Demand and Value

8/8/2019 Demand and Value

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Demand and valueDemand and value

SituationsSituationsManish JantikarManish Jantikar


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Since B2B marketers target only other

businesses, they have considerably more

targeted markets than B2C marketers.


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The realities of business markets

a reality of Business marketing per se is thatsuppliers face concentrated markets whereindividual customers may be critically important.These customers are not passive but actively

search out and interact with selected suppliers,requiring customized products. These marketsare characterized by interaction, mutualdependency and trust. Negotiation is commonand business success is often determined by theability of individuals to manage the suppliercustomer relationships over considerableperiods of time.


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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.


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Effectiveness in B2B marketsEffectiveness in B2B markets

To be effective, marketers must address a number of keyquestions:

_ How is buying behaviour different in business markets?

_ Who are the key participants in purchasing?_ What process and procedures are followed in choosingand 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 andbuyers?


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Organizational buying structuresOrganizational buying structures

An organization is a group of people pursuing a common aimthrough co-ordinated activities. Organizations are characterized bystructure, activity and goals. By analysing organizational buying inthe light of these three factors, it is possible to highlight the essentialelements of organizational buying behaviour.

A major characteristic of organizational buying is that it is a groupactivity. It is comparatively rare that a single individual within anorganization will have sole responsibility for making all the decisionsinvolved in the purchasing process, and commonly we find a numberof people from different areas of the business and of varying statusinvolved.

This group is usually described as the decision-making unit or

buying centre. Thus, a major challenge facing business marketersand sales people is the identification of these key individuals whoconstitute the buying centre, the roles of these individuals and thevarious factors that may influence its constitution, and the majorgoals being pursued.


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Value in Business MarketsValue in Business Markets

Value in Business markets is defined as

the economic, technical, service andsocial

benefits received

by a customer firm inexchange 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.


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Value can be expressed in

Monetary Terms

Net Benefits Value is what a customer gets for the price he

pays


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Estimating CustomerValueEstimating CustomerValue

Methods

Focus Group

Customer interview Internal test

Conjoint Analysis


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The Determinants of DemandThe 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, Yd

Consumers tastes, T

T

he amount spent on advertising the product, Ao 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)


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These Relationships May beThese Relationships May be

Represented As:Represented As: A demand function - the general

mathematical form Qd = f(Po,Po,Ps,Yd,Ao,Ac,As,I,C,E)

A demand curve

Price

Quantity Demanded

The demand curve shows the quantity that would

be bought at each price, for some fixed

combination of all other factors


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The Demand CurveThe Demand Curve

D-curve shifts when anything except own-

price changes

Own Price

Quantity Demanded

A demand-curve shows the quantities sold at each

price, assuming other things do not change.

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.


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Concepts ofElasticityConcepts ofElasticity

Own price elasticity is:

percentage change in quantity demanded, divided by percentage

change in price:

If demand isprice-elastic, revenue increases with lower prices.

If demand isprice-inelastic, revenue decreases with lower prices Cross-price elasticityof demand between substitutes is positive Income-elasticitydetermines how demand changes with customers incomes.

For most goods income-elasticity is positive. Advertising elasticityis important in deciding on advertising budgets. It is

positive.As the level of advertising increases, we would expect advertisingelasticity to fall.


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The DemandThe Demand--Curve:ExamplesCurve:Examples

Zero-elasticity at all prices

Price

Quantity

Ed = 0


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Infinite elasticity at all prices

Price

Quantity

Ed = g


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Unitary elasticity at all prices

Price

Quantity

Ed = -1

This curve is a rectangular

hyperbola such that price x quantity

is a constant


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A Linear Demand Curve

Price

Quantity

Ed = -1

Ed = 0

Ed = -g


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Demand and Marginal RevenueDemand and Marginal Revenue

A Linear Demand Curve

$

Quantity

Ed = -1

Ed = 0

Ed = -g

Marginal Revenue


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Industrial demandIndustrial 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 otherhas to be used.

