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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 of three 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.

Income elasticity of demand Income elasticity of demand measures the relationship between a change in quantity demanded for 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 more is demanded at each price i.e. there is an outward shift of the demand curve Normal necessities have an income elasticity of demand of between 0 and +1 for example, if income increases by 10% and the demand for fresh fruit increases by 4% then the income elasticity 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 a 10% 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 as income rises. Typically inferior goods or services exist where superior goods are available if the consumer has the money to be able to buy it. Examples include the demand for cigarettes, lowpriced 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 for own-label foodsin supermarkets is less for the high-value finest food ranges.

There is a general downward trend in the income elasticity of demand for many basic products, particularly foodstuffs. One reason is that as a society becomes richer, there are changes in tastes and preferences. What might have been considered a luxury good several years ago might now be regarded as a necessity? How many of you regard a Sky sports 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 other factors remaining the same. How It Works/Example: The formula for income elasticity is: Income Elasticity = (% change in quantity demanded) / (% change in income) An example of a product with positive income elasticity could be Ferraris. Let's say the economy 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

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, elasticity refers the degree to which individuals (consumers/producers) change their demand/amount supplied 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's price. 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 to price. Businesses often strive to sell/market products or services that are or seem inelastic in demand because 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 are unaffected 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 considered perfectly inelastic. An example of perfectly inelastic demand would be a life saving drug that people 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 the demand for a product does not increase or decrease correspondingly with a fall or rise in its price. From the supplier's viewpoint, this is a highly desirable situation because price and total revenue are directly related; an increase in price increases total revenue despite a fall in the quantity demanded. An example of a product with inelastic demand is gasoline.

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 uses data to determine the probable future outcome of an event or a likelihood of a situation occurring. Predictive analytics encompasses a variety of statistical techniques from modeling, machine learning, data mining and game theory that analyze current and historical facts to make predictions about future events. In business, predictive models exploit patterns found in historical and transactional data to identify risks and opportunities. Models capture relationships among many factors to allow assessment of risk or potential associated with a particular set of conditions, guiding decision making for candidate transactions. Three basic cornerstones of predictive analytics are: Predictive modeling Decision Analysis and Optimization Transaction Profiling An example of using predictive analytics is optimizing customer relationship management systems. They can help enable an organization to analyze all customer data therefore exposing patterns that predict customer behavior. Another example is for an organization that offers multiple products, predictive analytics can help analyze customers spending, usage and other behavior, leading to efficient cross sales, or selling additional products to current customers. This directly leads to higher profitability per customer and 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 to design a strategy for using predictive information. Descriptive Analytics Descriptive analytics looks at data and analyzes past events for insight as to how to approach the future. Descriptive analytics looks at past performance and understands that performance by mining historical data to look for the reasons behind past success or failure. Almost all management reporting such as sales, marketing, operations, and finance, uses this type of post-

mortem analysis. Descriptive models quantify relationships in data in a way that is often used to classify customers or prospects into groups. Unlike predictive models that focus on predicting a single customer behavior (such as credit risk), descriptive models identify many different relationships between customers 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 product preferences and life stage. Descriptive modeling tools can be utilized to develop further models that can simulate large number of individualized agents and make predictions. For example, descriptive analytics examines historical electricity usage data to help plan power needs 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 of the predictions. Prescriptive analytics goes beyond predicting future outcomes by also suggesting actions to benefit from the predictions and showing the decision maker the implications of each decision option. Prescriptive analytics not only anticipates what will happen and when it will happen, but also why it will happen. Further, prescriptive analytics can suggest decision options on how to take advantage of a future opportunity or mitigate a future risk and illustrate the implication of each decision option. In practice, prescriptive analytics can continually and automatically process new data to improve prediction 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 the organization) and external (social media, et al.). The data may also be structured, which includes numerical and categorical data, as well as unstructured data, such as text, images, audio, and video data, including big data. Business rules define the business process and include constraints, preferences, policies, best practices, and boundaries. Mathematical models are techniques derived from 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 to leverage 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 for future capital investments such as new facilities and equipment utilization as well as understand the trade-offs between adding additional beds and expanding an existing facility versus building a new one. Another example is energy and utilities. Natural gas prices fluctuate dramatically depending upon supply, demand, econometrics, geo-politics, and weather conditions. Gas producers, transmission (pipeline) companies and utility firms have a keen interest in more accurately predicting gas prices so that they can lock in favorable terms while hedging downside risk. Prescriptive analytics

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

normative model
Definition Prescriptive model which evaluates alternative solutions to answer the question, "What is going on?" and suggests what ought to be done or how things should work according to an assumption or standard. In comparison, a descriptive model merely describes the solutions without evaluating them. Used mainly as a standard for measuring change or performance.

