Demand and value

Situations
Manish Jantikar
• Since B2B marketers target only other
businesses, they have considerably more
targeted markets than B2C marketers.
 The realities of business markets

• a reality of Business marketing per se is that

suppliers face concentrated markets where
individual customers may be critically important.
These customers are not passive but actively
search out and interact with selected suppliers,
requiring customized products. These markets
are characterized by interaction, mutual
dependency and trust. Negotiation is common
and business success is often determined by the
ability of individuals to manage the supplier–
customer relationships over considerable
periods of time.
• These interactions may involve many
people from different functions and levels
in both supplier and customer companies.
Although specific transactions (the focus
of much consumer marketing literature)
are often important, it is the overall
relationship which is critical to success.
Thus, relationship marketing becomes the
‘new’ marketing management challenge.
 Effectiveness in B2B markets
To be effective, marketers must address a number of key
questions:
_ How is buying behaviour different in business markets?
_ Who are the key participants in purchasing?
_ What process and procedures are followed in choosing
and evaluating competitive offerings?
_ What criteria are used in making buying decisions?
_ What sources of information and influence are used?
_ What organizational rules and policies are important?
_ What key relationships exist with other suppliers and
buyers?
 Organizational buying structures

• An organization is a group of people pursuing a common aim

through co-ordinated activities. Organizations are characterized by
structure, activity and goals. By analysing organizational buying in
the light of these three factors, it is possible to highlight the essential
elements of organizational buying behaviour.
• A major characteristic of organizational buying is that it is a group
activity. It is comparatively rare that a single individual within an
organization will have sole responsibility for making all the decisions
involved in the purchasing process, and commonly we find a
number of people from different areas of the business and of
varying status involved.
• This group is usually described as the decision-making unit or
buying centre. Thus, a major challenge facing business marketers
and sales people is the identification of these key individuals who
constitute the buying centre, the roles of these individuals and the
various factors that may influence its constitution, and the major
goals being pursued.
 Value in Business Markets
• Value in Business markets is defined as “
the economic, technical, service and social
benefits received by a customer firm in
exchange for the price paid for a product
or service offering.”
• Another way to define is ‘ratio betn what
the customer gets to what he gives.’
• Value can be expressed in
– Monetary Terms
– Net Benefits
– Value is what a customer gets for the price he
pays
 Estimating Customer Value
• Methods
– Focus Group
– Customer interview
– Internal test
– Conjoint Analysis
The Determinants of Demand
• Demand is the quantity of a product that purchasers are
willing and able to purchase in a specified period
• It is determined by
– Own Price - Po
– Price of other products, especially close substitutes and
complements, Pc,s
– Consumers’ disposable incomes, Y d
– Consumers’ tastes, T
– The amount spent on advertising the product, A o
– The amount spent on advertising complements and substitutes,
A c,s
– Interest rates (i) and credit availability (C)
– Expectations of future prices and supply conditions(E)
 These Relationships May be
Represented As:
• A ‘demand function’ - the general
mathematical form
• Qd = f(Po,Po,Ps,Yd,Ao,Ac,As,I,C,E)
• A ‘demand curve’
The demand curve shows the quantity that would
Price
be bought at each price, for some fixed
combination of all other factors

Quantity Demanded
 The Demand Curve
• D-curve shifts when anything except own-
price changes
A demand-curve shows the quantities sold at each
price, assuming other things do not change.
Own Price “Assume” here does not mean “we believe this to be
true” but simply “if”. We know the other things
change but we can only show two dimensions on a
diagram.

Quantity Demanded
 Concepts of Elasticity
• Own price elasticity is:
– percentage change in quantity demanded, divided by percentage
change in price:
• If demand is price-elastic, revenue increases with lower prices.
• If demand is price-inelastic, revenue decreases with lower prices
• Cross-price elasticity of demand between substitutes is positive
• Income-elasticity determines how demand changes with customers’ incomes.
For most goods income-elasticity is positive.
• Advertising elasticity is important in deciding on advertising budgets. It is
positive. As the level of advertising increases, we would expect advertising
elasticity to fall.
 The Demand-Curve:Examples
• Zero-elasticity at all prices

Price
Ed = 0

Quantity
 The Demand-Curve:Examples
• Infinite elasticity at all prices

Price
Ed = 

Quantity
 The Demand-Curve:Examples
• Unitary elasticity at all prices

Price This curve is a ‘rectangular

hyperbola’ such that price x quantity
Ed = -1 is a constant

Quantity
 The Demand-Curve:Examples
• A Linear Demand Curve
Ed = -
Price
Ed = -1

Ed = 0
Quantity
Demand and Marginal Revenue
• A Linear Demand Curve
Ed = -
$
Ed = -1

