3.1.3 Marketing Management

AQA A-Level Business Studies Interactive Study Resource

BIZ-OMICS | 3.1.3 Marketing Management: Demand & Elasticity

Demand and Elasticity Analysis

Understanding Demand

Demand represents the quantity of a good or service that consumers are willing and able to purchase at various price levels during a specific time period. The relationship between price and quantity demanded is typically inverse – as price rises, quantity demanded falls, and vice versa (the law of demand).

Understanding what influences demand is crucial for businesses when making decisions about pricing, production levels, and marketing strategies. Changes in demand can significantly impact a business's revenue and profitability.

Influences on Demand

1. Price of the Product

The most direct influence on quantity demanded. Generally, as price increases, quantity demanded decreases (law of demand), and as price decreases, quantity demanded increases. This inverse relationship occurs because:

Higher prices reduce consumers' purchasing power
Consumers switch to cheaper substitutes
Some consumers are priced out of the market entirely

2. Consumer Income (Real Income)

Changes in consumer income significantly affect purchasing power and demand patterns:

Normal goods: Demand increases when income rises (e.g., restaurant meals, new clothing, holidays)
Inferior goods: Demand decreases when income rises as consumers trade up to better alternatives (e.g., value supermarket brands, bus travel when consumers can afford cars)
Luxury goods: Demand increases significantly when income rises (e.g., designer fashion, premium cars, fine dining)

Real income refers to income adjusted for inflation. Even if nominal income stays the same, rising prices reduce real income and purchasing power, potentially decreasing demand.

📊 UK Example: Income Effects During Cost of Living Crisis (2022-2023)

Context: High inflation (10%+) eroded real incomes even when nominal wages increased slightly.

Impact on Demand:

Premium supermarkets (Waitrose, M&S): Saw declining footfall as real incomes fell – demand for premium goods decreased
Discount retailers (Aldi, Lidl): Gained market share as consumers traded down – demand for value products increased
Dining out: Restaurant bookings fell as discretionary spending reduced
Own-brand products: Demand surged as consumers sought savings

This demonstrates how real income changes directly influence demand across different market segments.

3. Price of Substitute Goods

Substitutes are products that can replace each other because they satisfy the same need or want. When the price of a substitute changes, it affects demand for the original product:

If the price of a substitute increases, demand for the original product increases (consumers switch to the relatively cheaper option)
If the price of a substitute decreases, demand for the original product decreases (consumers switch to the now-cheaper substitute)

Examples of substitutes:

Butter and margarine
Coca-Cola and Pepsi
Train travel and coach travel
Cinema tickets and streaming services
iPhone and Samsung Galaxy

📊 UK Example: Streaming Services Competition

Scenario: In 2023, Disney+ reduced its monthly subscription price from £7.99 to £4.99 (with ads option), while Netflix maintained prices at £10.99 for standard plans.

Impact: Disney+ became a cheaper substitute for Netflix, leading to:

Increased demand for Disney+ subscriptions (250,000+ new UK subscribers in following months)
Decreased demand for Netflix as price-sensitive consumers switched
Netflix responded by introducing own cheaper ad-supported tier (£4.99) to compete

This shows how substitute product pricing directly influences demand – when Disney+ became cheaper, it attracted customers away from more expensive alternatives.

4. Price of Complementary Goods

Complements are products consumed together – purchasing one increases the likelihood of purchasing the other. When the price of a complement changes, it affects demand for the related product:

If the price of a complement increases, demand for the original product decreases (the combined purchase becomes more expensive)
If the price of a complement decreases, demand for the original product increases (the combined purchase becomes more attractive)

Examples of complementary goods:

Cars and petrol
Printers and ink cartridges
Games consoles and video games
Strawberries and cream
Bread and butter

📊 UK Example: Electric Vehicles and Charging Infrastructure

Context: Electric vehicles (EVs) and charging infrastructure are complementary goods.