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 of the 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

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, which illustrates 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 actually work, and answers the question, "What is this?" In comparison, normative models are prescriptive and suggest what ought to be done (how things should work) according to an assumption or standard. descriptive modeling
Descriptive inShare Email Comment RSS Print A AA AAA : modeling is a mathematical process that describes real-world events and the

relationships between factors responsible for them. The process is used by consumer-driven organizations 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.

Descriptive modeling can help an organization to understand its customers, but predictive modeling is necessary to facilitate the desired outcomes. Both descriptive and predictive modeling constitute key elements of data mining and Web mining.

cost-oriented pricing
Definition A method of setting prices that takes into account the company's profit objectives and that covers its costs of production. For example, a common form of cost-oriented pricing used by retailers involves simply adding a constant percentage markup to the amount that the retailer paid for each product.

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.

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 emphasize profit 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 making the product. Customer-based pricing: where prices are determined by what a firm believes customers will be prepared to pay Competitor-based pricing: where competitor prices are the main influence on the price set Lets 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 or buying the product. In some ways this is quite an old-fashioned and somewhat discredited pricing strategy, although it is still widely used. After all, customers are not too bothered what it cost to make the product they are interested in what value the product provides them. Cost-plus (or mark-up) pricing is widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. An advantage of this approach is that the business will know that its costs are being covered. The main disadvantage is that 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 an additional 50 of profit on top of the unit cost of production. Unit cost 100

Mark-up Selling price

50% 150

How high should the mark-up percentage be? That largely depends on the normal competitive practice 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 (normally a wholesaler). So, if the wholesale cost of a product is 10 per unit, the retailer will look to sell it for 2.4x 10 = 24. This is equal to a total mark-up of 14 (i.e. the selling price of 24 less the bought cost of 10). The main advantage of cost-based pricing is that selling prices are relatively easy to calculate. If the 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 of penetration pricing. The aim ofpenetration pricing is usually to increase market share of a product, providing the opportunity to increase price once this objective has been achieved. Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower 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 increasing market share or sales volume. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified. Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic 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 . This is often used for the launch of a new product which faces little or no competition usually due to some technological features. Such products are often bought by early adopters who are prepared to pay a higher price to have the latest or best product in the market.

Good examples of price skimming include innovative electronic products, such as the Apple iPad and 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 products which 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 to give retailers higher margins to convince them to stock the product, reducing the improved margins that can be delivered by price skimming. A final problem is that by price skimming, a firm may slow down the volume growth of demand for the product. This can give competitors more time to develop alternative products ready for the 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 below cost-price in order to attract consumers into a shop or online store. The purpose of making a product a loss leader is to encourage customers to make further purchases of profitable goods while 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 existing customers 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 the price 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 will soon get used to the tactic, so it makes sense to change the loss leader or its merchandising every so often. Predatory pricing (note: this is illegal) With predatory pricing, prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition. The price set might even be free, or lead to losses by the predator. Whatever the approach, predatory pricing is illegal under competition law. Psychological pricing Sometimes prices are set at what seem to be unusual price points. For example, why are DVDs priced at 12.99 or 14.99? The answer is the perceived price barriers that customers may have. They will buy something for 9.99, but think that 10 is a little too much. So a price that is one pence lower can make the difference between closing the sale, or not!

The aim of psychological pricing is to make the customer believe the product is cheaper than it really 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 buy from. They may buy from the cheapest provider or perhaps from the one which offers the best customer service. But customers will certainly be mindful of what is a reasonable or normal price in the market. Most firms in a competitive market do not have sufficient power to be able to set prices above their competitors. They tend to use going-rate pricing i.e. setting a price that is in line with the prices charged by direct competitors. In effect such businesses are price-takers they 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, so price should not be a competitive disadvantage. The main problem is that the business needs some other way to attract customers. It has to use non-price methods to compete e.g. providing distinct customer service or better availability. demand-oriented pricing Method in which price of a product is changed according to its demand higher price when the demand is strong, lower price when it is weak. demandorientedpricing method of establishing the price for a product or service based on the level of demand; 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 marketbased 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,