Ed = 0
Quantity

Marginal Revenue
 Industrial demand
• Derived demand
• Fluctuating Demand – acceleration effect
• Stimulating Demand- eg. Intel inside, SAIL
• Joint Demand – eg. Cable jointing kit. 12 diff.
items. One needs to be purchased if the other
has to be used.
• Cross Elasticity of demand – It is the reaction of
sales of one product to a price change in
another product. Eg. Demand for Aluminium
doors.
• If the cross elasticity of the substitute
products is high, it indicates that the
products compete in the same market.
 Determinants of Other
Elasticities
• Income Elasticity
– Type of good
• necessities - salt, drinking water, zero elasticity
• luxuries, zero at low levels of income then high when
income thresholds exceeded
• inferior goods - negative, purchase less as income rises -
bus travel, low-grade margarine, paraffin
• Cross-price elasticity
– substitutes or complements,and how close?
– An industry is a group of firms producing products
with high positive cross-elasticities
 The Demand Curve for an
Individual Firm
• Depends on the conditions of competition
• For a monopoly, industry demand curve is the
firm’s demand-curve
• Under perfect competition, demand is infinitely
elastic at the market price
• Where competition is amongst a few firms it
depends on each firm’s market share and rivals’
reactions
 Elasticity and the Power of
Buyers
• Buyer power has two components
– price sensitivity of buyers (looser version of
the elasticity concept)
– bargaining power of buyers
 Bullwhip Effect

• With the Bullwhip effect demand order variability

is amplified as one moves up the supply chain.
• This is because demand information is distorted
• as it is transmitted up the supply chain.
• Causes erratic shifts in orders up and down the
• supply chain.
• 􀂄 Proctor and Gamble – Pampers
• 􀂄 Hewlett-Packard - Printers
 Symptoms of the Bullwhip Effect

• Excessive Inventory
• Poor Forecasts
• Insufficient and/or excessive capacities
• Unavailable Products
• Long Backlogs
• Costs for Expedited Shipments and
• Overtime
 Impact of Ordering Strategies on
Bullwhip Effect

• Naïve forecast – order only what is ordered

• Exponential smoothing at α=0.1, 0.5, and 0.9
• Order what is ordered plus cumulative backlog
• Order what is ordered + cumulative backlog
• unless inventory is some amount more than
order + cumulative backlog
• Order what is ordered + this period backlog
• (not cumulative)
 Cross Elasticity of Demand
(CPed)
• Cross price elasticity (CPed) measures the
responsiveness of demand for good X following
a change in the price of good Y (a related good)

• CPeD = % change in qty D of product A

% change in price of product B

• With cross price elasticity we make an important

distinction between substitute products and
complementary goods and services.
Identify some Substitutes
Identify some Complements
 Cross Price Elasticity for
Substitutes
Product Close Weak Good with no
Substitute Substitute relationship

Coca Cola
Cheese

Euro Star Journey

from London to Paris

Nescafe Filter Coffee

Ticket to a film at the

PVR Cinema in Saket
 Complementary Goods

Product Close Weak Good with no

Complement Complement relationship

Personal Computer

A bottle of expensive
white wine

Short Break Weekend

in Manali
Cross Elasticity of Demand (CPed)
+ = Substitutes
• Substitutes:
– With substitute goods
such as brands of
razors, an increase in
the price of one good
will lead to an
increase in demand
for the rival product Cross price elasticity
will be positive

+
– Weak substitutes –
inelastic CPed
– Close substitutes –
elastic CPed
Cross Elasticity of Demand (CPed)
- = Complements
• Complements:
– Goods that are in
complementary demand
– Weak complements –
inelastic CPed
– Close complements – The cross price
elasticity of demand
– elastic CPed
for two
complements is
negative
 Get your calculators ready
CPeD = % change in qty D of product A
% change in price of product B
 Calculate the CPeD and state
whether the goods are
complements or substitutes?
1. A 10% rise in the price of fish may cause
demand for chicken to increase by 2%.
2. The fall in the price of paper by 20% causes
the demand for pens to increase by 5%.
3. A 20% rise in the price of ice cream causes
demand for sweets to increase by 4%.
4. A 12% fall in the price of air fares leads to a
30% rise in the demand for foreign holidays.
5. A 10% rise in bikes will leave the demand for
cheese unaffected.
 Answers…
o ds
sti tute go
=sub
• A 10% rise in the price of fish may cause demand tive chicken
Posifor to increase
e me ntary
by 2%. comp
l
tiv e =
+2/+10 = +0.2 Nega
• The fall in the price of paper by 20% causes the demand for pens to
increase by 5%.
+5/-20 = -0.25
• A 20% rise in the price of ice cream causes demand for sweets to
increase by 4%.
+4/+20 = +0.2
• A 12% fall in the price of air fares leads to a 30% rise in the demand for
foreign holidays.
+30/-12 = -2.5
• A 10% rise in bikes will leave the demand for cheese unaffected.
0/+10 = 0
 Importance of CPed for
businesses
• Firms can use CPed estimates to predict:
• The impact of a rival’s pricing strategies on demand for
their own products:
• Pricing strategies for complementary goods:
– Popcorn and cinema tickets are strong
complements. Popcorn has a very high mark up
i.e. popcorn costs pennies to make but sells for
more than a pound
If firms have a reliable estimate for XED they can
estimate the effect, say, of a two-for-one cinema
ticket offer on the demand for popcorn
 Applications of Cross Elasticity
• Effects of the national minimum wage on
demand for younger and older workers
(might younger workers be replaced?)

• Higher indirect taxes on goods such as

tobacco – the impact on demand for
nicotine patches and other substitutes
 Applications of Cross Elasticity
• Effect on demand for different
modes of mass transport
following introduction of road
pricing schemes in urban
areas (e.g. the London
congestion charge and the M6
Toll Road)
• Rise in the price of natural gas
– effect on the demand for
coal used in power generation