Impact of Charging Costs:

When electricity prices surged in 2022 (tripling in some cases), the cost of "fueling" EVs increased significantly
Public rapid charging costs rose from ~£0.30/kWh to £0.70/kWh+
This reduced demand for new EV purchases as the total cost of ownership increased
UK new EV registrations growth slowed compared to previous years

Positive Example: Conversely, government grants reducing home charging installation costs (complement) increased demand for EVs by reducing total ownership costs.

5. Consumer Tastes, Preferences and Fashion

Changes in consumer preferences, influenced by trends, fashion, advertising, and social factors, significantly affect demand:

Fashion and trends: Products become more/less desirable based on current styles
Health consciousness: Growing awareness increases demand for healthy products, decreases demand for unhealthy ones
Environmental concerns: Sustainability trends increase demand for eco-friendly products
Celebrity endorsements: Can rapidly increase demand for products
Social media influence: Viral trends drive sudden demand surges

📊 UK Example: Plant-Based Food Trend

Shift in Preferences: Between 2019-2023, UK consumer preferences shifted significantly toward plant-based diets due to health, environmental, and ethical concerns.

Impact on Demand:

Plant-based products: Demand surged – UK plant-based market grew to £1.5 billion (2023)
Greggs Vegan Sausage Roll: Launched January 2019, sold 2.5 million units in first 7 weeks
Oat milk: Sales increased 71% year-on-year (2020-2021)
Traditional meat products: Slight decline in per capita consumption
Supermarket response: Tesco, Sainsbury's, M&S all launched extensive plant-based ranges

This demonstrates how changing consumer tastes directly shift demand curves for entire product categories.

📊 UK Example: Fast Fashion vs Sustainable Fashion

Changing Preferences (2020-2024): Growing environmental awareness, particularly among younger consumers (Gen Z), shifted preferences toward sustainable fashion.

Demand Changes:

Vintage and second-hand: Platforms like Vinted and Depop saw explosive growth (Vinted UK users: 5 million+ in 2023)
Sustainable brands: Increased demand for brands like Nobody's Child, Reformation
Fast fashion backlash: Some consumers reduced purchases from ultra-fast fashion brands
Brand responses: H&M Conscious collection, Zara sustainability lines launched to meet changing preferences

6. Advertising and Marketing

Effective marketing campaigns can increase consumer awareness, change perceptions, and directly increase demand:

Brand awareness: Introduces products to potential customers
Perception changes: Positions products as desirable or necessary
Emotional connections: Creates brand loyalty
Product differentiation: Distinguishes from competitors

📊 UK Example: Compare the Market's Meerkat Campaign

Campaign Launch: 2009 – introduced Aleksandr Orlov meerkat character

Impact on Demand:

Brand awareness increased dramatically
Market share grew from minor player to UK's most-used comparison site
Website traffic increased by millions
Meerkat toys reward scheme drove customer loyalty and increased usage
Consistently high advertising recall rates (50%+ unprompted awareness)

The campaign directly increased demand for the service by making the brand memorable and creating emotional engagement.

7. Population Size and Demographics

Changes in population size and structure affect overall market demand:

Population growth: Increases overall demand for most products
Aging population: Increases demand for healthcare, retirement services, mobility aids
Birth rate changes: Affects demand for childcare, education, baby products
Immigration: Can increase demand and introduce new product demands

📊 UK Example: Aging Population and Healthcare Demand

Demographic Trend: UK population aging – over-65s projected to represent 24% of population by 2043 (up from 18% in 2018).

Impact on Demand:

Private healthcare: Increased demand (Bupa, Nuffield Health seeing growth)
Retirement housing: McCarthy & Stone, retirement village operators experiencing higher demand
Pharmacies: Increased prescription volume
Mobility products: Growing market for stairlifts, mobility scooters, walking aids
Cruise holidays: Significant growth as over-65s have time and disposable income

8. Seasonality and Weather

Predictable seasonal patterns and unexpected weather variations influence demand:

Seasonal demand: Ice cream in summer, heating in winter, toys at Christmas
Weather variations: Unexpectedly hot weather increases demand for cooling products; cold snaps increase heating demand
Holiday periods: Christmas, Easter, summer holidays create demand spikes

📊 UK Example: 2022 Heatwave Impact

Event: July 2022 – UK experienced record-breaking 40°C temperatures.