Cross Elasticity of demand It is the reaction of

sales of one product to a price change inanother product. Eg. Demand for Aluminiumdoors.


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If the cross elasticity of the substitute

products is high, it indicates that the

products compete in the same market.


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Determinants ofOtherDeterminants ofOther

Elasticities

Elasticities

Income Elasticity

Type of good

necessities - salt, drinking water, zero elasticity

luxuries, zero at low levels of income then high whenincome 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


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The Demand Curve for anThe Demand Curve for an

Individual FirmIndividual Firm Depends on the conditions of competition For a monopoly, industry demand curve is the

firms demand-curve

Under perfect competition, demand is infinitely

elastic at the market price

Where competition is amongst a few firms it

depends on each firms market share and rivalsreactions


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Elasticity and the Power ofElasticity and the Power of

BuyersBuyers Buyer power has two components price sensitivity of buyers (looser version of

the elasticity concept)

bargaining power of buyers


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Bullwhip EffectBullwhip 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


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Symptoms of the Bullwhip EffectSymptoms of the Bullwhip Effect

Excessive Inventory

Poor Forecasts

Insufficient and/or excessive capacities Unavailable Products

Long Backlogs

Costs forExpedited Shipments and Overtime


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Impact ofOrdering Strategies onImpact ofOrdering Strategies on

Bullwhip EffectBullwhip Effect

Nave forecast order only what is ordered

Exponential smoothing at =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 thanorder + cumulative backlog

Order what is ordered + this period backlog

(not cumulative)


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Cross Elasticity of DemandCross Elasticity of Demand

(CPed)(CPed) Cross price elasticity (CPed) measures theresponsiveness of demand for good X followinga 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 importantdistinction between substitute products andcomplementary goods and services.


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Identify some SubstitutesIdentify some Substitutes


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Identify some ComplementsIdentify some Complements


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Cross Price Elasticity forCross Price Elasticity for

SubstitutesSubstitutes

Product Close

Substitute

Weak

Substitute

Good with no

relationship

Coca Cola

Cheese

Euro Star Journey

from London to Paris

Nescafe Filter Coffee

Ticket to a film at the

PVR Cinema in Saket


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Complementary GoodsComplementary Goods

Product Close

Complement

Weak

Complement

Good with no

relationship

Personal Computer

A bottle of expensive

white wine

Short Break Weekend

in Manali


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Cross Elasticity of Demand (CPed)Cross Elasticity of Demand (CPed)

+ = Substitutes+ = Substitutes

Substitutes: With substitute goods

such as brands ofrazors, an increase in

the price of one goodwill lead to anincrease in demandfor the rival product

Weak substitutes inelastic CPed

Close substitutes elastic CPed

Cross price elasticity

will be positive

+


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Cross Elasticity of Demand (CPed)Cross Elasticity of Demand (CPed)

-- = Complements= Complements

Complements:

Goods that are in

complementary demand

Weak complements

inelastic CPed

Close complements

elastic CPed

The cross price

elasticity of demandfor two

complements is

negative


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Get your calculators readyGet your calculators ready

CPeD = % change in qty D of product A

% change in price of product B

C l l t th CP D d t tC l l t th CP D d t t


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Calculate the CPeD and stateCalculate the CPeD and state

whether the goods arewhether the goods are

complements or substitutes?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% causesthe demand for pens to increase by 5%.

3. A 20% rise in the price of ice cream causesdemand 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.


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AnswersAnswers

A 10% rise in the price of fish may cause demand for chicken to increaseby 2%.

+2/+10 = +0.2

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 toincrease 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


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Importance of CPed forImportance of CPed for

businessesbusinesses Firms can use CPed estimates to predict:

The impact of a rivals 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 poundIf 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


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Applications of Cross ElasticityApplications 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


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Applications of Cross ElasticityApplications of Cross Elasticity

Effect on demand for

different modes of mass

transport following

introduction of road pricingschemes 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

Demand and Value

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