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 the offering. Demand factors are particularly relevant when a firm is selling a product in several distinct market segments, each with a different level of demand. For most products, demand is a function of price ? demand increases as price decreases, and vice versa. Since the typical demand curve is downward sloping, the tendency of demand to vary inversely 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 a negative shift in demand. When the shift is positive, the firm can expect to sell a greater quantity of its products at each price 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 and preferences, the size of the market, the level of consumer income, and the range of goods available: (1) When consumers become more favorably disposed to a product, the demand curve for the product 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 the increase in the size of the market, the more the demand curve shifts to the right; conversely, the greater 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 a decrease in real income has the opposite effect. (4) The introduction of a new product or service to the market usually causes a negative shift in the demand curves of competitive products or services. Demand is based on a variety of considerations, of which price is just one. The information required 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

product); 4. Prices of substitute products 5. Potential market for the product (if there is an unfulfilled demand in the market or if the market is 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 each other precisely. According to John M. Brion, the following customer information is needed for pricingstrategies: ? 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 the influence 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 declining market (e.g., very little with Iuxury items). ? Customer relations. ? Channel relations, and channel costs to figure in calculations. ? The markup at each channel level, company intermediary goals. ? Advertising and promotion requirements and costs. ? Trade-in, replacement parts, service, delivery, installation, maintenance, pre-order and postorder engineering; inventory, obsolescence, and spoilage problems and costs. ? The product differentiation that is necessary. ? Existing industry customs and reaction of the industry. ? Stockholder, government, labor, employee, and community reactions.

When the total demand of an industry is highly elastic, the industry leader may take the initiative to lower prices. The loss in revenues due to decreased prices will be more than compensated for by the additional demand expected to be generated; therefore the total money market expands. Such a strategy is highly attractive in an industry where economies of scale are achievable. Where demand 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, or substitutes may 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 much market share it can command by changing its own prices. In the case of undifferentiated standardized products, lower prices should help a firm to increase its market share as long as competitors do not retaliate by matching the firm's prices. Similarly, when business is sought through bidding prices, lower prices should be of help. In the case of differentiated products, however, market share can be improved even by maintaining higher prices (within a certain range). The products may be differentiated in various real and imaginary ways. Brand name, an image of sophistication, and the perception of high quality are other factors which may help to differentiate the product and thus create for the firm an opportunity to increase prices and not lose market share. Of course, other elements of the marketing mix should reinforce the image suggested by the price. In brief, a firm's best opportunity lies in differentiating the product and then communicating this fact to the customer. A differentiated product offers more opportunity 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 through quantitative techniques such as regression analysis to see how demand goes up or down based on prices. A consumer survey planned for studying sensitivity of prices is no different from another market 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 not correspond directly to differences in cost. Differential pricing is practiced when the market is composed of several distinct segments, each of which has a differentelasticity of demand for the product in question. The firm attempts to sell the product at a high price in market segments characterized by inelastic demand and at a low price in the segments characterized by elastic demand. (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 prestige pricing and odd-even pricing.

SIMON'S MODEL OF DECISION MAKING How does one go about "making a decision"?

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, and information is collected concerning the problem. This can be a long process, as the decision to be made comes from the information. The design phase develops several possible solutions for the problem. Finally, the choice phase chooses the solution.

The Intelligence Phase The intelligence phase consists of finding, identifying, and formulating the problem or situation that calls for a decision. This has been called deciding what to decide. The intelligence stage may involve, for example, comparing the current status of a project or process with its plan. The end 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 be made. Simon borrowed the term from its military meaning, which involves the gathering of information without necessarily knowing what it will lead to in terms of decisions to be made. In business decision making, we must often collect a great deal of information before we realize that a decision is called for. The Design Phase The design phase is where we develop alternatives. This phase may involve a great deal of research into the available options. During the design phase we should also state our objectives for the decision we are to make. The Choice Phase In the choice phase, we evaluate the alternatives that we developed in the design phase and choose 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 Development Life Cycle (SDLC)?

SIMON'S MODEL Intelligence Design Choice Implementation Review

SCIENTIFIC APPROACH Define Problem Develop Alternatives Select Solution / Design Solution Implement Solution

SDLC System Investigation System Analysis System Design Implementation 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.

.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.

