What Is Market Demand Analysis?

by Osmond Vitez; Updated September 26, 2017

Companies use market demand analysis to understand how much consumer demand exists for a product or service. This analysis helps management determine if the company can successfully enter a market and generate enough profits to advance its business operations. While several methods of demand analysis may be used, they usually contain a review of the basic components of an economic market.

Market Identification

The first step of market analysis is to define and identify the specific market to target with new products or services. Companies will use market surveys or consumer feedback to determine their satisfaction with current products and services. Comments indicating dissatisfaction will lead businesses to develop new products or services to meet this consumer demand. While companies will usually identify markets close to their current product line, new industries may be tested for business expansion possibilities.

Business Cycle

Once a potential market is identified, companies will assess what stage of the business cycle the market is in. Three stages exist in the business cycle: emerging, plateau and declining. Markets in the emerging stage indicate higher consumer demand and low supply of current products or services. The plateau stage is the break-even level of the market, where the supply of goods meets current market demand. Declining stages indicate lagging consumer demand for the goods or services supplied by businesses.

Product Niche

Once markets and business cycles are reviewed, companies will develop a product that meets a specific niche in the market. Products must be differentiated from others in the market so they meet a specific need of consumer demand, creating higher demand for their product or service. Many companies will conduct tests in sample markets to determine which of their potential product styles is most preferred by consumers. Companies will also develop their goods so that competitors cannot easily duplicate their product.

Growth Potential

While every market has an initial level of consumer demand, specialized products or goods can create a sense of usefulness, which will increase demand. Examples of specialized products are iPods or iPhones, which entered the personal electronics market and increased demand through their perceived usefulness by consumers. This type of demand quickly increases the demand for current markets, allowing companies to increase profits through new consumer demand.

Competition

An important factor of market analysis is determining the number of competitors and their current market share. Markets in the emerging stage of the business cycle tend to have fewer competitors, meaning a higher profit margin may be earned by companies. Once a market becomes saturated with competing companies and products, fewer profits are achieved and companies will begin to lose money. As markets enter the declining business cycle, companies will conduct a new market analysis to find more profitable markets.