In the UK market,
warm summer weather led to a sales increase of 
23% for frozen sweets and 10% for chilled drinks.
In the US do-it-yourself market, stores reported falling sales of outdoor
product categories due to 
poor weather


In the automobile industry, sales of convertibles increase by 5.4% when
the temperature rises. In the US and Canada,
McDonald’s added technology that allowed them to recommend products based on outside
temperatures, but not adjust pricing.

Optimising profits
based on the weather


Despite the clear influence of the weather on the sales of certain products,
firms’ decisions on price, advertising or promotions can often be more a matter
of habit than reason. Indeed, several marketing departments’ practices show
that the links between the marketing decisions and the weather are still poorly
understood. Understanding these links would give them a framework to better
take the weather into account, and thus potentially increase sales and
profits. 

In a recent study, we help fill this gap by
studying how price and advertising expenses can be adjusted to the outside
temperature for “weather-sensitive” products.

The mapping of prices of such products on the French market shows discrepancies
in the order of 20% within a same geographical region and between regions.
Advertising expenditures can be concentrated on certain months of the year,
sometimes reaching more than twice the annual average. Our study helps
companies understand whether these practices of modulation in price and in
advertising expenses are justified and how they can be optimised in relation to
outdoor temperature.

Theoretical results of our study show that when the outside temperature
increases, price and advertising expenditures should be increased when:

 

·        
Demand is relatively insensitive to price changes;

 

·        
Demand more sensitive to price changes than to advertising changes –
that is, an increase in price impacts demand more than an increase in
advertising expenditures of the same intensity.

 

 

Yop yogurt as the
case study


We empirically tested our theoretical results for a well-known product in the
French FMCG market, the drinkable yogurt Yop. The
data used in our analysis included more than 1,300 sales and price observations
over a period of three years at nine different regional levels as well as
advertising expenses and outdoor temperature recordings from 1,100 weather
stations all over the French metropolitan territory. We studied the
relationship between temperature and price on the one hand, and between
temperature and advertising expenditures on the other.

Estimates show that Yop’s demand is consistent with our theoretical model. It
is not particularly price-sensitive (when price rises by 10%, demand falls only
by 5%) and more sensitive to price than to advertising (when advertising
expenditures rise 10%, demand increases by less than 1%). Most important, the
price and the advertising expenses were shown to increase with the temperature.

The ConversationIn sum, our
study can help firms better set prices and advertising expenditures according
to temperature. For brand products (monopolistic markets), the warmer it gets,
the greater firms’ ability to increase prices and advertising while increasing
sales. In such markets, rising temperatures strengthens the market power of
brands. For managers and their consulting firms, our study provides conceptual
tools confirmed by an empirical analysis that can lead to better-informed price
and advertising decisions and, ultimately, improve profits.

Source:
Bizcommunity