What Is Demand In Business 

What Is Demand In Business

What is demand in business?

This is one of the important business terminologies you have to familiarize yourself with as a business owner.

This is because it can directly impact the profitability of your business.

So, let’s explore this important concept in the business world together.

Meaning of Demand – What is Demand in Business 

Demand is an economic term that refers to the number of people willing to buy a particular service or good for a particular price. 

It is a customer’s desire and purchasing power towards a particular service or product. 

Demand is significant for economic growth and even the success of any business

This is because, with it, companies would make sales. 

Businesses will not need to produce anything if there isn’t demand for that particular thing. 

When demand is high, it means many people desire and have the money to purchase that product. 

So, you would typically have an increase in sales. 

However, you’d have a decrease in sales when demand is low. 

Note that it isn’t enough for people to desire your product or service. 

If they cannot buy your product or service, their mere desire would not influence demand. 

This is because they will simply crave the product/service without the means to acquire it. 

Also, a company must have the means to adequately meet its demand to benefit from a surge in demand. 

If a company is having challenges meeting high demands, it won’t be able to increase its profit from the increase in demand. 

Let’s consider this relationship below. 

Supply and Demand – What is Demand in Business

Supply is another word you would likely hear whenever demand is discussed. 

This is because both concepts share a very close relationship. 

Demand is the number of people willing to buy a good or service at a particular price.

Supply is the number of goods or services the producers offer. 

For example, if you have a company that produces women’s bags, the demand is the number of customers that want your products and want to pay the price you offer them. 

On the other hand, supply is the number of bags you have available for sale. 

These two concepts go a long way in influencing the cost of market products. 

Prices tend to go up when supply is low, but demand is high. 

So, you have about 200 customers willing to buy your women’s bags, but you only have a limited supply of just 100. 

Those 200 customers would be willing to pay more money to get one out of the 100 bags. 

Likewise, when demand is low, but supply is high, the product or service cost will decrease. 

So, if you have 100 customers but 200 bags, the price of the bags will decrease. 

However, in a stable market condition, supply should match demand. 

This means the number of customers should match the quantity of services/products available. 

This is known as the equilibrium price. 

Types of Demand – What is Demand in Business 

As a business owner, it is important for you to know what demand means and the different types we have. 

Knowing this would help you understand how to properly analyze the situation and make sure you have enough products to match your demand. 

With that said, let’s look at the different types of demand below. 

Joint 

This refers to complementary services and goods. 

These goods or services often go together, for instance, milk and cereal or printer and ink. 

Because they complement each other, when one’s demand increases, the other will most likely experience this increase too. 

However, while this link exists, it doesn’t necessarily mean that it will always happen like this.

Sometimes, the demand for one won’t influence that of the other. 

Composite 

This is when one product is used for different purposes.

For example, milk is used for yoghurts, cheese, margarine, and cream. 

If the demand for one of these goods increases, it can cause a supply shortage of the remaining products. 

And when this happens, it can cause the prices of these products to increase too. 

Price – What is Demand in Business 

This relates to how much customers think they can spend on a particular product. 

Customers typically spend on a product according to the perceived value they think the product has. 

When a business is looking to launch a new product, it can get an idea of how much it should cost by analyzing its price demand. 

Short-run and Long-run 

This refers to consumers’ immediate reaction to a price change when the factors are the same. 

For instance, a product’s demand substantially reduces and causes the manufacturer to accumulate overhead costs. 

The manufacturer can make up for this by absorbing the loss.

However, the manufacturer would subsequently have to get used to the current situation. 

And there are several ways for them to do this; they may choose to increase their prices or decrease labour.   

Income – What is Demand in Business

Consumers often buy products and services according to their income.

The more income consumers make, the higher demand becomes. 

Simply put, people would buy more when they make more money. 

However, more income can also mean a change in taste and values. 

Consumers may think a service or product is not the best quality, but they keep purchasing it because that is within their income range.  

But once they start earning more income, they most likely will stop buying the product/service they think is of lower quality and opt for the high-quality ones. 

This may lead to the reduction of one market and the increment of another. 

Direct and Derived 

Direct demand refers final product’s demand. 

This includes food, smartphones, cars, clothing, and so on. 

This is also known as autonomous demand. 

Derived demand refers to the demand for intermediate products resulting from the need for another good. 

For instance, if yoghurt demand increases, then there will also be an increase in the demand for milk. 

In this illustration, the demand for milk depends on the demand for the final product made out of milk. 

Derived and joint demands are somewhat similar because there’s a link between products. 

However, they are different in that derived demand is only a result of the final goods. 

If there’s no need for the final product, then there’ll be no need for the products used to make them. 

Competitive 

This happens when there are alternatives to a particular product 

For instance, Coke and Pepsi, Burger King and McDonald’s, UPS and FedEx are all competitive products. 

Typically, the increase in demand for one would likely result in a decrease in demand for the other.

But if one has a limited supply, the other product will likely see an increase in sales. 

For instance, if you prefer McDonald’s but you visit a neighbourhood that has just Burger King, you can decide to patronize Burger King just because your preference is not available at the moment. 

This is why businesses can usually study their competitors’ prices and demand to determine the potential for their similar products. 

Factors that Determine Demand – What is Demand in Business 

Businesses and consumers play a very active role in determining demand levels. 

For businesses, their main goal is to increase demand and thereby drive up sales. 

