capture relationships among many factors to allowassessment of risk or potential associated with a particular set of conditions, guiding decisionmaking for candidate transactions.

Three basic cornerstones of predictive analytics are:

Predictive modelingDecision Analysis and Optimization

Transaction Profiling

An example of using predictive analytics is optimizing customer relationship managementsystems. They can help enable an organization to analyze all customer data therefore exposingpatterns that predict customer behavior.

Another example is for an organization that offers multiple products, predictive analytics can helpanalyze customers spending, usage and other behavior, leading to efficient cross sales, or sellingadditional products to current customers. This directly leads to higher profitability per customerand stronger customer relationships.

An organization must invest in a team of experts (data scientists) and create statistical algorithms

for finding and accessing relevant data. The data analytics team works with business leaders todesign a strategy for using predictive information.

Descriptive Analytics

Descriptive analytics looks at data and analyzes past events for insight as to how to approach thefuture. Descriptive analytics looks at past performance and understands that performance bymining historical data to look for the reasons behind past success or failure. Almost allmanagement reporting such as sales, marketing, operations, and finance, uses this type of post-


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mortem analysis.

Descriptive models quantify relationships in data in a way that is often used to classify customersor prospects into groups. Unlike predictive models that focus on predicting a single customerbehavior (such as credit risk), descriptive models identify many different relationships betweencustomers or products. Descriptive models do not rank-order customers by their likelihood of

taking a particular action the way predictive models do.

Descriptive models can be used, for example, to categorize customers by their productpreferences and life stage. Descriptive modeling tools can be utilized to develop further modelsthat can simulate large number of individualized agents and make predictions.

For example, descriptive analytics examines historical electricity usage data to help plan powerneeds and allow electric companies to set optimal prices.

Prescriptive Analytics

Prescriptive analytics automatically synthesizes big data, mathematical sciences, business rules,

and machine learning to make predictions and then suggests decision options to take advantage ofthe predictions.

Prescriptive analytics goes beyond predicting future outcomes by also suggesting actions tobenefit from the predictions and showing the decision maker the implications of each decisionoption. Prescriptive analytics not only anticipates what will happen and when it will happen, butalso why it will happen.

Further, prescriptive analytics can suggest decision options on how to take advantage of a futureopportunity or mitigate a future risk and illustrate the implication of each decision option. Inpractice, prescriptive analytics can continually and automatically process new data to improveprediction accuracy and provide better decision options.

Prescriptive analytics synergistically combines data, business rules, and mathematical models.The data inputs to prescriptive analytics may come from multiple sources, internal (inside theorganization) and external (social media, et al.). The data may also be structured, which includesnumerical and categorical data, as well as unstructured data, such as text, images, audio, andvideo data, including big data. Business rules define the business process and include constraints,preferences, policies, best practices, and boundaries. Mathematical models are techniques derivedfrom mathematical sciences and related disciplines including applied statistics, machine learning,operations research, and natural language processing.

For example, prescriptive analytics can benefit healthcare strategic planning by using analytics toleverage operational and usage data combined with data of external factors such as economic

data, population demographic trends and population health trends, to more accurately plan forfuture capital investments such as new facilities and equipment utilization as well as understandthe trade-offs between adding additional beds and expanding an existing facility versus building anew one.

Another example is energy and utilities. Natural gas prices fluctuate dramatically depending uponsupply, demand, econometrics, geo-politics, and weather conditions. Gas producers, transmission(pipeline) companies and utility firms have a keen interest in more accurately predicting gasprices so that they can lock in favorable terms while hedging downside risk. Prescriptive analytics


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can accurately predict prices by modeling internal and external variables simultaneously and alsoprovide decision options and show the impact of each decision option

normative model

DefinitionPrescriptivemodel which evaluates alternative solutions to answerthe question, "What is goingon?" and suggests what ought to be done or how things should workaccording toan assumptionorstandard. In comparison, a descriptive model merely describes the solutionswithout evaluating them. Used mainly as a standard for measuring change orperformance.

What Is a Normative Business Model?A business model is a textual or graphical representation of business methods,

practices and structures. Enterprises use such models to illustrate and facilitate

profit-earning activities. Many different types of business models exist, but the two

main groups into which business planners and managers group business models are

descriptive models and normative models.