Immediate Demand Surges:

Fans: Sold out nationally – Argos, B&Q, Screwfix depleted stock within hours
Portable air conditioning: Amazon sales increased 800%+, widespread stockouts
Ice cream: Supermarket sales doubled week-on-week
Bottled water: Sales increased 50%+ as consumers stockpiled
Paddling pools: Completely sold out across major retailers
Sun cream: Boots reported 300% sales increase

This demonstrates how unexpected weather events can cause dramatic short-term demand shifts.

9. Interest Rates and Credit Availability

The cost and availability of borrowing affects demand for expensive items typically bought on credit:

Lower interest rates: Cheaper borrowing increases demand for houses, cars, home improvements
Higher interest rates: Expensive borrowing reduces demand for big-ticket items
Credit restrictions: Stricter lending criteria reduces demand from credit-dependent purchases

📊 UK Example: Interest Rate Rises 2022-2023

Context: Bank of England increased base rate from 0.1% (Dec 2021) to 5.25% (Aug 2023) to combat inflation.

Impact on Demand:

New car sales: Declined as finance costs increased (monthly payments rose significantly)
Housing market: Demand fell as mortgage costs soared – average mortgage payment increased by £500+/month
Home improvements: Demand for extensions, renovations declined as borrowing became expensive
Furniture retailers (DFS, Sofology): Sales fell as consumers delayed purchases requiring finance
Discretionary spending: Reduced as consumers' disposable income squeezed by higher mortgage/loan payments

10. Expectations of Future Prices

Consumer expectations about future price changes influence current demand:

Expected price increases: Consumers buy now to avoid higher future prices (demand increases)
Expected price decreases: Consumers delay purchases waiting for lower prices (demand decreases)
Sales announcements: Can reduce immediate demand as consumers wait for discounts

📊 UK Example: Pre-Budget Fuel Purchasing (2010)

Scenario: March 2010 – speculation that Chancellor would increase fuel duty in upcoming budget.

Impact:

Demand for petrol surged in days before budget announcement
Long queues at petrol stations across UK
Some stations ran out of fuel entirely
Consumers filled tanks and even jerry cans expecting immediate price increases

Modern Example: Black Friday sales announcements reduce demand in October/early November as consumers wait for discounts, then surge demand on sale days.

Summary: Influences on Demand

Influence	Increase Causes	Decrease Causes
Price	Price decreases	Price increases
Income	Income rises (normal goods)	Income falls (normal goods)
Substitutes	Substitute prices increase	Substitute prices decrease
Complements	Complement prices decrease	Complement prices increase
Tastes	Product becomes fashionable	Product becomes unfashionable
Marketing	Successful campaigns	Negative publicity
Population	Population/target demographic grows	Population/target demographic shrinks
Interest Rates	Rates fall (for credit purchases)	Rates rise (for credit purchases)

Price Elasticity of Demand (PED)

Having understood the various influences on demand, we now examine how responsive demand is to one specific influence: price changes. Price Elasticity of Demand measures the responsiveness of quantity demanded to a change in price.

PED = (% Change in Quantity Demanded) / (% Change in Price)

Where: % Change = ((New - Old) / Old) × 100

PED Value	Type	Meaning
PED > 1	Elastic	Demand is responsive to price changes
PED < 1	Inelastic	Demand is unresponsive to price changes
PED = 1	Unit Elastic	% change in price = % change in quantity

📊 UK Example: Tesco Petrol Pricing

Scenario: Tesco raised petrol prices from £1.30 to £1.43 per litre (10% increase). Sales fell from 2 million to 1.9 million litres (5% decrease).

