The total purchase value, or revenue earned by a product or service within a specified demographic at a given point in time (across a range or a time period), in a specific location, is known as market demand. To accurately ascertain demand, a strong focus on the demographic needs to be maintained.
If one does not accurately assess demand, production and inventory become difficult to manage (in case of a company offering professional services, this can mean many, long-term 'benched' resources with no work to perform. For a product company or finished goods manufacturer, this can be quite the nightmare with production AND inventory levels that are in excess of the units that will sell. This can lead to poor profitability.
Steps for Market Demand Analysis at infoAnalytica:
Step 1: Ascertain your demographic
Step 2: Decide whether the population within the demographic will purchase the product (potential market size, not actual market size)
Step 3 (Optional): What is the perceived value of the product (how much will the buyer pay per unit - see demand elasticity in the last paragraph)
Market demand is the total volume of a product or service that will likely be purchased (and not is purchased, or has already been purchased because clearly there is little demand left there until a future event) by a population (in this case, the universe) in a demographic. Market demand can vary significantly based on competitors (direct and indirect), market saturation, the economy of the geography under study, and in the case of mission-critical solutions, several other factors.
Certain concepts infoAnalytica uses to understand Market Demand for an offering
Market Minimum -The market minimum, is the revenue the solution can generate without any sales or marketing effort whatso ever. The parameters for this need to be defined, because otherwise, in our opinion, this always, if analyzed realistically, tends to zero. Also, if product development costs are part of a marketing budget, then in creating the product the company has already invested in marketing. Eventually, even responding to an inbound customer or channel partner's phone call is a sales or marketing cost. In our experience we have not worked with any companies that factor in the market minimum alone while investing in a product. What is more important to measure here is what infoAnalytica calls 'leverage'. Leverage ranges from brand strengths, criticality of market needs, existing distribution channels, and any customers who may have indicated a propensity to purchase the product owing to either a strong customer relationship or simply because the need for the product is high. Usually a market minimum will only be seen where there is absolutely no competitor in the segment - (e.g. when Facebook first started out, or back in the days of the Macintosh computer)
Market Potential -The Market Potential is the maximum revenue the solution can attract after all sales and marketing strategies and tactics have been realized and fully invested in. This occurs after marketing expenditure within an industry approaches infinity. There is no upward inflection in Sales beyond the point that market potential is fulfilled.
Primary Demand -e.g. 'All beer drinkers'
Selective Demand -e.g. 'All Budweiser drinkers'
How to estimate current demand
The Market-Build-up Method involves identifying the total of potential buyers in the market, and then estimating their potential purchase value
The Multiple-Factor Index Method can also be performed by assigning weights to different parameters such as sales, population, or ability to purchase
How to estimate future demand:
- Surveys or Interviews administered to a population sample, or industry experts respectively
- Test Marketing to a population sample and extrapolating the values if required
- Purchase histories and industry trends
Once demand is measured, additional factors such as demand elasticity can be determined. Elasticity of demand shows the relationship between changes in price and quantities sold. Since both these variables are measured in different units, elasticity is measured in percentage.