How to Measure Product Demand for Businesses - 5 Ways
While the demand for essential services and staple goods generally stays consistent regardless of price differences, this may not be the case for every item. In fact, price, exclusivity, seasonality, and functionality can all come into play when it comes to fluctuations in product demand.
What is Product Demand?
Product demand (also referred to as market demand) is a term that describes how much customers desire a company's product in a given period. The demand for the product is determined by multiple factors - the number of people looking for the product, how much they are willing to pay, and the quantity available for consumers to purchase.
Fluctuations in market demand occur over time due to predictable patterns like seasons or unexpected external factors like economic disturbances and natural disasters.
Generally, when a larger number of people desire a specific product, the product demand increases. This may result in price surges, as the more demand there is, the more people are willing to pay. When the demand decreases, the price tends to follow this downward trend.
When merchants and businesses are organizing their inventory management and replenishment schedules, observing current and past market demand can reveal trends in the company's sales data to inform future purchasing decisions and prevent understocking or out-of-stock situations.
5 Ways to Measure Product Demand
There are various ways to measure and forecast product demand. Accurately estimating the level of demand can help to optimize daily processes such as labor scheduling and inventory stocking. In order to find the right balance, companies can consider the 5 common approaches.
1. Past Demand Analysis
This is a great first step for identifying product demand trends. By reviewing past sales records and adding up the total sold units over a given time period, businesses can isolate seasonal spikes or dips in sales.
This will give management insight into what the company can expect in the coming year. Though it will not account for factors such as changes in marketing strategies, marketplace demand, or competitor product shifts, the past demand analysis provides a reliable general overview.
2. Marketing Projections
When a company increases its marketing efforts, the inventory will also need to be adjusted to meet the influx of demand caused by the new incoming customers.
If an organization's marketing scheme aims to add X amount of new customers, the company should also estimate that X amount of shoppers will be equal to X number of sold products, give or take a few percent.
3. Competitor Data
This tactic is especially useful for small businesses without sufficient internal sales data. Creating a competitive pricing strategy for similar products or newly developed items by analyzing competitors' demand will provide a stable starting point for demand forecasting.
4. Global Economic Trends
It is also important for businesses to pay close attention to the state of both local and global economic trends. Periods of local economic struggle or a global depression can affect product demands to varying degrees.
5. Recent Performance Estimations
Estimating future purchases based on recent sales performance can be helpful, especially for new product lines without historical sales records. Businesses should pay attention to any declining numbers in sales, especially as the initial popularity of the product tapers off, and adjust inventory levels accordingly.
Key Factors that Affect Product Demand
Many determinants come into play when anticipating sales. Each of these variables will affect product demand in different ways. Therefore, understanding the key factors is a great place to start so that companies are aware when assessing changes in marketing, production, and product development strategy.
The relationship between the product's price and the demand for its quantity is generally inverse, with the demand decreasing as prices increase.
For example, consumers usually choose to purchase larger quantities of a product when the item costs less. This pricing factor is what leads to organizations having price wars with competitors.
The income of consumers greatly affects their purchasing power, which can directly influence the demand for a product. In many cases, an increase in the household income also increases a product's demand (assuming other factors remain constant).
When a consumer's income increases, the individual will have more capital to purchase luxury or non-essential items for the family. The relationship between income and demand can be assessed by grouping products into four categories- normal goods, essential goods, inferior goods, and luxury goods.
The preferences of consumers can be connected to factors such as habits, trends, standards of living, demographics, lifestyles, and more. When these factors change, the tastes and preferences of consumers will also shift.
Related Goods Price
There are two types of related goods to consider-
- Complementary Goods
When consumers expect the price to change for a product in the future, the short-term demand for that product may be affected.
For example, if customers expect a product's price to drop in the future, this would decrease present demand.
Marketing catches the attention of consumers to inform them of products and promotions and persuade them to make purchases. Strategic advertisements and promotions can also raise the demand for products.
This factor is relatively simple - with more people, the capacity to consume also increases, which leads to higher market demand and a larger target audience.
Governmental regulations, such as high tax rates on a product may increase the price point of an item, which can consequently lower the demand for that product.
Climatic Conditions and Seasons
Seasonality can also positively or negatively affect the demand for products. Man-made seasonality can include holidays and major events such as Valentine's Day and Superbowl weekends.
On the other hand, weather changes can also change consumption - higher demand for cold foods and drinks in the summer, and warm apparel in the winter.
For businesses looking to expand their offerings, develop new business ideas, or improve inventory management, strategically assessing product demand can help in optimizing operations and creating actionable insights.