Descriptive vs. Normative

A descriptive business model is an illustration of the way in which an enterprise

operates. It lays out the various departments and levels of authority for the

enterprise and defines the responsibilities of each. A normative business model does

not describe a situation or structure that exists in an enterprise. Rather, it is a plan

that an enterprise utilizes to improve its operations. Rather than simply stating how a

particular enterprise works, a normative business model prescribes structures and

practices for the business.

Origins

Normative business models tend to arise out of descriptive business models. For

instance, if a particular enterprise has become successful by utilizing revolutionary

methods, other enterprises may develop normative business models based on a

descriptive model of that enterprise's business. An enterprise may also develop a

normative business model all of its own after analyzing the success of its current

descriptive model.

Components

The components of a normative business model are the same as the components of a

descriptive business model. The first component is the value proposition. This part ofthe business model states why the business's product or service is potentially

valuable to prospective customers, and even estimates a measurement of that value.

The second part, the market segment, details exactly which demographic the

enterprise seeks to target based on location, profession, domestic situation, age,

ethnicity, sex and other similar factors. The third part, which deals with the value

chain structure, illustrates the enterprise's situation between its suppliers and its

customers, showing how much value it creates and can capture for itself. The fourth
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part details revenue generation. It shows how the enterprise collects revenue,

through methods such as subscriptions, direct sales and leasing. It also states target

profit margins. The fifth part shows how the enterprise can work with other

companies to convey value to customers. For instance, the enterprise may bundle its

products together with those of companies that sell related products. The sixth part

of a normative business model is the enterprise's competitive strategy, whichillustrates how the enterprise plans to continue developing its products, services and

marketing to beat competitors and remain profitable.

Preparation

The preparation of a normative business model may not fall to any particular person

in an enterprise. For a small startup enterprise, the normative business model may

originate completely from the owner. For a larger company that is attempting to

revolutionize or shift its operational efforts, a normative business model may form as

a conglomeration of efforts from multiple individuals and departments. For instance,

sales, marketing, and research and development professionals may all contribute to

the preparation of a normative business model designed to enhance profitability.

Descriptive model

That depicts or describes how things actuallywork, andanswersthe question, "What is

this?" In comparison,normative modelsare prescriptive and suggest what ought to be done

(how things should work) according to anassumptionorstandard.

descriptive modeling

inShare Email Comment RSS Print A AA AAA:Descriptive modeling is a mathematical process that describes real-world events and the

relationships between factors responsible for them. The process is used by consumer-drivenorganizations to help them target their marketing and advertising efforts.

In descriptive modeling, customer groups are clustered according to demographics, purchasing

behavior, expressed interests and other descriptive factors. Statistics can identify where the

customer groups share similarities and where they differ. The most active customers get special

attention because they offer the greatest ROI (return on investment).

The main aspects of descriptive modeling include:

Customer segmentation: Partitions a customer base into groups with various impacts on

marketing and service.

Value-based segmentation: Identifies and quantifies the value of a customer to the

organization.

Behavior-based segmentation: Analyzes customer product usage and purchasing patterns.

Needs-based segmentation: Identifies ways to capitalize on motives that drive customer

behavior.
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Descriptive modeling can help an organization to understand its customers, butpredictive

modeling is necessary to facilitate the desired outcomes. Both descriptive and predictive

modeling constitute key elements ofdata miningand Web mining.

cost-oriented pricing

Definition

A method of settingprices that takes into accountthe company'sprofit objectivesand

that covers its costs ofproduction. For example, a commonform of cost-oriented pricing used

by retailersinvolves simply adding a constant percentage markupto the amount that the

retailerpaid foreachproduct.

Profit- & Cost-Oriented Pricing Strategies

Profit-oriented pricing strategies are developed with high margin or specific profit objectives in

mind. Cost-oriented pricing strategies are developed with a focus on understanding cost basis and

setting prices at a certain threshold above that point. Numerous specific pricing approaches fall

within these two broad categories and generally align with other marketing goals and strategies.

Profit-Oriented Pricing

Short-term or long-term profit maximization is the key objective of profit-oriented pricing.

Premium pricing is a technique where you set industry-high price points to coincide with a value

proposition that emphasizes superior benefits. Skimming is a short-term profit strategy where you

try to milk maximum profits off buyers with high discretionary income at initial product launch.

Targeted return pricing is a separate type where you set prices to achieve a targeted profit margin.If your current prices don't achieve desired margins, you work to reduce costs or raise prices.

Pros and Cons

Profit-oriented pricing helps you establish a brand reputation of high quality, luxury or status.

