Demand Analysis - Definition, Importance, Steps, Parameters & Example
What is Demand Analysis?
Demand analysis is a research done to estimate or find out the customer demand for a product or service in a particular market. Demand analysis is one of the important consideration for a variety of business decisions like determining sales forecasting, pricing products/services, marketing and advertisement spending, manufacturing decisions, expansion planning etc. Demand analysis covers both future and retrospective analysis so that they can analyze the demand better and understand the product/service's past success and failure too.
Importance of Demand Analysis
For a new company, the analysis can tell whether a substantial demand exists for the product/service and given the other information like number of competitors, size of competitors, industry growth etc. It helps to decide if the company could enter the market and generate enough returns to sustain and advance its business.
Demand analysis helps in identifying key business areas where demand is highest and areas which needs attention as very low demand indicates different problems like either the customers are not aware of the product/service and more focus must be in advertisement and promotion or the customer needs are not met by current product/service and improvements are needed or competitors have sprung up with better offerings etc.
Steps in the Demand Analysis
Demand analysis process needs to be done in a structured manner for a particular market and affects the business strategy and decisions. Some of the steps which are to be followed for the analyzing the demand are:
1. Market Selection
Demand is linked to a market. Without knowing the market properly, demand cannot be analyzed. Every business would be operating in a single or multiple markets but it should be clearly known. The first step is understanding the market and knowing the demand trends for the particular product or service.
2. Product/Service category analysis
Next step would be to make sure which product or service is being used to analyze the demand. A company may be having a product portfolio of 20 products. Total demand would not give a picture at an individual level. It may happen that demand is huge for 5 categories and low for the rest of 15 but still overall demand is high. For analysis, the product category has to be selected. e.g. if a company is selling smart devices it needs to select phones or the tablets only for its purpose.
3. Understanding Business Parameters
Demand is never constant across a single year or a time. A less demand in a particular month may not be a sign of an issue with the product line but it may be that due to climate change, the demand of an item like an air conditioner may go low but it may again rise in summer season.
4. Understanding the competitors and partner trends
For an accurate demand analysis, we also need to see what our partners, vendors and suppliers are predicting in the market as they are also in the same market and product category. Also competitors performance and past sales can help us analyze the demand correctly.
Demand Analysis Parameters
The key drivers while determining demand are:
1. Product's own price
Price of the product plays an important role in demand analysis. If the price is high as compared to competitors or what the customer can pay, the demand would be affected.
It can be low or high depending upon the price point of the product or service.
2. Customer income
They buying power of customer would definitely impact the demand of a product. If the product or service is offered at a price point more than the affordability of a customer group then the demand would be low hence customer income needs to be analyzed for demand.
3. Price of competitor goods
As we discussed in the first 2 points about price and buying power, competitor's price adds to the equation and can affect the demand of product/service. If competitor is priced lower then the demand of that particular product would be more and vice versa. It can be different scenario in case of luxury of niche products.
4. Tastes & requirements of the customer
Consumer behavior has be to taken into account. The product or service has to align with the customer's preferences else there would be no demand for the product.
5. Expectations
Sometimes the customer has expectations from a new or existing product based on the overall industry landscape. e.g. if every competitor in the market is offering free warranty service but one company doesn't then most likely it would not be able to meet the customer expectations.
6. Number of customers in the market
The potential market is an important parameter for demand analysis as the customers drive the demand. if the customers are too low then even though the first 5 points are in favor still the demand would never rise as the customer base is too small for a viable business.
Demand Analysis Example
Below is the demand analysis for US restaurant industry (Source: Dun & Bradstreet)
It shows that market activity is highest in East North Central area. The figures are arrived by tracking the annual sales in each region. So for offering a particular product in this market, a company needs to analyze if they can do business in multiple sub-markets with decent demand or focus on sub markets or areas with high demand. Both aspects are part of demand analysis to be done by the company based on product or service parameters.
Hence, this concludes the definition of Demand Analysis along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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