What is promotional elasticity of a product?

Advertising Elasticity of Demand (AED) is a measure of effectiveness of increase in expenditure of advertising in increasing demand of a product. AED is always positive, meaning that the demand always increases with increase in advertising expenditure. Whereas values of this ratio below 1 mean that the increase in demand is less than the increase in advertising expenditure, while values greater than 1 indicate that the rise in demand is more than the rise in expenditure.

While this is a good way to estimate expected rise in advertising costs for growth in demand or the expected growth with rise in expense toward advertising, this is not the most accurate way. This ratio assumes that several other factors that may affect demand are constant, which cannot be the case in real life.

The formula is 

This ratio can lie between 0 and ∞ (infinity).

Advertising Elasticity of Demand Factors

The demand of a certain good/service depends on, apart from expense on advertising, the following to name a few factors:

1. Income of the people of the region (state of economy): Expensive advertising may not yield very good results if the region has been recently hit by an economic crisis where people have been laid off on a large scale and are struggling to make ends meet; or in a region with generally low income.

2. Price of the product: No matter how much money is put in the advertising, if a similar product is in the market for a lower price that may take away from the success of the advertising.

3. Quality/Appeal of the ad: High expense doesn’t always mean high quality in terms of audio-visual or content. Or the ad just may lack appeal for the demographic the product is for.

All these factors can alter the demand of the product, and hence the AED. Thus, AED may not be the most accurate measure of effectiveness of increase in advertising expenditure.

Examples of Advertising elasticity of demand

Let us take an example of Pizza chain. If the pizza outlet spends money on promotion of an existing variant of Pizza, then the demand of that Pizza can increase and stay at that level even after the promotions are over.

On the other hand, the impact of an offer regarding a discount offer at a pizza outlet may be drastically high but the same may not be true for an offer at a jewellery store.

Hence, this concludes the definition of Advertising Elasticity of Demand along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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Exhibit 27.11   Discount elasticity — an illustration.

Price elasticity (discount elasticity) is a measure of the responsiveness of sales quantity demanded to a (temporary) change in price, and it is determined by the following equation:

If ε > 1, demand is elastic. Any dip in price due to a price-off promotion is offset by a disproportionately large increase in sales volume. On the other hand, if ε < 1, demand is inelastic, a dip in price will result in a decrease in revenue.

Discount elasticity is essentially the price elasticity due to a temporary price reduction. Since consumers are much more sensitive to a discounted price promotion than a regular price reduction, the discount elasticity is a lot greater than the price elasticity.

Exhibit 27.11 provides an illustration of discount elasticity. The SKUs in this chart, with discount elasticity of less than 1 (such as B, M and P) will experience a decline in revenue (sales value) when promoted. Items such as these with low elasticity tend to possess high brand equity and can command a price premium. Discounting these products will result in the loss of revenue and profit.

Price promotions should be considered in the context of discount elasticities as well as the SKU’s profit margin. Low margin products need to be highly elastic to retain profitability when promoted.

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The advertisement expenditure has a direct effect on the demand for goods and services. In all modern businesses, advertisement plays a very important role. An increase in advertisement expenditure leads to an increase in the sale of a commodity. As advertisement has a saturation point, sales quantity increases up to a saturation point, and then it declines even if advertisement expenditure has increased by the businesses. The effect of advertisement expenditure by the firm on the demand for their product can be measured by advertisement elasticity of demand. This article describes the concept and degree of advertisement elasticity of demand.

Advertisement elasticity of demand is also known as the promotional elasticity of demand. It quantifies the change in quantity demand as a result of a change in advertisement expenditure. More specifically, it can be defined as the promotional change in quantity demanded of a product due to a proportional change in advertisement spending by the business firm. So, it is the ratio of the percentage change in the demand for a commodity with the percentage change in the advertisement expenditure as a promotional expenditure. Following is the formula to measure the coefficient of advertisement elasticity of demand.

EA= Proportionate or Percentage change in quantity demanded/Proportionate or the percentage change in the advertisement or promotional expenditure

EA = (ΔQ/Q)*100/ (ΔA/A)*100 = (ΔQ/ΔA)*A/Q

Where Q= Initial quantity; A=Initial units of advertising expenses; ΔQ= change in quantity demanded of goods; and ΔA= change in advertising expenses or the promotional expenses

Degrees or Types of Advertisement Elasticity of Demand

The advertisement elasticity coefficient is generally positive. The major types or degrees of advertisement elasticity of demand can be briefly explained below.

Relatively Elastic Demand (EA>1)

When a percentage change in quantity demand of a product is higher than the percentage change in advertisement expenditure by a firm then this is the case of the relatively elastic advertisement or case of advertisement elasticity of demand greater than one. It means a relatively lower percentage change in promotional expenditure beings a higher percentage increase in the quantity demand of a product.

Unitary Elastic Demand (EA=1)

It is the situation in which the percentage change in quantity demand is equal to the percentage change in advertisement expenditure of the firm. If a certain percent increase in advertisement expenditure brings an equal percentage change in sales volume of the business firm then promotional elasticity is equal to one.

Relatively Inelastic Demand (EA<1)

When the percentage change in quantity demand of a commodity is less than the percentage change in advertisement expenditure of the business firm then it is relatively inelastic demand resulted from the advertisement. It means a certain percentage change in the promotional expenditure by the business firm brings a change in sales volume by a lower percentage then it is the case of advertisement elasticity of demand less than one.    

The following table shows the summary of degrees or types of advertisement elasticity of demand.

Home Promotional Elasticity of Demand

(1) general: holding other variables constant, the percent change in demand that may result from increased promotional activity. Cf. price elasticity.

(2) retailing: the percent change in customer demand for merchandise that results from a percent change in promotional activity, when all other factors are constant. See elasticity of demand.