Design of Price and Advertising Elasticity Models

12 Pages Posted: 30 May 2017

See all articles by Rajkumar Venkatesan

Rajkumar Venkatesan

University of Virginia - Darden School of Business

Paul Farris

University of Virginia - Darden School of Business

Abstract

The marketing mix that a manager may deploy can affect the sales of a product and can be categorized under the traditional four Ps of marketing (product, price, promotion, and placement). But the perennial question managers face concerns the combination of these different marketing mix variables that will give them maximized sales, highest share, lowest inventory, or maximized margins. Quite often, these questions are answered by historical data: for example, past sales or market share for different levels of expenditures on these marketing mix variables. In this note, we consider the design of models that allow managers to obtain robust price and advertising elasticity estimates.

Excerpt

UVA-M-0805

Rev. Jun. 20, 2014

DESIGN OF PRICE AND ADVERTISING ELASTICITY MODELS

Introduction

The marketing mix that a manager may deploy can affect the sales of a product and can be categorized under the traditional four Ps of marketing (product, price, promotion, and placement). But the perennial question managers face concerns the combination of these different marketing-mix variables that will give them maximized sales, highest share, lowest inventory, or maximized margins. Quite often, these questions are answered by historical data: for example, past sales or market share for different levels of expenditures on these marketing-mix variables. In this note, we consider the design of models that allow managers to obtain robust price and advertising elasticity estimates.

Consider the following scenario: Belvedere vodka was introduced in the United States in 1996. This vodka traced its roots back to the Warsaw suburb of Żyrardów, Poland, and its production process went back more than 600 years. Lately, it had begun to observe a decline in its overall share of the vodka market. The company suspected the cause to be new market entrants that were capturing market share with effective advertising. To sustain the growth rate and defend its share from the competition, Belvedere was considering two options: increasing its advertising expenditure and/or reducing the pricing. Such a scenario is very common for most brands during the various stages of their brand (or product) life cycles. The first step toward solving this issue is to estimate the elasticity of a brand to its price and advertising.

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Keywords: market response models, price elasticity, advertising elasticity, marketing mix, marketing-mix regression

Suggested Citation

Venkatesan, Rajkumar and Farris, Paul, Design of Price and Advertising Elasticity Models. Darden Case No. UVA-M-0805. Available at SSRN: https://ssrn.com/abstract=2974687

Rajkumar Venkatesan (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/html/direc_detail.aspx?styleid=2&id=5808

Paul Farris

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-0524 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/farris.htm

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