This only works if your products and services go along with the price points. Additionally, you

earn optimum profits from your core base of customers. The risks of high prices is that if your

products fall short, customers perceive your brand as a rip-off. Additionally, your customer

audience is limited because of the inability of many people to pay high price points.

Cost-Oriented Pricing

While cost-oriented pricing can still result in high profits, the company's primary concern is

establishing price points that allow for stable, consistent profits over time. Cost-plus pricing is the

simplest form of cost-oriented pricing. In this case, the company sets prices with certain mark-ups

above costs. For instance, if all costs are $20 and the desired mark-up is 40 percent, the price

would be $28.
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Pros and Cons

Cost-oriented pricing is a practical model in that it ensures you at least cover your costs of doing

business. Cost and profit estimates are also simpler when you base your prices on your costs of

doing business. While offering longevity and stability, cost-oriented pricing doesn't emphasizeprofit maximization. Your prices help attract customers, but competitors with more aggressive

pricing and better quality can earn more on each sale.

Pricing - Pricing Strategies

Marketing - Pricing approaches and strategies

There are three main approaches a business takes to setting price:

Cost-based pricing: price is determined by adding a profit element on top of the cost of makingthe product.

Customer-based pricing: where prices are determined by what a firm believes customers will beprepared to pay

Competitor-based pricing: where competitor prices are the main influence on the price setLets take a brief look at each of these approaches;

Cost based pricing

This involves setting a price by adding a fixed amount or percentage to the cost of making orbuying the product. In some ways this is quite an old-fashioned and somewhat discreditedpricing strategy, although it is still widely used.

After all, customers are not too bothered what it cost to make the product they areinterested in what value the product provides them.

Cost-plus (or mark-up) pricing is widely used in retailing, where the retailer wants to knowwith some certainty what the gross profit margin of each sale will be. An advantage of thisapproach is that the business will know that its costs are being covered. The main disadvantage isthat cost-plus pricing may lead to products that are priced un-competitively.

Here is an example of cost-plus pricing, where a business wishes to ensure that it makes anadditional 50 of profit on top of the unit cost of production.

Unit cost

100


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Mark-up 50%

Selling price 150

How high should the mark-up percentage be? That largely depends on the normal competitivepractice in a market and also whether the resulting price is acceptable to customers.

In the UK a standard retail mark-up is 2.4 times the cost the retailer pays to its supplier (normallya wholesaler). So, if the wholesale cost of a product is 10 per unit, the retailer will look to sell itfor 2.4x 10 = 24. This is equal to a total mark-up of 14 (i.e. the selling price of 24 less thebought cost of 10).

The main advantage of cost-based pricing is that selling prices are relatively easy to calculate. Ifthe mark-up percentage is applied consistently across product ranges, then the business can also

predict more reliably what the overall profit margin will be.

Customer-based pricing

Penetration pricing

You often see the tagline special introductory offer the classic sign ofpenetration pricing.The aim ofpenetration pricing is usually to increase market share of a product, providing theopportunity to increase price once this objective has been achieved.

Penetration pricing is the pricing technique ofsetting a relatively low initial entry price, usuallylower than the intended established price, to attract new customers. The strategy aims to

encourage customers to switch to the new product because of the lower price.

Penetration pricing is most commonly associated with a marketing objective of increasingmarket share or sales volume. In the short term, penetration pricing is likely to result in lowerprofits than would be the case if price were set higher. However, there are some significantbenefits to long-term profitability of having a higher market share, so the pricing strategy canoften be justified.

Penetration pricing is often used to support the launch of a new product, and works best when aproduct enters a market with relatively little product differentiation and where demand is priceelastic so a lower price than rival products is a competitive weapon.

Price skimming

Skimming involves setting a high price before other competitors come into the market. Thisis often used for the launch of a new product which faces little or no competition usually due tosome technological features. Such products are often bought by early adopters who areprepared to pay a higher price to have the latest or best product in the market.


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Good examples of price skimming include innovative electronic products, such as the Apple iPadand Sony PlayStation 3.There are some other problems and challenges with this approach:

Price skimming as a strategy cannot last for long, as competitors soon launch rival productswhich put pressure on the price (e.g. the launch of rival products to the iPhone or iPod).

Distribution (place) can also be a challenge for an innovative new product. It may be necessary togive retailers higher margins to convince them to stock the product, reducing the improvedmargins that can be delivered by price skimming.A final problem is that by price skimming, a firm may slow down the volume growth of demandfor the product. This can give competitors more time to develop alternative products ready forthe time when market demand (measured in volume) is strongest.

