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Demand Anlysis

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A measure of a market's sensitivity to increases or decreases in advertising saturation. Advertising elasticity is a measure of an advertising campaign's effectiveness in generating new sales. It is calculated by dividing the percentage change in the quantity demanded by the percentage change in advertising expenditures. A positive advertising elasticity indicates that an increase in advertising leads to an increase in demand for the advertised good or service.

Read more: http://www.investopedia.com/terms/a/advertising-elasticity-of-demand.asp#ixzz26vP0W4Xo

Advertising elasticity of demand (or simply advertising elasticity, often shortened to AED) is an elasticity measuring the effect of an increase or decrease in advertising on a market.[1][2]Although traditionally considered as being positively related, demand for the good that is subject of the advertising campaign can be inversely related to the amount spent if the advertising is negative. * |
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edit]Definition
Good advertising will result in a positive shift in demand for a good. AED is used to measure the effectiveness of this strategy in increasing demand versus its cost.[3] Mathematically, then, AED measures the percentage change in the quantity of a good demanded induced by a given percentage change in spending on advertising in that sector:[3]

In other words, the percentage by which sales will increase after a 1% increase in advertising expenditure assuming all other factors remain equal (ceteris paribus).[2] AED is usually positive.[3]Negative advertising may, however, result in a negative AED.
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[edit]Applications
AED can be used to make sure advertising expenses are in line, though an increase in demand may not be the only desired outcome of advertising.[3] The rule of thumb combines the AED with a known price elasticity of demand (PED) for the same good. The optimal relationship is denoted by:[1]

In words, "to maximize profit, the firm's advertising to sales ratio should be equal to minus the ratio of the advertising and price elasticities of demand."[1] As noted by Pindyck and Rubinfeld, firms should advertise heavily if their AED is high (they get a lot of bang for their advertising buck) or if their PED is low (since for every added sale there is significant profit).[1]
Thus, a comparison of PED and AED can also be used to determine whether more advertising is the correct strategy to maximise profits (e.g. for Heinz in the market for baked beans), or changing prices (as with supermarket own brands).

4. Advertisement Elasticity of Demand:
The degree of responsiveness of quantity demanded to the change in the advertisement expense of expenditure.
Ea= Change in quantity demanded x original advertisement expenses
Chang in advertisement expenses original quantity demanded
Important factors influencing Advertisement:
1. Promotional elasticity of demand will be affected, depending on whetherit is a new product or the product with a growing market.
2. The amount a competitor reacts to the firm’s advertisement.
3. The time interval between the advertisement expensed or expenditure and the unresponsiveness of the sales.
4. The influence of non-advertisement determinants of demands such as trends, price, income etc.
Uses of Advertisement Elasticity of Demands:
1. It helps the manager to decide the advertisement expense. If the advertisement is more than one, which means incremental revenue exceeds incremental expenses, then increased expenditure on advertisement can be justified.
2. The fire should observe the saturation point, where advertisement pays nothing or does not help in increasing sales revenue.
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Factors Influencing AED

1.Type of product i.e. whether the product is already existing or new product
2.Brand name.
3.Number of competitors and substitutes in the market.
4.Strategies of competitors
5.Frequency of advertisements.
6.Mode of advertisements.
7.Time of advertisements.
8.Other factors influencing demand like tastes, professions, income etc.

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Applications / Uses of AED
1.Helps in evaluating success of adverting campaign.
2.Helps the firms in deciding advertising expenditure or budget.
3.Helps in choosing more effective media for promotion.
4.Helps in withdrawing ineffective promotional campaigns.
5.Helps in strategic management to respond to competitor’s promotional policies.
6.Helps in building brands.

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Limitations of AED
1.Value of AED does not help in analyzing effect of advertising a single product.
2.Difficult to analyze the effectiveness of promotional strategies at a particular period of time, especially when the campaigns are over a long period of time
3.The Purpose of campaigns may be to create brands, rather than only influencing size of demand.
4AED does not take into account effect of other factors influencing demand.…...

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