-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 class organizations (W.C.O) is Benchmarking. However, the fear of industrial espionage stops many companies from releasing competitively sensitive information about their operations and techniques. Moreover, situation in India is worse with little reliable data available about major companies, though organizations like CMIE are trying to build such analyses. In view of globalization and need for world class working there is a vacuum felt for analytical databases about 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 scale study designed to measure the relationship between business actions and business results. The project was initiated and developed at the General Electric Co. from the mid-1960s and expanded upon at the Management Science Institute at Harvard in the early 1970s; since 1975 The Strategic Planning Institute has continued the development and application of the PIMS research.

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 with participating companies to assure data integrity. The data covers the important characteristics of the market environment, the state of competition, the strategy pursued by each business and the results 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; PIMS data has been used in dozens of academic articles; and PIMS theory guides the thinking of senior executives in major companies around the world. PIMS today is much more than the research study from which it originated. PIMS is
o o o

a database of business strategies, used to generate benchmarks and identify winning strategies. a set of data-derived business strategy principles to guide strategic thinking and strategic measurement. 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 of businesses, designed to help understand what kinds of strategies (e.g. quality, pricing, vertical integration, innovation, advertising) work best in what kinds of business environments. The data constitute a key resource for such critical management tasks as evaluating business performance, analyzing new business opportunities, evaluating and reality testing new strategies, and screening business portfolios. The primary role of the PIMS Program of the Strategic Planning Institute is to help managers understand and react to their business environment. PIMS does this by assisting managers as they develop and test strategies that will achieve an acceptable level of winning as defined by various strategies and financial measures. The PIMS database allows for the identification of those critical strategic factors that enable a business to achieve an improved sustainable position. The years of research on the PIMS database and on other cross-sectional databases of business units show quite clearly that profitability is strongly linked to strategic position. The R square of .65 of a regression of ROI on 18 key strategic variables indicates that strategic positioning is the major determinant of business success.

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 a business's future direction, a competitor or a potential acquisition can be evaluated and benchmark performance levels can be measured.

Hotelling's Model

Suppose that two owners of refreshment stands, George and Henry, are trying to decide where to locate along a stretch of beach. Suppose further that there are 100 customers located at even intervals along this beach, and that a customer will buy only from the closest vendor. Finally, assume that the beach is short enough 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 half of the business. However, this solution would not be an equilibrium. If George moved from point A to point 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 the middle.

This story of the beach was first told a half century ago by Harold Hotelling and is called Hotelling's model. Although it can give some insights into businesses decisions concerning location and product characteristics, the model has been more useful in explaining certain political phenomena. Instead of two refreshment stands along a beach trying to attract dollars from customers, consider two political candidates along the political spectrum trying to attract votes from voters. Only the candidate who attracts the most votes will win, and a candidate must locate nearer to more voters than his opponent to attract votes. 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 the party. Because the average Democrat has significantly different views than the average Republican, Republican and Democratic candidates sound quite different before nominations are decided. After the party nominations are determined, the two candidates must "sell" to the same beach. Republican candidates move to the left and Democratic candidates move to the right. By election time, their positions on 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 Republican nomination standing well to the right of the average voter, and was unable or unwilling to reposition himself in the center. In 1972, George McGovern won the Democratic nomination standing well to the left 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 the cost assumption. There must be some cost to traveling because customers prefer the closest vendor. But these costs must be small, because the people at the end of the beach continue to buy the same amount no matter how far they are from the nearest vendor. If traveling costs are less, then people might not care whether they go to the nearest vendor. If they are greater--so that when the vendor gets far away--people do not bother to go, the vendors will no longer cluster at the middle.

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 George sells to customers located from the 1000-foot mark to the middle at 2000 feet, and Henry sells from 2000 feet to 3000 feet. If George moves to the 1000-foot mark, he will gain 1000 feet of new territory, and he will lose only 500 feet to Henry. At the 1000-foot mark, he will sell to all people from 0 to 1000 feet. He will 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. Equilibrium in 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 economically efficient. By increasing traveling costs, it seems that we can have location decisions that are economically efficient. 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 penetration for 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 o individual 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) = 0.051 Q4 = 0.4(0.36)4-1 = 0.4 (0.36)3 =0.4 (0.046) = 0.0186 Q5 = 0.4(0.36)5-1 = 0.4 (0.36)4 = 0.4 (0.0168)

= 0.00672 Q6 = 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 saturation sales 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 increase nxt mnth. Problem no Q6.5 Formula :Where Q = sales volume X = advertising spends V = Market volume r = Sales response time = 2(5000) (42000-29000) 6%(29000) 42,000 = 10,000 (13000) 1740 42,000 = 130,000,000-1740 42000 = 1, 30,000 1740 42 = 3095-1740 =1355