Knowing the YED of a product may help a firm respond to changing economic situations and help the firm to plan ahead.
If a firm is producing inferior goods.
Demand will increase during periods of recessions and economic
downturns. Therefore, at the present moment (in recession) Tesco may be
advised to advertise its value products. This may attract customers
trying to survive on a tight budget.
If the economy was booming, then firms like Tesco, should try to
promote luxury items (e.g. Organic bread). These good will sell better
as incomes are rising.
If a firm is producing an inferior good and economic growth in long
term is positive, then they should consider diversifying into producing
normal goods. For example, a firm producing black and White TVs should
switch to colour and then HD Tv’s. Note what is a luxury good today may
become an inferior good tomorrow as changing technology changes consumer
expectations about goods.
If a firm knows that YED of a good is over 1. Then it means it is
income elastic (luxury good). This means that demand will be sensitive
to changes in income. High economic growth may lead to a boom in sales,
but, the firm should be aware that this boom in sales could coming
crashing to an end if the economy went into recession. Therefore, firms
should be nervous about overstretching themselves. There may also be a
case to diversify.
Types of.....
Types of Products
Certain
types of products are more affected by income elasticity. Consumers
usually take care of their basic needs when income elasticity is high.
For example, people need food, water, shelter and personal-care items.
However, consumers often cut back on luxury items when their incomes are
limited. Consequently, marketers of sports cars, vacations and
computers may need to offer extra incentives to spur sales, including
discounts, long-term payments or "no money down" deals. Food companies
and restaurants are not exempt from income elasticity. Small food
companies may need to lower prices to compete with generic brands, items
consumers often buy during tough economic periods. When a company's
production costs get too high, it may also cut portions or sizes of
their brands, or use cheaper paper in packaging.
Types of Customers
A
strategy for a small companies is to focus marketing efforts on
higher-income consumers when consumer income elasticity is high. These
individuals may be less sensitive to price changes. Marketers may also
target certain types of consumers known for being the first to buy new
products. "Innovators" are the consumers who are first to buy new
products. They typically represent about 2 percent of a company's
market, according to The Business Journal online. Adopters are the next
group of consumers to buy new products, representing about 15 percent of
a company's customers. Savvy small companies may stand to earn higher
revenues and profits by selling their products in locations innovators
and adopters typically shop. For example, a small manufacturer may start
selling more to specialty stores if this is where the innovators and
adopters shop.
Product Life Cycle
Income
elasticity also comes into play with product life-cycle management.
Overall demand for products are usually higher during their introduction
and growth stages. The challenge comes as a product ages and more
substitutes become available. This usually happens in the maturity or
decline stages of the product life cycle. A small company may need to
diversify its product line to attract consumers with less disposable
income. One way to accomplish this is to provide new features, flavors
or fragrances for the products while keeping prices the same. A small
company may also need to find new uses for their products to attract
customers with more disposable income. For example, a consumer soap
manufacturer may find that its products also sell well among workers in
plants and factories. The plants and factories would be the new market
-- one that may be less sensitive to price changes. And these entities
would foot the bill for the products instead of the consumers.
