What Is the Relationship Between Supply & Demand and Customer Tastes in a Product?

The level of supply and demand for a given product is one of the strongest economic influences in sales volume, pricing, revenue and profit margin derived from it. When customers have strong tastes or preferences for a given product, the demand is typically higher than it is when customers aren't interested or are less passionate.

The law of demand in economics suggests that under normal circumstances when other conditions are constant, an increase in demand relative to supply leads to higher prices, while a decrease in demand relative to supply leads to lower prices. This is because companies want to maintain the equilibrium price point where sales volume and price are optimized to maximize revenue and profit. Understanding the tastes of customers allows companies to better generate demand and manage supply.

For a customer-centric business, the first step in marketing is to research the needs and preferences of a target market to figure out how to develop and promote a product that best matches. You want to know which features and benefits customers want that your company can best develop and offer. Along with assessing whether there is demand, you must consider your ability to make or acquire products at reasonable-enough rates to earn a profit. This is a supply-related concern.

Once a product solution is developed or acquired, marketing enters the promotional phase where ads, publicity, social media, personal selling and other forms of communication are used to present the value proposition, or mixture of benefits to targeted customers. Effective promotions are key in generate high levels of awareness and demand within your customer base. This is critical to tipping the scales of supply and demand in your favor.

The ultimate goal of any business is to get as much money as it can from each product. Some companies emphasize short-term profit maximization, while others use low initial price points to build a large customer base and to gain loyalty. Regardless, your ability to get customers, achieve high prices and earn good profits is based on the market's perception of your product's benefits compared to its price. Availability of substitutes is a consideration. Additionally, customer tastes change seasonally or based on various market factors. For instance, demand for snow gear in the Midwest peaks at the onset of winter. Managing the supply-demand relationship year-round is key so you don't have too little supply in high demand months and too much out of season.