To achieve this, businesses typically use several marketing and advertising strategies to get their products or services out. 

On the other hand, consumers influence demand by reacting to price changes, tastes, and income levels. 

All these actions often determine the demand level. 

Let’s consider these determiners below to understand them better and for you to know how to work them to your advantage to drive up demand. 

Price 

The price of a product can significantly affect its demand. 

Typically, when the price of a product reduces, consumers will rush the product. 

But the reverse would be the case if the product increases in price. 

Price expectation can also influence demand to a considerable extent. 

If consumers think a product’s price will increase, they will start stocking up on it before the price increment. 

Likewise, if they believe that the product’s price will reduce, they’d wait for the price to drop before they buy it. 

As a business owner, you can use this determiner to significantly increase the demand for your service or product. 

Consumers’ Income 

An increase in consumers’ income subsequently means an increase in demand. 

Simply put, the more money the consumers earn, the more they will be willing to spend.

However, sometimes, an individual won’t necessarily buy more of one product just because they now earn more money. 

For instance, just because consumers can afford a costly washing machine doesn’t mean they would keep buying the product. 

This is known as the marginal utility principle, which means a product stops being useful when it reaches a particular price or quality point. 

Competitive Products 

The price and availability of competitive (substitute) products can also considerably determine demand. 

If the price of your competitor’s product goes up, it may cause their customers to turn to a substitute product (in this case, your product). 

Likewise, if your competitor’s products are unavailable, customers can also turn to your product as an alternative. 

Consumers’ Preference – What is Demand in Business 

Consumers have certain preferences that influence their buying decisions. 

For instance, a gym can get more subscribers if more community members live healthier lifestyles. 

Other demographic and psychographic factors can also influence consumers’ preferences and, in turn, demand. 

Also, consumers’ perceptions about a brand can determine whether they will patronise it. 

For instance, if most people in a community are environmentalists, then a company that manufactures products that are considered harmful to the earth won’t have a high demand from that community. 

Market Size 

A big market would typically have a higher demand level, the same way a smaller market would have a lower level.

For instance, if the number of people who can afford exotic cars increases, that market will become bigger, and demand will also increase. 

But the reverse will be the case if the number of people who can afford exotic cars decreases. 

Complementary Products – What is Demand in Business 

Complementary products offer value to each other; they complement themselves, like jelly and peanut butter. 

The main product price often determines the demand for the complementary product. 

If the main product’s price increases, consumers may not buy the product as much as they used to, which means they also won’t buy the complementary product as much as they used to. 

Suppose you run a business that offers complementary products or services.

In that case, you need to pay attention to the condition of the main product’s market, as it can directly affect your business. 

Consumers’ Expectations

Consumers will purchase more of a product if they believe that the value of that product will increase soon. 

Examples include real estate, gold, stocks, and so on. 

Tips on How to Generate Demand 

If you want to improve sales in your business, you have to work on generating demand for your products. 

The good thing is that you can do this just by following the tips below. 

Carry Out Market Research 

Market research is all about evaluating factors in the market you belong to. 

In this case, the factor you need to pay the most attention to is your consumers. 

Market research will help you learn more about your consumers and their needs. 

There are so many ways to learn more about your consumers’ needs.

These include test groups, social media feedback, reviews, and surveys. 

Regardless of your method, you should know that you should not just gather this data but also consider them. 

If a particular issue keeps coming up, try your best to address that issue. 

Remember, consumers’ preference goes a long way in influencing demand, so if you can cater to their preference, you will attract them to your products. 

Offer Deals to New Customers 

When the price of a product is favourable, more people will want to buy that product. 

While you can’t offer a very low price to attract customers, you can offer your new customers a discount or special offer. 

Consumers may not want to buy a new product for the total price, but if there’s a discount, they may consider buying the product. 

Now, you should know that this tactic will only work if you offer a valuable product.

This is the only way to retain customers after attracting them with a discount or special offer. 

If your product does not offer consumer value, they may not see the need to keep patronizing you. 

But if they find the product useful, they might become return customers. 

Also, you should be very clear about the terms of the deal. 

Ensure that your prospects know that the deal is a one-off. 

This way, they won’t be disappointed and decide not to patronize you again if they return and find that the product is more expensive.

Put Up Customers’ Reviews on your Website 

Consumers tend to see value in products that other people find useful. 

This is why you should have a customer review section on your website to convince other shoppers. 

You should also work on delivering high-quality services and products to your existing customers.

This way, they’d mostly leave positive reviews about your business. 

If you have only negative customer reviews, prospective customers would rather patronize your competitors than patronize you. 

Put Out High-Quality Content

Content is everything in today’s world. 

Almost everyone uses the internet these days, and companies have taken advantage of this to promote their businesses to netizens through high-quality content. 

To generate demand for your business, you should create high-quality content that your target audience will relate to your website and social media platform. 

Your content can take on any media form as it is educational and informative. 

Use your content to educate your prospects about your products.

Conclusion on What is Demand in Business 

Demand determines how much sales and revenue a business makes. 

This is why every business owner should be concerned about the level of demand their products can generate. 

There are different determinants and types of demand. 

As a business owner, you should have a deep understanding of this as it can influence your product’s demand. 

Apart from this, there are also certain things that you can do to drive up demand for your products or services. 

Thankfully, this article has explored all of these topics. 

Now, all you have to do is follow the tips the best way you can.