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Demand analysis is a study of the reasons underlying demand for a product or service. The aim is to estimate and predict customer demand for a product or service in a particular market. That way, the company can anticipate sales and adopt the right marketing mix.
Why demand analysis is important
Demand is the lifeblood of business. Producers will create a product or service if the market demands it. They are optimistic when market demand is great and strongly growing and pessimistic when demand is small and weak.
Demand analysis helps companies to forecast market analysis and make business decisions. Its output helps them to develop new products, design appropriate pricing policies, allocate marketing and advertising expenses, plan an expansion, and build effective distribution.
Companies can choose to reduce or increase product prices by observing trends in consumer demand for their products. Manufacturers cannot set prices for their products without the first understanding of market demand.
Key variables
Several variables that companies observe in examining the demand for a product include:
- Income level. In general, the higher the income, the higher the demand for a product or service. When we have more money (higher income), we can buy some goods. We might specify individual income into disposable, which reflects the amount of money available for spending on products and services.
- Population. The population is, of course, the primary determinant of demand because of the more significant the population, the higher the opportunity to sell products. Not only the population, but variables such as population growth and population distribution (based on education, gender, and income) are also eligible for analysis.
- Availability and price of substitutes. The substitute product is the closest competitor. For example, Coke and Pepsi are both close substitutes for each other and compete directly. There are also imperfect substitutes, for instance, non-soda drinks, which, although not in direct competition, also need to be considered because they determine the elasticity of demand for a product.
- Taste and preferences. Tastes and preferences form the characteristics of a market. They exist as a result of culture or advertising, which provides information and knowledge about products and services.