Loss leaders

The use of loss leaders is a method of sales promotion. A loss leader is a product priced belowcost-price in order to attract consumers into a shop or online store. The purpose of making aproduct a loss leader is to encourage customers to make further purchases of profitable goodswhile they are in the shop. But does this strategy work?

Pricing is a key competitive weapon and a very flexible part of the marketing mix.

If a business undercuts its competitors on price, new customers may be attracted and existingcustomers may become more loyal. So, using a loss leader can help drive customer loyalty.

One risk of using a loss leader is that customers may take the opportunity to bulk-buy. If theprice discount is sufficiently deep, then it makes sense for customers to buy as much as they can(assuming the product is not perishable).

Using a loss leader is essentially a short-term pricing tactic for any one product. Customers willsoon get used to the tactic, so it makes sense to change the loss leader or its merchandising everyso often.

Predatory pricing (note: this is illegal)

With predatory pricing, prices are deliberately set very low by a dominant competitor in themarket in order to restrict or prevent competition. The price set might even be free, or lead tolosses by the predator. Whatever the approach, predatory pricing is illegal under competitionlaw.

Psychological pricing

Sometimes prices are set at what seem to be unusual price points. For example, why are DVDspriced at 12.99 or 14.99? The answer is the perceived price barriers that customers mayhave. They will buy something for 9.99, but think that 10 is a little too much. So a price thatis one pence lower can make the difference between closing the sale, or not!


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The aim ofpsychological pricing is to make the customer believe the product is cheaper than itreally is. Pricing in this way is intended to attract customers who are looking for value.

Competitor-based pricing

If there is strong competition in a market, customers are faced with a wide choice of who to buyfrom. They may buy from the cheapest provider or perhaps from the one which offers the bestcustomer service. But customers will certainly be mindful of what is a reasonable or normal pricein the market.

Most firms in a competitive market do not have sufficient power to be able to set prices abovetheir competitors. They tend to use going-rate pricing i.e. setting a price that is in linewith the prices charged by direct competitors. In effect such businesses are price-takersthey must accept the going market price as determined by the forces of demand and supply.

An advantage of using competitive pricing is that selling prices should be line with rivals, soprice should not be a competitive disadvantage.

The main problem is that the business needs some other way to attract customers. It has to usenon-price methods to compete e.g. providing distinct customer service or better availability.

demand-oriented pricingMethod in which price of a product is changed according to its demand higherprice when the demand is strong, lower price when it is weak.

demand-orientedpricing

method of establishing the price for a product or service based on the level ofdemand; also calleddemandbased pricing. For example, sellers of compact

discs charge a higher price for recordings that appeal to a broad market,such as those of Garth Brooks or Madonna, than they charge for recordings

of classical music. The manufacturing cost of the product and the

required gross profit margin are of secondary importance to demand in

setting the price.

Demand-Oriented Pricing

Christoph Breuer & Pamela Wicker

Pricing methods can be differentiated into cost-based methods and market-based methods.Among the cost-based methods are cost-plus pricing and break-even pricing, whereas market-

based methods include demand-oriented pricing and competitor-based pricing. The central

premise of demand-oriented pricing is to charge a high price when demand is strong and a low

price when demand is weak. In the sport system this pricing method is common with fitness

studios and health clubs. They charge relatively high prices in peak periods (like late afternoon

and early evening) and lower prices in off-peak periods (like mid-morning). Value-based pricing,
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as a form of demand-oriented pricing, goes one step further and takes the value of the product as

perceived by the custumer into account. The in-stadium capacity for most sport events is fixed.

That is, there is a fixed number of seats in the venue that cannot be adjusted in the short run. The

marketer of the ...

demand-oriented pricing

A way of setting price that takes into account the nature and quality of market demand for theoffering. Demand factors are particularly relevant when a firm is selling a product in severaldistinct market segments, each with a different level of demand.For most products, demand is a function of price ? demand increases as price decreases, and viceversa. Since the typical demand curve is downward sloping, the tendency of demand to varyinversely with price is referred to as movement along the demand curve.A shift in the entire demand curve is to be distinguished from movement along the demand curve.Such shifts are not caused by price, but by one of the more fundamental forces of demand, such

