Demand analysis is the research conducted by companies that aim at understanding customer demand for a certain product. Businesses generally use it to determine 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 for a specific product indicates that it does not fulfill customers' needs and perhaps has little value for them. Some of the causes of low demand include the incompatibility of products with the market, poor digital marketing, competitors that offer better alternatives, etc.
Why is demand analysis important?
A company's success or failure depends on the ability to identify and satisfy customers' needs. 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 process. After conducting research, companies obtain knowledge crucial for sales forecasting, product pricing, costs on marketing and advertising, financial decisions, and production.
Let's take financial decisions, for example. The demand for a product affects the financial decisions of a specific company. Suppose there's a high demand for a firm's product, and it's constantly growing. In that case, it requires additional costs on the production of more products and quality improvement, advertising to reach more customers, and boosting the marketing team's capabilities.
The pricing policy of a company also depends on consumer demand. Understanding the trend of customer demand helps businesses decide whether to increase or decrease the price of their product.
If you aim to understand your leads and customers and succeed in your industry, demand analysis should be 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 customers' response towards a product
- Formulating a pricing policy
- Sales forecasting
- Establishing a production policy
Any business can fail when they don't fulfill consumer demand. Hence, some of the decisions a company makes can be at risk. If your company aims to eliminate this possibility, you can use demand analysis to determine customer demand for a particular product. This process has several objectives.
- Evaluating customers' response towards a product. Gaining and monitoring customer feedback is vital if your goal is to see customers' reactions to your new product. This is a great way to find out whether consumers are satisfied with your goods or if there's still something you can improve.
- Formulating a pricing policy. You can set the prices after having analyzed the demand thoroughly. Understanding the trend of consumer demand allows you to quickly decide whether to increase or decrease the price for a particular product. Remember, companies can't set prices without understanding the inclinations of their target audience.
- Sales forecasting. It enables you to make informed business decisions and predict your company's performance. With a detailed analysis, you can estimate your future sales. Sales forecasting can give you insights and tips on managing your firm's cash flow, resources, and workforce. Besides the proper allocation of resources, it helps you predict sales revenue.
- Establishing a 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. Besides, your company can utilize resources to the maximum if your operations are based on forecasts.
Now that you know that demand analysis can bring a lot of valuable data for your business success, let's review how to perform 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: 22.03.2023
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