Page 117 - Marketing the Basics 2nd
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going up over 30 per cent according to some analysts, and allowing Air Canada to have a great third quarter.
STEP 2. DETERMINE DEMAND AND SUPPLY
Once management declares the marketing objective of the product, the next step is to estimate the expected demand. Because no one can accurately predict the future correctly all the time, estimating market demand is more an art than a science. Statistical tools and methodologies greatly aid the decision making process, a seasoned manager however, knows when to go with their gut despite what the numbers may suggest. Under normal economic circumstances, relying on intuition is unnecessary because the relationship between price and quantity sold is usually inversely proportional; the higher the price, the lower the demand. Conversely, the lower the price, the higher the demand. This relationship can be illustrated by a demand curve. Before we delve into how to predict demand, we must first discuss issues related to supply.
SUPPLY SHORTAGES
The supply of a product creates exceptions to the demand-price relationship. When there’s a shortage of a product, and demand is unchanged, the mechanism that balances the market is a higher price. If the supply shortage persists, a higher price increases demand, since buyers believe it is better to have the product in their hands today while supplies last.
LUXURY GOODS
Another exception to the demand-price relationship is the existence of luxury goods. Luxury goods are products that are relatively price insensitive meaning demand doesn’t fall as much as the price increases. As such, if there’s too much supply of a luxury good, consumers will reject the product causing the price to fall. The reason being is that for high involvement products, the consumer is buying the prestige associated with the product, not the product itself. This happened with Gucci in the 1980s and 1990s when a greedy management expanded the once exclusive brand into