Business (9609) | Marketing analysis

Welcome to Marketing Analysis (A Level 9609: Topic 8.1)

Hey there, Business students!

This chapter, Marketing Analysis, is where you move from the basics of the marketing mix (the 4 Ps) towards making smart, strategic decisions for the future. You’ll learn how to predict customer reactions and future sales using data, making this a crucial step in preparing for Paper 3 and Paper 4 case studies.

Don't worry if the calculations seem intimidating at first. We will break down the formulas for elasticity and sales forecasting step-by-step. Let's turn data into powerful business insights!

8.1.1 Elasticity: Predicting Customer Reactions

Elasticity is a vital concept in marketing analysis. It measures how sensitive the demand for a product is to changes in variables like price, income, or promotional spending.

A. Price Elasticity of Demand (PED)

PED measures the responsiveness of quantity demanded to a change in the product's price. Businesses use this to decide whether raising or lowering prices will increase total revenue.

Formula for PED

$$PED = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}$$

Remember that PED results will almost always be negative because price and demand move in opposite directions (the law of demand). However, for interpretation, we usually ignore the negative sign (use the absolute value).

Interpretation of PED Results

• 1. Inelastic Demand (PED < 1):
  A change in price causes a less than proportionate change in demand.
  Example: Necessities (like basic medicine or fuel). If the price increases by 10%, demand might only fall by 2%.
  Decision Impact: Raising the price will increase total revenue.
• 2. Elastic Demand (PED > 1):
  A change in price causes a more than proportionate change in demand.
  Example: Luxury goods or products with many substitutes (like a specific brand of soft drink). If the price increases by 10%, demand might fall by 30%.
  Decision Impact: Lowering the price will increase total revenue.
• 3. Unitary Elasticity (PED = 1):
  Demand changes by the exact same percentage as the price change. Total revenue remains unchanged.

B. Income Elasticity of Demand (YED)

YED measures the responsiveness of demand to a change in consumer income. This helps businesses predict sales performance during economic booms or recessions.

Formula for YED

$$YED = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in income}}$$

Interpretation of YED Results

• 1. Normal Goods (YED is Positive):
  As income rises, demand rises. These are the products we buy more of when we are richer (e.g., holidays, branded clothes).
• 2. Inferior Goods (YED is Negative):
  As income rises, demand falls. These are cheaper alternatives people stop buying when they can afford better options (e.g., cheap instant noodles, budget bus tickets).
  Memory Aid: I for Inferior, I for Income goes down! (When income rises, demand for inferior goods goes down.)

C. Promotional Elasticity of Demand (AED)

AED measures the responsiveness of sales (quantity demanded) to changes in promotional spending (advertising budget).

Formula for AED

$$AED = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in promotional spending}}$$

Interpretation of AED Results

• AED > 1 (Elastic): Promotional spending is highly effective. A small increase in the advertising budget leads to a large increase in sales. The business should consider increasing promotion.
• AED < 1 (Inelastic): Promotional spending is relatively ineffective. Increasing the advertising budget by 10% only increases sales by 1%. The business may need to rethink its promotional methods or budget allocation.

D. Limitations of Elasticity Measures

While useful, elasticity figures aren't perfect crystal balls:

• They assume all other factors remain constant (ceteris paribus). In reality, competitor actions or economic changes happen simultaneously.
• Calculations rely on historical data, which might not reflect future trends.
• They are often estimates, especially for new products where data is scarce.

8.1.2 Product Development and Research & Development (R&D)

A business cannot survive long just selling old products. The market changes constantly, and competitors innovate. Product development is essential to maintain relevance and growth.

A. The Process of Product Development (Step-by-Step)

This process transforms a raw idea into a marketable product:

1. Idea Generation: Collecting initial concepts for new products or improvements. (See 'Sources of New Ideas' below).
2. Idea Screening: Filtering the ideas to discard those that are impractical, too expensive, or do not fit the business's objectives.
3. Concept Development and Testing: Developing a detailed version of the idea (a "concept") and testing it with target consumers, often using market research (e.g., focus groups).
4. Business Analysis: Estimating costs, sales, and profitability to ensure the product is financially viable. This often involves sales forecasting.
5. Product Development (Prototype): Creating a physical model or working version (prototype) and testing its technical viability and safety.
6. Test Marketing: Launching the product in a small, representative geographical area to gauge real-world customer reaction before a full national launch.
7. Commercialisation (Launch): Full-scale production, distribution, and promotion.

