A LevelBusinessCambridge (CIE)Revision NotesMarketingMarketing AnalysisPromotional Elasticity of Demand

Promotional Elasticity of Demand (Cambridge (CIE) A Level Business)

Revision Note

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

The Concept of Promotional Elasticity of Demand

  • Promotional elasticity of demand measures the responsiveness of demand for a product to a change in the amount of money spent on promoting it
     

  • In most cases, an increase in spending on promotional activity should increase demand for a product, whilst a reduction in spending on promotional activity should lead to a fall in demand

    • Promotional elasticity of demand determines by how much the level of demand will change when spending on promotional spending is increased or decreased
       

  • Businesses can use promotional elasticity of demand to determine

    • Whether increased spending on promotion is worthwhile

    • The effect on demand of reducing spending on promotional activity

    • The best use of promotional budgets

Calculating Promotional Elasticity of Demand

  • Promotional elasticity is calculated using the formula:

begin mathsize 16px style Promotional space elasticity space of space demand space equals space fraction numerator percent sign space change space in space quantity space demanded over denominator percent sign space change space in space promotional space spending end fraction space equals space ? space colon space 1 end style

 

  • The outcome is expressed as a ratio

    • This shows the percentage by which demand changes with each one per cent change in promotional spending

Worked Example

Yaltrex Industries currently spends $2.4 million each year promoting its range of e-scooters and e-bikes. It is considering running a TV advertising campaign costing $600,000 that it expects will increase annual sales by 30%.

Calculate the promotional elasticity of demand for Yaltrex's proposed TV advertising campaign.   [3 marks]

 

Step 1: Calculate the percentage change in promotional spending

Percentage space change space equals fraction numerator space Change space in space spending over denominator Original space spending end fraction space straight x space 100

equals space fraction numerator 600 comma 000 over denominator 2 comma 400 comma 000 end fraction space cross times space 100 space

equals space 25 percent sign     [1]

 

Step 2: Calculate promotional elasticity of demand

begin mathsize 16px style Promotional space elasticity space of space demand space equals space fraction numerator percent sign space change space in space quantity space demanded over denominator percent sign space change space in space promotional space spending end fraction end style

equals fraction numerator space 30 percent sign over denominator 25 percent sign end fraction   [1]

 

equals space 1.2 space colon space 1   [1]

  • In this case, for every 1% increase in promotional spending, demand is expected to rise by 1.2%

Interpreting & Using Promotional Elasticity to make Decisions

  • Businesses can use promotional elasticity of demand to determine whether changes in promotional spending are worthwhile

    • Where demand is responsive (elastic) to changes in promotional spending, increasing or decreasing spending can have a significant impact on product sales 

      • The percentage change in demand will be greater than the percentage change in promotional spending

      • The outcome of the formula will be greater than 1

      • In these cases, increased spending on promotional activity could be worthwhile

      • Reducing spending on promotional activity could cause a significant drop in demand so may be best avoided

    • Where demand is unresponsive (inelastic) to changes in promotional spending, increasing or decreasing spending will have a limited impact on product sales 

      • The percentage change in demand will be less than the percentage change in promotional spending

      • The outcome of the formula will be less than 1

      • In these cases, increased spending on promotional activity is unlikely to be worthwhile

      • Reducing spending on promotional activity is likely to have little impact on demand so may be an effective way to reduce costs

Worked Example

Vulkan Tours Ltd's marketing director has proposed increasing advertising spending in 2024 by 55% to pay for monthly magazine advertisements. She hopes these adverts will increase sales of its specialist educational travel packages by 25% over the year.

Explain why Vulkan Tours Ltd's directors may reject this advertising proposal. [3 marks] 

Step 1: Calculate the promotional elasticity of demand

   Promotional space elasticity space of space demand space equals space fraction numerator percent sign space change space in space quantity space demanded over denominator percent sign space change space in space promotional space spending end fraction

equals space fraction numerator 25 percent sign over denominator 55 percent sign end fraction

begin mathsize 16px style equals space 0.45 space colon thin space 1 end style   [1]

Step 2: Explain the outcome

  • Vulkan Tours Ltd's directors may reject this proposal because demand in response to changes in promotional spending is inelastic [1]. For every 1% increase in promotional spending, demand is expected to rise by just 0.45% [1], indicating that this significant increase in spending may not be worthwhile.

  • Promotional elasticity of demand can also help managers evaluate promotional options and select the option that is most likely to increase demand

    • The higher the outcome of the formula, the more responsive demand is to changes in promotional spending

      • Focusing spending on products with the highest promotional elasticity of demand is likely to be the best use of the promotional budget, as it is most likely to lead to increased sales

    • However, consideration of the affordability of promotional activity is also important

Worked Example

Flatfish Scuba's marketing manager is trying to decide how to promote its new range of watersports equipment.  She has determined the cost of three options and estimated the promotional elasticity of demand for each.

Option

Cost ($)

Promotional Elasticity of Demand

1. Advertising in specialist magazines

22,000

1.4 : 1

2. A viral campaign using social media

18,000

1.3 : 1

3. Sponsoring a national aquatic event.

40,000

1.6 : 1

Explain one benefit and one drawback of exclusively using promotional elasticity of demand to determine which option the marketing manager should choose. [6 marks]

Step 1: Explain one benefit

  • Promotional elasticity of demand shows how much demand is expected to increase with a change in promotional spending [1]. In this case, the marketing manager can see that sponsoring a national aquatic event would likely have the greatest impact on demand [1] because it has the highest value. For every $1 spent on this promotional activity, demand for Flatfish Scuba's products would increase by 1.6% [1].

Step 2: Explain one drawback

  • However, exclusively using promotional elasticity of demand to determine the choice of promotional activity does not take into account the cost of the promotion [1]. In this case, sponsoring a national aquatic event is the most expensive option, around twice the cost of the other options [1]. Flatfish Scuba could spend the same amount on both advertising in specialist magazines and a viral social media campaign and achieve better results [1].

Limitations of Promotional Elasticity of Demand

  • Promotional elasticity calculations should be used with caution when making decisions

    • Promotional activity is not always used to directly boost demand

      • It may be used to help build a brand image or increase brand loyalty, neither of which is shown by the promotional elasticity of demand value
         

    • It can be difficult to isolate the effect of higher promotional spending on a single product

      • This may distort the analysis of its effectiveness in increasing demand
         

    • It is difficult to determine the impact of promotional spending on a specific time period

      • Some campaigns are ongoing over an extended period of time and other factors, such as word-of-mouth promotion or changing consumer tastes, can influence demand over time

Examiner Tips and Tricks

Elasticity of demand calculations often require the use of estimates. Questioning the accuracy of these estimates is a good evaluative point, especially of calculations are relied upon to make business decisions.

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.