Promotional Elasticity of Demand (CIE A Level Business)

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

     [1]

 

Step 2: Calculate promotional elasticity of demand

  [1]

 

  [1]

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

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

   

   [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.

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].