Calculation:

% Change in Quantity = ((1.9 - 2.0) / 2.0) × 100 = -5%

% Change in Price = ((1.43 - 1.30) / 1.30) × 100 = 10%

PED = -5% / 10% = -0.5 (inelastic)

Interpretation: With PED of 0.5, petrol demand is inelastic. People need fuel for essential journeys with limited short-term alternatives, allowing retailers pricing power.

📊 UK Example: M&S Clothing Sale

Scenario: M&S reduced fashion prices by 15%. Sales volume increased by 30%.

Calculation:

PED = 30% / -15% = -2.0 (elastic)

Interpretation: Fashion has elastic demand due to many substitutes and discretionary nature. The price cut significantly increases volume, justifying M&S's sale strategy.

Price Changes and Revenue

Demand Type	Price Increase	Price Decrease	Strategy
Elastic (PED > 1)	Revenue decreases	Revenue increases	Lower prices
Inelastic (PED < 1)	Revenue increases	Revenue decreases	Higher prices

Total Revenue = Price × Quantity

📊 UK Example: Virgin Trains Revenue

Scenario: Sold 50,000 tickets at £80. Increased to £88 (10%), sales fell to 46,000 (8%). PED = 0.8 (inelastic).

Revenue Analysis:

Original Revenue = £80 × 50,000 = £4,000,000

New Revenue = £88 × 46,000 = £4,048,000

Increase = £48,000 (+1.2%)

Insight: Inelastic demand allowed price increases to boost revenue despite losing some customers.

Income Elasticity of Demand (YED)

Income Elasticity of Demand measures how quantity demanded responds to changes in consumer income.

YED = (% Change in Quantity Demanded) / (% Change in Income)

YED Value	Good Type	Meaning	Examples
YED > 1	Luxury Good	Demand increases more than income	Designer fashion, sports cars, luxury holidays
0 < YED < 1	Normal Good	Demand increases with income	Basic clothing, groceries
YED < 0	Inferior Good	Demand decreases as income increases	Value brands, bus travel

📊 UK Example: Waitrose (Luxury Good)

Scenario: UK incomes rose 8% (2012-2015). Waitrose customers increased 18%.

Calculation:

YED = 18% / 8% = +2.25

Interpretation: YED of 2.25 shows Waitrose products are luxury goods. For every 1% income increase, demand rises 2.25%. Benefits greatly during economic growth but vulnerable in recessions.

📊 UK Example: Primark (Inferior Good)

Scenario: During 2008-2010 recession, UK incomes fell 6%. Primark sales increased 9%.

Calculation:

YED = 9% / -6% = -1.5 (negative)

Interpretation: Negative YED shows inferior good characteristics. As incomes fell, consumers traded down from premium retailers to budget options. Primark benefits during economic downturns.

Interactive Elasticity Calculator

Scenario Generator

Target Markets and Market Segmentation

Introduction to Market Segmentation

Market segmentation divides a broad market into sub-groups based on shared characteristics. This allows businesses to:

Target marketing more precisely and cost-effectively
Develop products meeting specific needs
Create relevant promotional messages
Identify market gaps and opportunities
Build stronger customer loyalty

Types of Market Segmentation

1. Demographic Segmentation

Dividing markets based on measurable population characteristics.

Variable	Examples	Business Application
Age	Children, Teenagers, Adults, Seniors	Toys, skincare, financial services
Gender	Male, Female, Non-binary	Fashion, cosmetics, grooming
Income	Low, Middle, High income brackets	Retail positioning, luxury goods
Education	Secondary, A-Level, University	Publishing, professional services
Family Stage	Single, Married, Young families	Housing, holidays, cars

📊 UK Example: Saga (Age Segmentation)

Segment: Over-50s demographic

Strategy: Saga exclusively targets 50+ consumers with tailored holidays, insurance, and financial services.

