Demand analysis is research conducted by companies that aim at understanding a customer demand for a certain product. It’s widely used by businesses to find out whether they can successfully enter the market and obtain the expected profit. During this process, the management decides on cost allocation, production, advertising, pricing, etc.
A new firm can easily figure out if there’s a significant demand for the product they offer and receive information about the number of competitors, the growth of the industry, etc. Demand analysis techniques allow entrepreneurs to determine the main business areas with the highest demand.
Low demand indicates that customers don’t need this specific product. Some of the causes of low demand include the product that is incompatible with the market, poor digital marketing, competitors that offer better products, etc.
Why is demand analysis important?
A company’s success or failure depends on the ability to identify and satisfy the demand of customers. That’s why in today’s market every business needs to understand consumer behavior and hold inventory accordingly. Demand analysis brings many insights essential for the decision-making of each business. After conducting research, companies obtain knowledge that can be used in sales forecasting, product pricing, costs on marketing and advertising, financial decisions, and production, etc.
Let’s take financial decisions, for example. The demand for a product affects the financial decisions of a specific company. If there’s a high demand for a firm’s product and it’s constantly growing, it requires additional costs on the production of more products and quality improvement, advertising to reach more customers, and boosting the capabilities of the marketing team.
The pricing policy of a company also depends on demand. Understanding the trend of customer demand helps businesses decide whether to increase or decrease the price for their product.
If you aim to understand your leads and customers and succeed in your industry, demand analysis is an integral part of your business. We’ve already revealed the importance of this process so now let's take a look at its objectives.
Objectives of Demand Analysis
- Evaluating a customer’s response towards a product
- Formulating pricing policy
- Sales forecasting
- Establishing production policy
Every business can fail when demand isn’t met. Hence, some of the decisions a company makes can be at risk. To decrease these risks, businesses can use demand analysis to determine the demand of customers for a particular product. This process has several objectives.
- Evaluating a customer’s response towards a product. The analysis is very necessary if you want to see customers’ reactions to your new product. This is the way to find out whether consumers are satisfied with your goods or there’s still something you can improve.
- Formulating pricing policy. You can set the prices based on the demand. Understanding the trend of consumer demand allows you to easily decide whether to increase or decrease the price for a particular product. Remember, companies can’t set prices without understanding the demand of their target audience.
- Sales forecasting. It enables you to make informed business decisions and predict your company’s performance. With an analysis, you can estimate your future sales. Sales forecasting gives you insight into how to manage your firm’s cash flow, resources, and workforce. Besides the right allocation of resources, it helps you predict sales revenue.
- Establishing production policy. It enables you to define the gap between demand and supply. You can estimate the necessary number of raw materials to maintain the regular supply. Also, your company can utilize resources to the maximum if operations are based on forecasts.
Now that you know that demand analysis can bring a lot of useful information necessary for the success of your business, let’s review several steps to do demand analysis.
How to Do Demand Analysis
- Identify the market
- Assess the business cycle
- Create a product that meets a particular niche
- Define your advantage
- Determine your competitors
To define whether a company can easily enter the market and obtain the expected profits, businesses use demand analysis that helps understand the customer’s need for a product or service. There are five steps to consider.
- Identify the market. The first thing you should do is to identify the market you would like to target with your new goods. For this purpose, firms conduct market surveys to receive feedback from customers about the product and understand the level of customer satisfaction. If clients demonstrate dissatisfaction with it, companies try to develop a product so that it meets the customer demand.
- Assess the business cycle. Once a market is defined, you can proceed to evaluating the stage of the business cycle. It has three stages. In the first, emerging stage, there’s high customer demand and a low supply of goods. In the second, plateau stage, the supply of products meets the market demand. In the third, declining stage, the demand for the products is lagging.
- Create a product that meets a particular niche. You need to create a product that suits a certain niche within the market. Develop your products so that they can meet the needs of your consumers. Also, customers should be able to distinguish your goods from competitors’ alternatives.
- Define your advantage. Developing products that can resolve customers’ problems allows you to create a sense of usefulness and increase demand. Let’s take iPods or iPhones, for example. These products increased the demand by entering the personal electronics market because they were perceived by customers as useful products.
- Determine your competitors. Define the number of your competitors and their market share. It depends on the stage of the business cycle you’re in. For example, in the emerging stage, you’ll have fewer competitors which will allow you to obtain a higher profit margin.
To sum it up, demand analysis is an essential step before making any business decisions. Companies should understand consumer behavior that defines the demand for a specific product within the market.
Last Updated: 16.07.2021