B. Sources of New Ideas for Product Development

Ideas can come from internal efforts or external sources:

• Internal Sources:
  • Research and Development (R&D) Department: Dedicated teams experimenting with new technology or materials.
  • Employees: Staff suggestions, especially those in sales or production, who deal directly with the product or customers.
• External Sources:
  • Customers: Feedback, complaints, or suggestions (e.g., asking users what features they want in the next phone model).
  • Competitors: Analysing successful products launched by rivals (often called reverse engineering).
  • Suppliers: New materials or component technologies that can be incorporated into a product.

C. The Importance of Research and Development (R&D)

R&D is the activity a business undertakes to make discoveries that can lead to new products or processes.

R&D is crucial because it provides:

• Competitive Advantage: Creating unique products (with a USP) that competitors cannot easily copy.
• Future Revenue Streams: Ensuring the business has a continuous supply of products to replace those that inevitably decline on the Product Life Cycle.
• Process Improvements: Developing more efficient production methods, leading to lower costs and higher profitability.
• Meeting Dynamic Needs: Ensuring the business is customer-oriented by developing solutions to evolving consumer problems.

8.1.3 Sales Forecasting: Looking into the Future

Sales forecasting is the process of estimating future sales volume or revenue. This information is the foundation for almost all other business planning (e.g., budgeting, production schedules, staffing levels).

A. The Need to Forecast Sales

Accurate forecasts help management in several key areas:

• Inventory Management: Knowing how much raw material to order (too little means lost sales; too much means high storage costs).
• Human Resources: Planning workforce needs (hiring or training staff to meet expected production levels).
• Finance and Budgets: Setting realistic cash flow forecasts and budgets for the year.
• Production Planning: Ensuring sufficient capacity is available to meet anticipated demand.

B. Quantitative Sales Forecasting: Time Series Analysis

This method assumes that past sales patterns will continue into the future. It involves identifying trends, seasonal variations, and random fluctuations.

The Four Period Centred Moving Average Method

This method is used to smooth out short-term fluctuations (like weekly or monthly seasonal variations) to reveal the underlying long-term trend.

Don't worry if this seems tricky at first—it's just a sequence of calculating averages.

Step-by-Step Calculation (Four Period Centred Moving Average):

1. Calculate the 4-Period Moving Total:
   Sum the sales figures for the first four consecutive time periods (e.g., Quarter 1 + Q2 + Q3 + Q4). Place this total in the middle of the four periods, which will be between Q2 and Q3.
2. Calculate the 4-Period Moving Average:
   Divide the 4-Period Moving Total by 4. This is the simple moving average.
3. Calculate the Centred Moving Average (The Trend):
   Since the 4-period average sits between two periods (e.g., between Q2 and Q3), it's not aligned to a specific point in time. To 'centre' it, you must average two consecutive 4-Period Moving Totals.
   (Total of first 4 periods + Total of next 4 periods) / 8.
   Alternatively, average two consecutive 4-Period Moving Averages. This final figure is placed directly beside the third quarter (Q3). This centered figure represents the trend line.

Did you know? Once you establish the trend, you can project it forward and then re-introduce the seasonal variations (which you calculate as the difference between actual sales and the trend) to get a more accurate forecast.

C. Qualitative Sales Forecasting

These methods rely on judgment and experience rather than purely on numerical data, often used when historical data is unreliable or non-existent (e.g., for new product launches).

• Expert Opinion:
  Consulting with people who have deep knowledge of the market (e.g., senior sales staff, industry consultants, or economists). This is quick and cheap but can be biased.
• Delphi Method:
  A structured technique that uses a panel of experts. Experts submit individual forecasts, which are summarized and returned to the group for revision. This process is repeated until a consensus forecast is achieved, eliminating personal confrontation.
• Market Research:
  Surveys and interviews conducted with potential customers to gauge their purchasing intentions for the future.

D. The Impact of Sales Forecasting on Business Decisions

If sales forecasts are high, the business might decide to:

• Increase production capacity (e.g., invest in new machinery).
• Increase inventory of raw materials.
• Run extensive recruitment drives.
• Increase advertising spending (based on a high AED).

If sales forecasts are low, the business might decide to:

• Scale back investment plans.
• Seek new markets internationally to diversify risk (Topic 8.2).
• Reduce staffing levels or use flexible contracts.