Marketing Mix:

Product: Accessible accommodation, medical facilities, cultural tours
Price: Premium pricing justified by specialised service
Place: Magazine ads, direct mail, though now online presence
Promotion: Emphasises safety, comfort, expertise rather than adventure

Success: Become synonymous with quality for over-50s, commanding premium prices in growing market.

📊 UK Example: Gymshark (Age & Gender)

Segment: Young adults (16-30), fitness enthusiasts

Strategy: Founded by 19-year-old, grew targeting young fitness enthusiasts through social media influencers.

Marketing Mix:

Product: Trend-driven designs, body-sculpting fits, limited editions
Price: Mid-range (£20-60), between budget and premium
Place: Direct-to-consumer online, pop-up experiences
Promotion: Heavy social media (Instagram, TikTok), fitness influencers

Results: Reached unicorn status (£1bn+ valuation) by 2020 through precise targeting.

2. Geographic Segmentation

Dividing markets based on location, recognising regional variations in needs and preferences.

Variable	Examples	Relevance
Region	England, Scotland, Wales, NI	Cultural preferences, regulations
Urban vs Rural	City centres, towns, villages	Transport needs, lifestyle
Population Density	High, medium, low density	Delivery feasibility, store locations
Climate	Regional weather patterns	Seasonal products, heating systems

📊 UK Example: Greggs (Geographic Strategy)

Segment: High footfall urban and town centre locations

Strategy: Strategically locate stores based on geographic factors, with high concentration in Northern England and Scotland.

Geographic Adaptations:

London stores: Smaller formats, extended hours, higher prices, grab-and-go focus
Motorway services: Larger stores, family meal deals
Town centres: Larger seating, broader menu, student deals in university towns
Scotland: Greater emphasis on traditional products like Scotch pies

Success: Over 2,300 stores optimised for specific geographic markets.

3. Psychographic Segmentation

Dividing markets based on lifestyle, personality, values, and attitudes - understanding why consumers buy.

Variable	Description	Application
Lifestyle	Activities, hobbies, interests	Outdoor brands, fitness, travel
Personality	Outgoing, cautious, ambitious	Financial products, cars, fashion
Values	Environmental, ethical, family-oriented	Sustainable brands, premium positioning
Social Class	Income, education, lifestyle aspirations	Luxury brands, mass market

📊 UK Example: innocent Drinks (Values-Based)

Segment: Health-conscious consumers valuing natural products and sustainability

Strategy: Built brand around psychographic values rather than demographics.

Psychographic Alignment:

Product: "Nothing but fruit", no added sugar, natural ingredients
Sustainability: B-Corp certified, carbon neutral since 2007
Brand personality: Quirky, friendly tone attracts those rejecting corporate formality
Social mission: innocent foundation donating 10% of profits

Results: Captured 73% of UK smoothie market at peak by aligning with consumer values despite premium pricing.

4. Behavioural Segmentation

Dividing markets based on consumer behaviour - actual purchase patterns and product usage.

Variable	Examples	Marketing Implication
Purchase Occasion	Regular, special occasion, seasonal	Timing of promotions
Usage Rate	Heavy, medium, light users	Loyalty programs, incentives
Brand Loyalty	Loyal, switchers, uncommitted	Retention vs acquisition strategies
Benefits Sought	Quality, price, convenience, status	Product positioning

📊 UK Example: Tesco Clubcard (Behavioural)

Segment: Multiple behavioural segments identified through purchase data

Strategy: Clubcard launched 1995, revolutionised UK retailing by tracking every purchase.

Behavioural Insights:

Purchase History: Personalised promotions (baby products to parents, wine offers to wine buyers)
Frequency: Different rewards for frequent vs occasional shoppers
Basket Composition: Premium recommendations to premium buyers
Price Sensitivity: Value promotions to price-sensitive segments

Results: Enabled Tesco to dominate UK grocery (30%+ share) for two decades through precise behavioural targeting.

