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Archive for February, 2012

Price Elasticity of Demand

Friday, February 10th, 2012

There’s an economics principle you might benefit from understanding because it can increase your revenues – the price elasticity of demand.

Price Elasticity – Petrol at $4 per Litre

If petrol rose in price tomorrow at your local bowser to $4 per litre would it affect the amount of petrol you would want to purchase? Contrast that answer to the opposite end and think how you would react to a $0.50 decrease instead. Would that affect your purchase?

Of course the change would affect the amount that you were willing to purchase. This is an economics calculation your local supermarket is always tweaking when it offers 2 -for-cheaper deals and specials. The supermarkets don’t just guess at the price elasticity of demand; they pretty well know how given groups will react to the price changes of specific products because they hire economists to continually rethink their calculations.

Cigarettes and Elasticity / Inelasticity of Demand

A single product may affect different people, in that different groups may have differing price elasticities of demand for that product. A simple example of this is to consider cigarettes.

Somebody with an inelastic demand will tolerate rather large increases in price with little or no effect on the amount of the product they are willing to purchase. In contrast to somebody who has elastic demand who will not buy the product with even a small price increase.

Nicotine addicts have an inelastic demand. New and aspiring smokers have an elastic demand. If you double the price of cigarettes tomorrow the (inelastic) addicts will fork out double the cash (with a grumble) and the (elastic) newbies will look to another vice.

There is only so much more money we are willing to pay for a good or service and that depends on some pretty predictable drivers.

Inelasticity of Demand is about that Price Stretch

If you’re a little confused about the terms elastic and inelastic don’t be worried, it’s quite simple.

An addict has inelastic demand, meaning that even though the price doubles overnight they are pretty much caught up in the buying of cigarettes regardless of the price. So, for a greater increase in price you will only see a few of those nicotine addicts quit smoking.

The new or aspiring smoker is said to have elastic demand. Even a small increase in price means a greater proportion will not purchase the cigarettes.

The Rationale Behind *Live* Documents

Wednesday, February 8th, 2012

When you invest resources authoring a business plan with a review date for 6 or 12 months into the future… what happens if one month later a direct competitor opens next door? Or you have only half the available finances you thought were there… or double the finances?

As Boring as Bat Shit

Do you pretend the environmental change didn’t happen (the osterich strategy)? Do you react from the seat of your pants (the John Wayne strategy)? Or do you manage *live* strategic documents that guide your business toward profit and sustainable enterprise (the sensible strategy)? Before you answer that question, I’ll add that the answer should continue to be correct over the long-term.

There is no way around the fact that business can be mundane and boring. I agree. While corporate strategies may have a certain theoretical coolness, the areas of finance, accounting, statistics, law and general reporting are on the short list for uncoolest thing to talk about at the bar on Friday nights.

A good example: the reputation of the humble business plan is as likely to clear a room as throwing a wounded skunk through the door. Strategic marketing documents fare little better. Accounting forecasts seem to have invisible duck fat all over them because nobody will even pick them up.

So I get it. I do. Most of what business is about is boring and you got into it to be your own boss, follow a passion and take surfing holidays in the Philippines.

Get Excited about Live Documents

But here’s the rub… you should be excited to open your business plans and marketing plans because that’s where you’re going to identify new opportunities and threats ahead of your competition.

Given that the person who knows more and is finding out about the market environment has the first chance to respond… who do you think is going to win from a standing start? You will. Your business will have a constantly updated dossier on everything that comes past your corporate ears – your competitors’ pricing, their suppliers, their major customers. This is how you manage to sell your goods and services to the right people at the right price in the right place using the right promotion and employing the right people who will develop ongoing customer / supplier relationships.

This is how you know when to purchase a new asset or to rent it. Or to diversify into new directions or to divest non-core business units and regroup. The marketplace is dynamic… it’s not a static world you push into your drawer for 12 months and review with a yawn over a coffee. These are the business trenches.

Because you want to figure out who and why those customers go to the competitor with their money… and when you understand the answer you have a chance to poach that customer with a more targeted offering.

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Misleading & Deceptive Conduct

Friday, February 3rd, 2012

It’s difficult for entrepreneurs and small business owners to know where the legal line is in marketing. I really do get that – they’re desperate to make conversions and, along the way, there are probably going to be casualties.

The Limitations on Australian Companies

However, in the modern world everybody should be aware that companies do have limitations on the claims they can make and the manner of selling they undertake to snag new customers. In the modern world it’s not enough to be greedy in business… even if you’re successful. You are going to be held to account for your marketing integrity.

The limitations for an Australian company are spelled out in the Competition and Consumer Act 2010. Prior to 1 January, 2011 this piece of legislation was more widely known as the Trade Practices Act 1974.

Any Australian company should understand what constitutes misleading and deceptive conduct under this legislation. And they should realise that:

No matter how a business communicates with you—whether it is through packaging, advertising, logos, endorsements or sales pitch—you have the right to receive accurate and truthful messages about the goods and services that you buy.ACCC

Legislation that Protects Consumers

When defining what constitutes misleading and deceptive conduct in business the ACCC provides these statements:

It is illegal for a business to make statements that are incorrect or likely to create a false impression. This includes advertisements or statements in any media (print, radio, television, social media and online) or on product packaging, and any statement made by a person representing your business.

For example, your business must not make false or misleading claims about the quality, value, price, age or benefits of goods or services, or any associated guarantee or warranty. Using false testimonials is also illegal.

When assessing whether conduct is likely to mislead or deceive, consider whether the overall impression created by the conduct is false or inaccurate.ACCC

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About the Author

Steven Clark Steven Clark - the stand up guy on this site

My name is Steven Clark and I live in the Derwent Valley in Southern Tasmania. I have an MBA (Specialisation) and a Bachelor of Computing from the University of Tasmania. I'm a mazer & a yeast farmer (making beer, fruit wine and mead as by-products of continuous improvement in my farming practices). I'm a photographer, although my film cameras are currently silent. I do not tolerate idiots. I do not tolerate bigotry. I do not tolerate excuses. Let's be clear, if you sit with my enemies you my are my enemy for life.

Blogger. Thinker. Brewer. Drinker. Life partner to the amazing and incredible Megan.

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