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Elasticity: marketing's magic metric

News, 21 September 2015

LONDON: Elasticity is a misunderstood and neglected metric that can help marketers choose the best prices, the best promotions, the best media and so achieve optimum brand value, a leading academic has argued.

Writing in the current issue of Market Leader, Robert Shaw, honorary professor of marketing analytics at Cass Business School, described popular metrics such as awareness, engagement, loyalty and satisfaction as being helpful for brand beauty contests.

"But to pragmatic decision-makers they're as useful as sunroofs on submarines," he said.

Take price – "the litmus test of successful marketing" – where a premium signifies brand strength, differentiation and customer preference.

Cutting the price should theoretically increase revenues and market share, but Shaw pointed to the cautionary tale of General Motors which chased market share and ended up bankrupt.

"Smart decision-makers scrutinise revenue-growth and also take account of cost-growth," he averred, and they can pinpoint the precise price to optimise brand value.

That could mean raising prices and conceding market share while growing brand value. Or the opposite. "There are no cast-iron generalisations and the right decision depends on the details of the value calculations," Shaw advised.

A similarly pragmatic approach needs to be taken to decisions on promotions, which consumers have come to expect, but which can often damage brand value.

Shaw highlighted cannibalisation and rebates as big destroyers of brand value but added that, "judiciously planned, promotions are a major source of value for brand owners".

Turning to media elasticity, Shaw said this was typically much lower than price or promotional elasticity, with the law of diminishing returns setting in rapidly.

But knowledge of diminishing returns curves could enable planners to set an overall media budget that would help them both to find the total budget that optimised value-added and to select a mix of media that optimised value for a given total budget.

"Elasticity is not an esoteric concept," he declared. "This neglected metric deserves to be better known and more widely used."

Data sourced from Market Leader