Choosing Target Markets

Influences on Target Market Selection

Factor	Considerations	Key Questions
Segment Size & Growth	Current size, Growth rate	Is segment large/growing enough?
Profitability	Customer lifetime value, margins	Can we achieve adequate margins?
Competition	Number of competitors, intensity	How saturated is this segment?
Company Resources	Financial, production capacity	Do we have resources to serve effectively?
Strategic Fit	Brand alignment, capabilities	Does segment align with our strengths?
Accessibility	Distribution, communication channels	Can we reach these customers?

📊 UK Example: Fever-Tree Premium Mixers

Target Decision (2004): Premium spirit drinkers wanting quality mixers

Market Context: Mixer market dominated by Schweppes and own-brands competing on price. Identified underserved segment: consumers buying premium spirits (£25+) but mixing with cheap tonics.

Selection Rationale:

Unmet Need: Premium drinkers wanted quality mixers
Segment Growth: Craft gin revival expanding premium spirits market
Profitability: Low price sensitivity - willing to pay premium
Differentiation: Natural ingredients, authentic sourcing
Competition: No established premium mixer brands

Results: Grew to control 50%+ of UK premium mixer market, revenues £250m+. Created entirely new category.

Niche vs Mass Markets

Niche Market Strategy

Focusing on small, specialised segments with unique needs.

✓ Advantages

Less competition from large firms
Strong customer loyalty
Premium pricing justified
Focused, efficient marketing
Deep expertise development
Lower marketing costs

✗ Disadvantages

Limited growth potential
Vulnerability to market changes
Lack of economies of scale
Resource constraints
Dependency on small customer base
Risk of larger firms entering

📊 UK Example: Brompton Bicycles (Niche Success)

Niche: Urban commuters needing compact folding bicycles

Advantages Realised:

Premium Pricing: £800-1,500 vs £200-400 standard bikes
Brand Loyalty: Cult-like following, many owners buy multiple bikes
Expertise: 40+ years refinement, patent protection
Less Competition: Large manufacturers don't focus on folding bikes

Results: Dominates folding bike niche globally, £40m+ revenues, 300+ employees. Sustainable, profitable by staying focused.

Mass Market Strategy

Targeting largest possible audience with broadly appealing products.

✓ Advantages

Economies of scale reduce unit costs
Higher revenue potential
Strong brand recognition
Distribution power
Risk spreading across customers
Investment capacity for R&D

✗ Disadvantages

Intense competition
High entry costs
Price pressure
Less customer loyalty
High marketing costs
Slower adaptation

📊 UK Example: Cadbury (Mass Market Success)

Mass Market: Chocolate for all UK consumers

Advantages Realised:

Economies of Scale: Millions of bars daily at low unit costs
Distribution Power: In virtually every UK retail outlet
Brand Recognition: 95%+ brand awareness, purple colour iconic
Marketing Reach: Can afford TV advertising, major campaigns

Results: ~35% UK chocolate market share, £500m+ annual sales. Mass market scale essential for profitability.

Adapting the Marketing Mix

Once target market selected, adapt the 4Ps (Product, Price, Place, Promotion) to match segment needs.

Product Adaptation Examples

Target Market	Product Adaptation	UK Example
Affluent consumers	Premium materials, exclusive features	Waitrose Duchy Organic, Burberry
Price-sensitive	Essential features, basic packaging	Aldi Essentials, Lidl basics
Health-conscious	Organic, low sugar/fat, clear labels	M&S Balanced For You
Time-poor professionals	Convenience, pre-prepared, time-saving	Tesco meal kits, Nespresso pods

Price Adaptation Examples

Target Market	Pricing Strategy	UK Example
Premium segment	Premium/prestige pricing	Fortnum & Mason, Aston Martin
Value segment	Competitive pricing, value packs	Asda Low Prices, B&M Bargains
Students	Student discounts, subscriptions	Spotify student rates, railcards
Families	Multi-buy offers, family packs	Tesco Clubcard deals, Pizza Hut