as a change in consumer tastes or preferences, the next exhibit illustrates both a positive and anegative shift in demand.When the shift is positive, the firm can expect to sell a greater quantity of its products at eachprice level. Thus, the demand curve shifts to the right. A negative shift has the opposite effect ?demand drops. In other words, the demand curve moves to the left.The major forces underlying shifts in demand are consumer tastes andpreferences, the size of themarket, the level of consumerincome, and the range of goods available:(1) When consumers become more favorably disposed to a product, the demand curve for theproduct shifts in a positive direction (to the right). Conversely, if consumers view the product less

favorably, the demand curve shifts in a negative direction (to the left).(2) The number of consumers in the market has a significant impact on demand. The greater theincrease in the size of the market, the more the demand curve shifts to the right; conversely, thegreater the decrease in the number of consumers, the more it shifts to the left.(3) As the real income of consumers increases, they are likely to buy more products. Therefore,for most products an increase in real income causes a positive shift in demand, whereas adecrease in real income has the opposite effect.(4) The introduction of a new product or service to the market usually causes a negative shift inthe demand curves of competitive products or services.Demand is based on a variety of considerations, of which price is just one. The informationrequired for analyzing demand is listed below:1. Ability of customers to buy;2. Willingness of customers to buy;3. Place of the product in the customer's lifestyle(whether a status symbol or a daily-use
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product);4. Prices ofsubstitute products5. Potential market for the product (if there is an unfulfilled demand in the market or if the marketis saturated);

6. Nature of non-price competition;7. Customer behavior in general;8. Segments in the market.All these factors are interdependent, and it may not be easy to estimate their relationship to eachother precisely.According to John M. Brion, the following customer information is needed forpricingstrategies:

? The customers' value analysis of the product: performance, utility, profit-rendering potential,quality, etc.;? Market acceptance level: the price level of acceptance in each major market, including theinfluence of substitutes.? The price the market expects, differences in different markets.? Price stability.? The product's S-curve and its present position on it.? Seasonal and cyclical characteristics of the industry.

? The economic conditions now and during the next few periods.? The effect of depressions to anticipate; the effect of price change on demand in such a decliningmarket (e.g., very little with Iuxury items).? Customer relations.? Channel relations, and channel costs to figure in calculations.? Themarkup at each channel level, company intermediary goals.? Advertising and promotion requirements and costs.

? Trade-in, replacement parts, service, delivery, installation, maintenance, pre-order and post-order engineering; inventory, obsolescence, and spoilage problems and costs.? Theproduct differentiation that is necessary.? Existing industry customs and reaction of the industry.? Stockholder, government, labor, employee, and community reactions.
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When the total demand of an industry is highly elastic, the industry leader may take the initiativeto lower prices. The loss in revenues due to decreased prices will be more than compensated forby the additional demand expected to be generated; therefore the total money market expands.Such a strategy is highly attractive in an industry whereeconomies of scaleare achievable. Wheredemand is inelastic and there are no conceivable substitutes, the prices may be increased, at least

in the short run. In the long run, however, the government may impose controls,orsubstitutesmay be developed.The demand for the products of an individual firm will be derived from the total industry demand.An individual firm will be interested in finding out how muchmarket share it can command bychanging its own prices. In the case of undifferentiated standardized products, lower pricesshould help a firm to increase its market share as long as competitors do not retaliate by matchingthe firm's prices. Similarly, when business is sought through bidding prices, lower prices shouldbe of help. In the case of differentiated products, however, market share can be improved even bymaintaining higher prices (within a certain range). The products may be differentiated in variousreal and imaginary ways.

Brand name, an image of sophistication, and the perception of high quality are other factorswhich may help to differentiate the product and thus create for the firm an opportunity to increaseprices and not lose market share. Of course, other elements of the marketing mixshould reinforcethe image suggested by the price. In brief, a firm's best opportunity lies in differentiating theproduct and then communicating this fact to the customer. A differentiated product offers moreopportunity for increasing earnings through price increases.The sensitivity of price can be measured by taking into account historical data, consumer surveys,and experimentation. Historical data can either be studied intuitively or manipulated throughquantitative techniques such asregression analysis to see how demand goes up or down based onprices. A consumer survey planned for studying sensitivity of prices is no different from anothermarket research study. Experiments can be conducted either in a laboratory situation or in the real

world tojudge what level of prices will generate what level of demand.Two common types of demand-oriented pricing are differential pricing and psychological pricing:(1) Differential pricing is defined as the sale of a product at price differentials that do notcorrespond directly to differences in cost. Differential pricing is practiced when the market iscomposed of several distinct segments, each of which has a differentelasticity of demandfor theproduct in question. The firm attempts to sell the product at a high price in market segmentscharacterized by inelastic demand and at a low price in the segments characterized by elasticdemand.(2) The term psychological pricing suggests that some noneconomic or psychological factors

enter into the determination of prices. Two common types of psychological pricing are prestigepricing and odd-even pricing.

