Elasticity of Advertising

1. Elasticity of Advertising Ted Mitchell

2. How to Increase Unit Sales • Increase Product Quality • Offer more Product Features/Service • Increase Advertising/Shelve Space • Increase Number of Salesmen • Lower the Selling Price

3. Increase the Advertising Q = kA ??? Quantity Sold A Advertising Effort

4. Increase the Advertising Q = kA ??? Quantity Sold A Advertising Effort

5. Increase the Advertising Quantity Sold X Q2 X Q1 A A1 A2 Advertising Effort

6. Increase the Advertising Quantity Sold X Q2 X Q1 A A1 A2 Advertising Effort

7. We want to know the elasticity of advertising! • For a $30,000 increase in advertising effort how many more units will we sell?

9. If we increase advertising by 1%, then we will increase of sales by 0.439%

10. Elasticity of Advertising = 0.44% Quantity Sold X 0.44% X A +1% Advertising Effort

11. In this case Point Elasticity is equal to the Arc Elasticity since the starting point (Q1,A1) is also the minimum values for the denominators

12. Remember • Always use arc elasticity based on the minimum of the two values unless the changes from the starting point are very very small, then use point elasticity • Using the minimum values for the denominator makes the starting point irrelevant • Minimums in the denominator ensure that only the independent changes in impacts are used in the elasticity

13. Definitions are Important • If Elasticity of Advertising = X% • Then a 1% change in advertising will result in a X% change in the quantity sold

14. Sample Exam Question #1 • Your current advertising elasticity has been estimated by market research to be 0.75 and you plan to increase you current advertising expense of $500,000 by $200,000 to $700,000. What increase in quantity sold should you anticipated due the bigger advertising effort? • %∆Q = Advertising Elasticity x %∆A • %∆Q = 0.75 x $200,000/$500,000 • %∆Q = 0.75 x 40% = 30% increase in quantity

15. Sample Exam Question #1 • Your current advertising elasticity has been estimated by market research to be 0.75 and you plan to increase you current advertising expense of $500,000 by $200,000 to $700,000. What increase in quantity sold should you anticipated due the bigger advertising effort? • %∆Q = Advertising Elasticity x %∆A • %∆Q = 0.75 x $200,000/$500,000 • %∆Q = 0.75 x 40% = 30% increase in quantity

16. Sample Exam Question #1 • You spent $150,000 on advertising in period 1 and $100,000 on advertising in period 2. The number of units sold due to advertising in period 1 was 20,000units and period 2 only 18,000 units were sold. What is you estimate of the advertising elasticity?

17. First make a table The change in advertising is very large … We Will Use Arc Elasticity Use the minimum points not the starting point in the denominator

18. First make a table The change in advertising is very large … We will Use Arc elasticity Use the minimum points not the starting point in the denominator

19. Calculate the Arc Elasticity

20. What Did we learn • How to estimate the elasticity of advertising from two points • The definition of advertising elasticity as the percentage change in units sold for a 1% change in Advertising effort. • How to use the elasticity of advertising for predicting changes to sales volume from a change in advertising expense

21. Any Questions on The Elasticity of Advertising?