How Does Advertising Affect Price Elasticity?

Happy Sunday, fellow aficionados of marketing and economics! This weekend, I've been deep in thought about the captivating dance between advertising and price elasticity, and how these concepts have been absolute game-changers throughout my career. Over the years, they've helped me lead some of the most successful consumer goods companies in Indonesia. Can't help but love how theory meets practice!

What Is Price Elasticity?

First things first—let’s demystify price elasticity. In simple terms, price elasticity of demand measures how sensitive consumers are to price changes. If a small change in price leads to a big change in the quantity demanded, we say the product is elastic. Conversely, if demand hardly changes with price fluctuations, it’s termed inelastic. Imagine a cup of your favourite coffee. If the price rises from IDR 4000 to IDR 5000 and suddenly no one wants it anymore, that’s elastic demand. But if a beloved essential like milk rises from IDR 5000 to IDR 6000 and people still buy it, that’s inelastic.

?The Role of Advertising

?Now, here’s where it gets interesting! Advertising isn’t just about putting a flashy poster up or running a catchy jingle. It shapes consumer perceptions, creates brand loyalty, and, ultimately, influences how we respond to price changes.

?The Advertising Effect on Elasticity?

1. Creating Brand Loyalty: Effective advertising can turn a mere product into a beloved brand. When consumers feel a connection or loyalty, they’re less sensitive to price changes. Think of the iPhone. Apple has cultivated such a strong brand following that even a price hike might not deter its devoted fans. This means the demand for iPhones is more inelastic compared to other smartphones.

2. Perceived Value Enhancement: Advertising can elevate the perceived value of a product. If a luxury skincare brand spends significantly on a clever advertising campaign, consumers may believe its products are worth the premium price. Consequently, the demand remains strong even when prices rise. Consider how brands like L'Oréal, Molton Brown, position themselves with high-quality imagery and aspirational messaging. Consumers are often willing to pay more because they ‘believe’ the products are superior.?

3. Shaping Consumer Expectations: Advertising informs consumers about what to expect in terms of quality and price. If a new product hits the market with a heavy marketing campaign, consumers may anticipate a certain level of performance, making them less likely to switch to a cheaper alternative. Take a new energy drink, heavily advertised with athletes and influencers. Even if a competitor offers a lower price, consumers may stick to the advertised brand because they associate it with performance and quality.

Key Biases Influenced by Advertising

• Anchoring Effect

When we see a high-priced item advertised, our brains anchor to that price. If it later drops, we perceive it as a bargain, even if it’s still more expensive than competitors. Imagine a luxury watch advertised with an initial price tag of USD 10,000 . Later, the ad shows a discounted price of USD 7,000. The USD 10,000 price serves as an anchor, making the USD 7,000 price appear as a fantastic deal, even though it may still be beyond the typical budget for a watch. Consumers are more likely to purchase because they perceive they are saving money.

• Social Proof Effect

Seeing others buy a product (thanks to effective advertising) can make it more desirable. This social validation can lead to increased demand, even if the price goes up.

• Scarcity Effect

The scarcity effect refers to the psychological principle that people place a higher value on things that are perceived as scarce or limited. Consider a fashion brand promoting a “limited edition” collection. The advertisement emphasizes that only 100 pieces are available. This creates urgency and a fear of missing out (FOMO), compelling consumers to buy quickly to avoid the risk of missing out on something special. The perception of scarcity increases the perceived value of the product and makes consumers less sensitive to its price.

• Bandwagon Effect

The bandwagon effect is a cognitive bias where individuals adopt certain behaviours or beliefs because others are doing so. Social media campaigns often leverage the bandwagon effect. For instance, if a beauty product goes viral with numerous influencers showcasing their use of it, many consumers may jump on the trend, believing they need to purchase it too. The advertisement creates a sense of community and belonging, reducing resistance to price increases as they want to be part of the “in” crowd.

• Framing Effect

The framing effect occurs when people react differently depending on how information is presented, rather than just on the information itself. A food product may be marketed as “80% fat-free” instead of “contains 20% fat.” Although the two statements convey the same information, the positive framing (80% fat-free) is more appealing to consumers. Advertisers cleverly use this bias to shape perceptions and influence purchasing decisions, making people less sensitive to price increases as they feel they are making a healthier choice.

A Delicate Dance

In summary, advertising wields significant influence over price elasticity through brand loyalty, perceived value enhancement, and shaping consumer expectations. Understanding these dynamics allows us to craft strategies that resonate deeply with our audience. In the ever-competitive landscape of consumer products, leveraging behavioural finance insights can be a game-changer, allowing brands to build stronger connections with their audiences and increase sales, even in the face of rising prices. So, the next time you design a campaign, consider not just what you’re selling but how you can engage those cognitive biases to make your message even more compelling!

Next time you sip that coffee or apply your luxury cream, consider the subtle dance of advertising and price elasticity. It’s a thrilling blend of psychology and economics, transforming the way we perceive value in the marketplace.

?Cheers to savvy marketing and smarter consumers!