Discuss whether LF should reduce price or increase promotional expenditure in order to increase sales of Lemonfizz. Refer to your results from (a) and any other relevant information. (14 marks) [9707/33/M/J/2015]
As I mark some of the answers for this question for those who sat for the mock exam, I realise that many students were not able to give a good answer to the essay part of the question after doing the calculation of both AED (advertising elasticity of demand) and PED (price elasticity of demand), Many presented a simple but (unfortunately) superficial comment that LF should stop spending more money on promotion when they find that result of AED is highly inelastic.
Many students are found to have calculated wrongly the AED (can be referred to as promotional elasticity of demand). They did not notice that the statement given in the is "Increase promotional spending by $1m to $11m" and not "Increase promotional spending from $1m to $11m". There is a big difference on how you should calculate if word used is "by" or "from". So it is imperative that students more attention to the data given in the case.
However, students must take note that promotion is still essential to LF. The loss of potential revenue in absolute term can still be considered as significant to the business.
There are few answers which perplexed me as students mention that LF should engage in promotion tactic of offering BOGOF (Buy One Get One Free) in order to encourage the target market to buy more of LF drink. There is a failure to assess how such approach can significantly hurt LF's financial bottomline because for each drink its give for me, it will be a cost to LF. So the question is how will LF improve its profit performance. In addition, there is a danger the the use of BOGOF may undermine the brand image of LF as the consumers may see that the drinks are 'cheap'. It must be understood that the margin for fizzy drinks are not very high.
Some students recommended due to the inelasticity of the AED, LF should not further pump in money for promotion and even went to the extent that LF should reduce its promotional expenditure. Their justification is that LF should rely on its brand since it has been around 20 years already. This unfortunately is not a sound argument. Students have to consider the pressure of competition. And even if LF has been operating for a long while does not mean they should 'slack' on its promotional effort. Think about how Coca-cola having to battle against its industrial rival, Pepsi. Despite being very well-known and having operated for so many years, Coca-cola still continue to invest a substantial amount of money for promotional purpose and allocate budget to find innovative ways in which they can engage its target market.
Furthermore, students some have a narrow view with regards to the information they can use for discussion in their answer and could not see the potential of looking at other information which can help them provide a better analysis and arguments. For example, despite the PED having high elasticity, it does not guarantee that LF will make a profit. And to be able to determine whether profit may actually fall, students should look into the variable cost of production.
So please take note, that if a question ask students "... and any other relevant information," they should attempt to look for information in the other parts of the cases and also to ascertain any other information which is not presented in the case that can still be relevant for discussion such as competitors' future actions or their reactions in response to LF's tactical marketing approach and the effectiveness of the current promotional approach use. For the latter, students must take note that the inelasticity in AED must be due to unattractive advertisement and poor promotional campaign. As such, students should make recommendations to LF to explore methods of promotion such as utilising social media and mobile marketing since they are targeting at the younger generation.
In addition, students can give suggestions to LF in introducing a creative promotion campaign that can engage the target audience. Students can make reference to the previous practices of other well-known canned drinks producers such as Coca-Cola (please watch the below videos) to give specific details on how such campaign can be made. Students can just mention how LF can explore the use augmented reality, social media, and QR code to engage the customers in order to introduce a more impactful marketing that can help increase the sales which will possibly even change the elasticity of AED for the better.
Video: 'Share A Coke' campaign ...Coca Cola, a marketing genius!!!
Video: Coca cola Creates First Ever Drinkable Advertising Campaign
In past I did mention not to bring in other companies for discussion and focus at the company stated in the case. Because make reference to other companies beyond the case study often divert the students' answer making it not or less relevant. However, in this case, students can just mention how LF can follow the approach that has been made by other well-established fizzy drinks manufacturers and look at their customer engagement promotional practices as a benchmark to design its own.
For those who do not know what I am saying here. Please look at the answer guide provided by Cambridge for this question.
Cambridge's Answer Guide:
Although AED is less than 1 (+0.5) this does not mean that advertising is a waste of money. An increase in sales of 5% if maintained over the course of a year would be 13.5 million litres extra – potentially $8.1m. [90% of 300 m = 270m litres. 5% of this = 13.5m × $0.60 = $8.1m] However, production costs of $4.745m ($0.35 × 13.5m) must be taken into account.
PED may be elastic (5 / – 3.33 = – 1.5) and there would be an increase in revenue [270m ×$0.60 = $162m but 283.5m × $0.58 = $164.43]. However, that does not necessarily mean an increase in profits. Again, production costs must be accounted for. [270m × $0.35 = $94.5m but 283.5m × $0.35 = $99.25m so profit will actually fall.]
Other considerations:
• How does a change in price or advertising fit in with other elements of the marketing mix?
• The actions of competitors may be important. If they are increasing advertising can LF afford not to respond? What sort of advertising would be most effective? LF has made good use of new forms of communication in the past. Is it necessary to increase advertising spending?
• How were the PED and AED estimates arrived at?
• Are they reliable? Much depends on the reaction of competitors to either decision – and these reactions could change the elasticity estimates.
Evaluation:
• Does LF want to enter into a price war with competitors – this could be damaging? Is competing on price the most effective approach for the market leader? Could social media be used more extensively – to the young consumers of LF – and would this achieve an increase in sales without a substantial increase in promotion spending?
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Though not relevant for A-Level study, here is an additional video to look into the execution of "Share A Coke" for your further knowledge.
Video: How Coca-Cola cans are printed with names
Very Very Very Interesting Marketing Strategies! Thankyou Sir!
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