Promotion Adaptation Examples

Target Market	Promotional Strategy	UK Example
Young adults (18-35)	Social media, influencers, TikTok	Gymshark Instagram, Boohoo
Older consumers (50+)	TV, print media, direct mail	Saga magazine ads, cruise lines
Business professionals	LinkedIn, trade publications	Microsoft LinkedIn presence
Environmentally conscious	Sustainability messaging, transparency	Patagonia activism, Co-op

Assessment: Test Your Knowledge

Part A: Multiple Choice Questions

Question 1: PED Calculation

A business increases price from £500 to £550 (10% increase). Sales fall from 200 to 180 units (10% decrease). What is the PED?

PED = -1.0 (unit elastic)

PED = -0.5 (inelastic)

PED = -2.0 (elastic)

Correct: A (PED = -1.0)
% change quantity = -10%, % change price = +10%
PED = -10% / 10% = -1.0 (unit elastic)
This means percentage changes are equal.

Question 2: Revenue and Elasticity

Demand for cinema tickets is elastic (PED = -1.8). To maximise revenue, they should:

Increase prices significantly

Decrease prices

Keep prices unchanged

Correct: B (Decrease prices)
With elastic demand (PED > 1), quantity is highly responsive to price.
A price decrease causes a proportionately larger increase in quantity, increasing total revenue.
Key principle: Elastic demand → lower prices increase revenue.

Question 3: Income Elasticity

During recession, incomes fall 5% and Poundland sales increase 8%. What type of good?

Normal goods

Inferior goods

Luxury goods

Correct: B (Inferior goods)
YED = +8% / -5% = -1.6 (negative)
Negative YED indicates inferior goods.
As incomes fall, demand increases - consumers trade down to budget alternatives.

Question 4: Segmentation Types

A company segments by environmental values, ethical production, and minimalist lifestyles. This is:

Demographic segmentation

Psychographic segmentation

Behavioural segmentation

Correct: B (Psychographic)
Psychographic segmentation divides by lifestyle, values, attitudes, personality.
Environmental values and ethical beliefs are psychographic characteristics.
Examples: innocent Drinks, Patagonia targeting value-driven consumers.

Question 5: Target Market Selection

Which is NOT a key factor when choosing target markets?

Segment size and growth potential

Personal preferences of business owner

Company's ability to serve segment

Correct: B (Personal preferences)
Target markets should be chosen based on strategic, objective factors:
• Market size/growth
• Profitability
• Competition
• Company capabilities
Personal preference alone is insufficient - commercial viability essential.

Question 6: Niche Markets

Which statement about niche markets is TRUE?

Niche businesses typically charge premium prices due to specialisation

Niche markets benefit from greater economies of scale

Niche markets are always more profitable than mass markets

Correct: A (Premium pricing)
Key niche advantage: ability to charge premium prices.
Specialisation and limited competition justify higher prices.
Generic alternatives don't meet specialised needs as well.
Example: Brompton bikes £1,000+ vs standard £200-400.

Part B: Calculation Questions

Calculation 1: PED and Revenue

Scenario: StyleHub sells 5,000 jackets at £60. If price reduces to £54 (-10%), sales increase to 6,000 (+20%).

Tasks: (a) Calculate PED (b) Is demand elastic/inelastic? (c) Calculate revenues (d) Should they reduce price?

Your Answer (a) - PED:

Your Answer (b) - Type:

Your Answer (c1) - Original Revenue £:

Your Answer (c2) - New Revenue £:

Calculation 2: Income Elasticity

Scenario: PoshNosh sells 50,000 meals monthly. Incomes rise from £45,000 to £49,500 (+10%). Sales increase to 62,500.

Tasks: (a) Calculate YED (b) What type of good? (c) If recession causes -8% income fall, predict sales

Your Answer (a) - YED:

Your Answer (b) - Good type:

Your Answer (c) - Recession sales: