Market Demand: What It Is & How to Use It for Your Business

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Researching market demand will give you crucial information for running a streamlined and effective business. The law of demand defines the relationship between price, supply and demand, which can influence everything from the size of your production order to how many employees you hire for customer support, marketing and more.

Overestimating market demand can result in wasted resources and loss of investment. However, severely underestimating market demand can also hurt your business initially as you scramble to scale up production to meet the demand without creating unhappy customers in the process. After all, you want your first customers to become loyal followers of your brand who make repeat purchases and leave excellent reviews.

Therefore, your goal should be to not only identify whether a market demand exists but to get a ballpark estimate of the total demand and your potential share of it to accurately scale your business.

What Is Market Demand?

Market demand refers to the sum of all consumers' individual demands, in which individuals have a desire to buy a product or service and an ability to pay for it. Market demand can be broken down into additional subsets, including no market demand, basic market demand and effective market demand. If your business sells something that is neither desirable nor affordable, then there's no market demand for it, and the business will surely tank. On the other hand, if people are willing to pay for something but few people can afford it, a basic market demand exists, but it's ineffective.

The goal of any business is to find the balance of an effective market demand where people not only want to buy the products or services but can afford to do so with relative ease. Of course, a high market demand will also raise competition as more businesses recognize the opportunity to cash in on the market, which can lower the price further and affect supply.

Knowing your target audience is also important but don't rule out the fact that other people might buy your product as a gift. For example, if you want to sell a men's grooming product, your intended audience is men within a certain age range. However, women might still buy your product as a gift and therefore affect the total market demand.

How Demand Affects Supply and Price

The relationship between demand, supply and price can be plotted on a graph to show what is known as the demand curve. This curve slopes down to the right, with price plotted on the vertical axis and quantity plotted on the horizontal axis.

The law of demand states that supply has an inverse relationship with price, displayed by the supply curve, which means that the quantity demanded will increase when the price decreases. On the other hand, any time demand increases, supply should increase to meet the new demand until it reaches market equilibrium again.

Because consumers must be able to afford the products they want to buy in order to create demand, a high price will always result in lower demand. This doesn't mean that consumers don't want to buy the product but simply means that they can't buy it, or will choose to put their dollars into something that will get them more perceived bang-for-their-buck.

Therefore, changing the price of your products is not the only thing that changes where they fall on the market demand curve. An income increase among consumers will also shift the demand curve since people's ability to pay will match their willingness to purchase the product.

Effective marketing and advertising campaigns can also drum up desire for a product when consumers can already afford to buy it. Demand will also shift based on the time of year for seasonal products. Supply and demand will inevitably ebb and flow due to numerous external factors, but they are both intertwined. Understanding the law of demand can help you set an appropriate price level for any given product to avoid excess or insufficient supplies, thus reducing wasteful spending.

Interpreting Market Demand

Once you know that people are willing to buy your product, you still need to do a little research. Exactly how much are they willing to pay for your product? It's time to do some more market research by conducting interviews and sending out surveys to answer this question.

Also take a look at any competitors that currently exist and gather information about how they price their products. Then, do some preliminary calculations about how much it would cost you to produce a competing product. Would you be able to sell it for a competitive price and still make a comfortable profit margin?

Substitute products can also affect the market demand of your product, and the milk industry is an excellent example of this. The demand for milk alternatives has increased, and the price of those alternatives has also decreased, making them more accessible to the consumers who want to buy them. As a result, the market demand for cow's milk has decreased. What substitute products exist in your industry that could potentially impact your market demand?

Meeting and Predicting Market Demand

Your market research should also allow you to determine the market size and market-penetration index. This information can help you understand the quantity you'll need to produce in order to meet market demand and the price level for which you should initially aim. You can always set a higher price or lower price as you gain first-hand experience in the elasticity of demand, which constantly shifts.

In the early stages of your business venture, it's wise to produce a limited supply of your product in order to gauge whether your market demand predictions were correct. It's better to run out of supplies and place backorders than to overproduce a product that you cannot sell, ultimately resulting in a loss of investment.

Over time, you can choose to analyze the number of sales and the number of potential leads that you generate compared to the product's price levels in order to forecast the market demand and keep your production lines running efficiently. If you're just starting out, try to gather similar data from your competitors to gauge market demand.

Creating Market Demand

Another type of market demand is called "latent demand". If consumers have no idea that a product or service even exists, there's no way for them to demand it. Therefore, latent demand refers to a possible future market demand that hasn't yet been cultivated among consumers.

Marketing and advertising are the primary ways to create market demand, and there are many different options and strategies that fall under this umbrella. You can run a social-media campaign, send out free products for testing and review, run sales and giveaways, set up pop-up shops and much more.

However, before you get too excited about creating market demand for your product, make sure you conduct appropriate market research in order to identify consumer pain points. Are you confident that your product solves those pain points? Do people react positively to the idea of your product in interviews, questionnaires and focus groups? Remember that the backbone of market demand is consumers' desire to buy the product, so you will get nowhere with a product that no one wants to buy.

Resources Related to Market Demand

Are you ready to analyze your industry's numbers? Look for ready-made market research reports if you're entering an existing market. You'll need to conduct your own research if you're essentially creating a brand-new market for an innovative product. The Small Business Administration has free market-research resources and serves as an excellent starting point.