SIMON'S MODEL OF DECISION MAKING

How does one go about "making a decision"?
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Herbert A. Simon developed a model of decision making. The model consisted of three steps,intelligence, design, and choice. In the intelligence phase, the problem is identified, andinformation is collected concerning the problem. This can be a long process, as the decision tobe made comes from the information. The design phase develops several possible solutions forthe problem. Finally, the choice phase chooses the solution.

The Intelligence Phase

The intelligence phase consists of finding, identifying, and formulating the problem or situationthat calls for a decision. This has been called deciding what to decide. The intelligence stagemay involve, for example, comparing the current status of a project or process with its plan. Theend result of the intelligence phase is a decision statement.

The name of this phase, intelligence, can be confusing. Intelligence as we usually use the term

informally, is talking about decision making, it is what we use after we know a decision must bemade. Simon borrowed the term from its military meaning, which involves the gathering ofinformation without necessarily knowing what it will lead to in terms of decisions to be made. Inbusiness decision making, we must often collect a great deal of information before we realize thata decision is called for.

The Design Phase

The design phase is where we develop alternatives. This phase may involve a great deal ofresearch into the available options. During the design phase we should also state our objectivesfor the decision we are to make.

The Choice Phase

In the choice phase, we evaluate the alternatives that we developed in the design phase andchoose one of them. The end product of this phase is a decision that we can carry out.

Extensions to Simon's Model

Implementation

The decision that is ultimately carried out.

Review

In this phase, decision implemented is evaluated. Was the course of action taken a good choice?

How does Simons Model correspond to the Scientific Method and to the Systems DevelopmentLife Cycle (SDLC)?


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SIMON'S MODEL SCIENTIFIC APPROACH SDLC

Intelligence Define Problem System Investigation

Design Develop Alternatives System Analysis

ChoiceSelect Solution / DesignSolution

System Design

Implementation Implement Solution Implementation

Review Maintenance

Product Portfolio Models

Product Portfolio Models-Classification of product portfolio models as standardized, customized and financial models.

-Standardized product portfolio models assume that the value of market position or market share depends

on the structure of competition and the stage of the product life cycle.

The Boston Consulting Group (BCG) approach-Earliest and the most widely cited standardized approach.

-Is a chart that had been created by Bruce Henderson in 1970.

-The company classifies all of its strategic business units in the business portfolio matrix.

-Analyst plot a scatter graph to rank business units (or products) on the basis of their relative market shares

and growth rates.
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.BCG & The GE/McKinsey Matrix

The GE/McKinsey Matrix

-The GE approach shares the benefits and problems associated with all standardized portfolio approaches.

-Its easy to implement, communicate and understand.

-Its limitation is that it attempts to boil down business strategy to the interplay of a small number of

somewhat arbitrary dimensions.

-The GE portfolio software allows you to built a customized matrix.

Financial Models

-Financial portfolio analysis deal with investments in holding of securities generally traded through financial

markets.

-The objective id typically to create efficient portfolio.

-The approach is theoretically appealing.

Analytical Hierarchy Process

-The AHP is another approach for assessing and allocating resources in a portfolio.

-It was developed by Thomas L. Saaty in the 1970s.

-Its a technique for dealing with complex decisions.

-The AHP provides a method for decomposing a complex decision problem into a hierarchy of more easily

comprehended sub-problems each of which can be worked with and evaluated on its own.

-AHP is most useful where teams of people are working on complex problems.
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-The AHP is an interactive ,structured process that brings together the key decision makers who represent

diverse functions and experiences

-The process is based on three steps.

Structuring the problem as hierarchy of levels.

Evaluating the element at each level along each of the criteria at the next level of the hierarchy.

Weighting the option.-In running the AHP model one should consider the possibility of rank reversal.

-The Expert Choice software provides two options to address this problem.

-The Ideal mode

-The Distributive mode

Example

-Ciba-Geigy, one of the top 10 pharmaceutical groups in the world.

-Needs to determine long-term international strategy for it dermatological unit.

-The promotional efforts has been irregular.

-A new segment of this market is developing.

-Management identified three possible strategies.

-Milking the existing business.

-Expand the existing business.

-Expand the existing business and create a new segment.

-The strategy guidance committee is in charge of evaluating the strategic consistency of product groups

actions.

-The objective is to ensure maximization of results based on different criterias.

-The committee constructed a three-level hierarchy.

-Level 1. is compatibility and consist of two criteria at a secondary level: consistency and support.

-For these inputs the third option is best along all criteria except the level of risk.

PIMS (PROFIT IMPACT OF MARKETING STRATEGY) PROGRAM

A powerful performance improvement technique which is widely practiced by World classorganizations (W.C.O) is Benchmarking. However, the fear of industrial espionage stops manycompanies from releasing competitively sensitive information about their operations andtechniques. Moreover, situation in India is worse with little reliable data available about majorcompanies, though organizations like CMIE are trying to build such analyses. In view ofglobalization and need for world class working there is a vacuum felt for analytical databasesabout top companies and their performance in India and comparing these with global databases.PIMS is one such one such answer in global context only.

Overview

The PIMS (Profit Impact of Market Strategy) of the Strategic Planning Institute is a large scalestudy designed to measure the relationship between business actions and business results. Theproject was initiated and developed at the General Electric Co. from the mid-1960s and expandedupon at the Management Science Institute at Harvard in the early 1970s; since 1975 The StrategicPlanning Institute has continued the development and application of the PIMS research.


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The comprehensive profiles of over 3,000 strategic experiences constitute this unique data pool.The items of information were collected by PIMS' trained professionals working directly withparticipating companies to assure data integrity. The data covers the important characteristics ofthe market environment, the state of competition, the strategy pursued by each business and theresults obtained.Taking a data-driven, empirical approach, PIMS has provided insights that have had a profound

impact on business strategy thinking. PIMS principles are taught in most business schools; PIMSdata has been used in dozens of academic articles; and PIMS theory guides the thinking of seniorexecutives in major companies around the world.

PIMS today is much more than the research study from which it originated. PIMS is

o a database of business strategies, used to generate benchmarks and identify

winning strategies.o a set of data-derivedbusiness strategy principlesto guide strategic thinking and

strategic measurement.o a methodology for diagnosing business problems and opportunities, and for

measuring the profit potential of a business.

The PIMS database forms the core of all services delivered by The Strategic Planning Institute.Thedatabase is a collection of statistically documented experiences drawn from thousands ofbusinesses, designed to help understand what kinds of strategies (e.g. quality, pricing, verticalintegration, innovation, advertising) work best in what kinds of business environments. The dataconstitute a key resource for such critical management tasks as evaluating business performance,analyzing new business opportunities, evaluating and reality testing new strategies, and screeningbusiness portfolios.

The primary role of the PIMS Program of the Strategic Planning Institute is to help managersunderstand and react to their business environment. PIMS does this by assisting managers as theydevelop and test strategies that will achieve an acceptable level of winning as defined by variousstrategies and financial measures.

The PIMS database allows for the identification of those critical strategic factors that enable abusiness to achieve an improved sustainable position. The years of research on the PIMS databaseand on other cross-sectional databases of business units show quite clearly that profitability isstrongly linked to strategic position. The R square of .65 of a regression of ROI on 18 keystrategic variables indicates that strategic positioning is the major determinant of businesssuccess.

Those businesses that position themselves to win the strategy game through a sustainable

advantage also win the performance game. PIMS can also serve as a screen such that abusiness's future direction, a competitor or a potential acquisition can be evaluated andbenchmark performance levels can be measured.

Hotelling's Model
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Suppose that two owners of refreshment stands, George and Henry, are trying to decide where to locatealong a stretch of beach. Suppose further that there are 100 customers located at even intervals along thisbeach, and that a customer will buy only from the closest vendor. Finally, assume that the beach is shortenough so that total sales are independent of where the vendors locate.

Suppose that initially the vendors locate at points A and C in the illustration below. These locations

would minimize the average traveling costs of the buyers and would result in each vendor getting one halfof the business. However, this solution would not be an equilibrium. If George moved from point A topoint B, he would keep all customers to his left, and get some of Henry's customers. For similar reasons,Henry would move toward the center, and in equilibrium, both vendors would locate together in themiddle.

This story of the beach was first told a half century ago by Harold Hotelling and is called Hotelling'smodel. Although it can give some insights into businesses decisions concerning location and productcharacteristics, the model has been more useful in explaining certain political phenomena. Instead of tworefreshment stands along a beach trying to attract dollars from customers, consider two politicalcandidates along the political spectrum trying to attract votes from voters. Only the candidate who attractsthe most votes will win, and a candidate must locate nearer to more voters than his opponent to attractvotes. With these rules, there is a strong tendency for each candidate to move to the middle.

In American politics this tendency has a predictable consequence for presidential candidates, who must

"sell" on two beaches. To gain the nomination, the candidate must position himself in the middle of theparty. Because the average Democrat has significantly different views than the average Republican,Republican and Democratic candidates sound quite different before nominations are decided. After theparty nominations are determined, the two candidates must "sell" to the same beach. Republicancandidates move to the left and Democratic candidates move to the right. By election time, their positionson issues usually sound close enough so that factors such as personality emerge as keys to the election.

There have been some notable exceptions to this pattern. In 1964, Barry Goldwater won the Republicannomination standing well to the right of the average voter, and was unable or unwilling to repositionhimself in the center. In 1972, George McGovern won the Democratic nomination standing well to theleft of the average voter, and was unable or unwilling to reposition himself. Both lost in landslides.

A problem with the Hotelling model when applied to commerce is that the results are very sensitive to thecost assumption. There must be some cost to traveling because customers prefer the closest vendor. Butthese costs must be small, because the people at the end of the beach continue to buy the same amount nomatter how far they are from the nearest vendor. If traveling costs are less, then people might not carewhether they go to the nearest vendor. If they are greater--so that when the vendor gets far away--peopledo not bother to go, the vendors will no longer cluster at the middle.


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Suppose that the beach is a long beach, and people more than 1000 feet away from any seller buy nothing.Also assume that the beach is 4000 feet long, and the two vendors start at the middle. Originally Georgesells to customers located from the 1000-foot mark to the middle at 2000 feet, and Henry sells from 2000feet to 3000 feet. If George moves to the 1000-foot mark, he will gain 1000 feet of new territory, and hewill lose only 500 feet to Henry. At the 1000-foot mark, he will sell to all people from 0 to 1000 feet. Hewill also sell to those people between him and Henry who are closer to him. Because Henry did not move,

but stayed at the 2000-foot mark, George will get all the customers up to the 1500-foot mark. Equilibriumin this case will occur only when Henry moves to the 3000-foot mark.

In Hotelling's original model with small traveling costs, location decisions were not economicallyefficient. By increasing traveling costs, it seems that we can have location decisions that are economicallyefficient. However, the next section shows that adding transport costs results in new efficiency problems

.

13)using the fourth-woodlock market- penetration model, compute the incrementsin penetrationfor the first five periods for a company whose rate of penetration of untapped potential is 0.4 and

whose potential sales as a percent of all buyers is 0.6. verify mathematically that sum oindividual increments approaches 0.6 as t goes to infinity

Problem no 10.4

Formula =

Now we have rate of penetration of untapped potential, r = 0.4

Potential rules as % of all buyers = 0.6

i.e. Q1= (0.4) (0.6)= 0.24

Q2 =

= 0.4 (0.6 0.4(0.6)

= 0.4 (0.6 0.24)= 0.4 x 0.36= 0.144

Q3 = 0.4(0.36)3-1

= 0.4 (0.36)2 = 0.4 (0.1296)

= 0.051Q4 = 0.4(0.36)4-1

= 0.4 (0.36)3 =0.4 (0.046)

= 0.0186Q5 = 0.4(0.36)5-1

= 0.4 (0.36)4

= 0.4 (0.0168)
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= 0.00672Q6 = 0.4(0.36)6-1

= 0.4 (0.36)5

= 0.4 (0.00605)= 0.00242

Q7 = 0.4(0.36)7-1

= 0.4 (0.36)6

= 0.4 (0.00218)=0.00087

Hence sum of individual increments = Q1+Q2+Q3+Q4+Q5+Q6+Q7= 0.24+0.144+0.051+0.0186+0.00672+0.00242+0.00087=0.41261

10) a co.s ad xpenditures avg $5000 per mnth. Current sales are 29000, thee saturationsales is estimated at $42000. the sales-response constant is $2, the sales-decay constant is

6% per mnth. Use viale-wolfe formula in appendix c to estimate probable sales increasenxt mnth.

Problem no Q6.5

Formula :-

WhereQ = sales volumeX = advertising spendsV = Market volumer = Sales response time

= 2(5000) (42000-29000) 6%(29000)42,000

= 10,000 (13000) 174042,000

= 130,000,000 -174042000

= 1, 30,000 174042

= 3095-1740

=1355

final notes for qtm

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