In the world of economics, “demand” refers to the desire and ability of consumers to buy or use a good or service. Demand is the underlying driver of economic growth.
The level of demand for your product or service depends on various factors. Below we take a closer look at the individual factors.
The best known factor is probably the price itself. Your pricing has an impact on how much demand there is for your product. This is based on the so-called law of demand. The law of demand states that a price increase leads to fewer people buying a product – and vice versa, that a lower price leads to increased demand.
The demand curve indicates how many units of a product are in demand at a given price. The shape of the curve is determined by two factors: the price of the good (on the y-axis) and the quantity demanded (on the x-axis). The typical curve follows the law of demand.
Besides the classic demand curve, there are also some special forms:
Higher net incomes allow potential customers to afford more. However, double income does not automatically mean that twice as much is consumed. Marginal utility (i.e. the increase in utility that occurs when an additional unit of a good is consumed) decreases with each additional unit. This fact is described by the first Gossen’s law. For example, the first ice cream on a nice summer day will probably taste better than the second or even third one.
Credit opportunities can also encourage your (potential) customers to consume more or higher priced products, such as cars or vacations.
The actual needs of your customers are of course important for the demand for your product or service. If your offer does not meet the needs of your customers, the other factors of demand will also be largely obsolete. What needs exist and how you can determine them, we show you in the article Customer Needs.
In this context, the so-called “jobs to be done” are also worth a look. This term refers to the overriding goals that customers want to achieve by buying a product or using a service. To take an example, this might mean “The customer doesn’t want a drill, but a hole in the wall.” A distinction is thereby made between functional, emotional and social jobs.
The market environment can also have an influence on the demand for your offer. Are there products or services that are similar to yours? If so, a price increase of these goods can result in an increased demand for your product. Of course, this works the other way around as well. To prevent competing offerings from being seen as “substitutes” for yours and causing this potentially undesirable effect, it helps to give your products features that set them apart from the competition. One example of this approach can be found with iPhones. To prevent the often cheaper Android smartphones from being perceived as an equal substitute, Apple always adds new innovations that make the phone unique – at least until the competition has followed suit.
Also, the price of complementary goods can affect demand for your offering. “Complementary goods” are those that are needed to use your products or services. An example of this is gasoline. When selling cars, a rising fuel price can also change the demand for your products. If you sell gas-guzzling SUVs, demand will tend to fall. If you sell fuel-efficient compact cars, then the rising price of fuel can cause demand to rise. This type of development was seen in the 1970s, for example. In the United States, for example, the oil crisis at that time caused demand to shift away from large cars toward economical Japanese imports.
As is well known, tastes vary – and can also change. Some products are born of their time and the demand for them is more the result of a trend than a real need. Keep this in mind, because hype-driven demand is often not sustainable. When did you last see a Fidget Spinner or watch a movie in 3D?
When customers expect the value of something to rise, demand for the corresponding good also increases. This was seen in the years 2005 to 2011: High demand for real estate led to rising prices. Demand remained high because buyers expected prices, and therefore the value of their homes, to continue to rise in the future. At some point, the bubble burst and prices fell. However, so did demand, although according to the law of demand one could assume that the opposite should have happened. The reason here, in addition to the general recession, was the expectation of potential buyers that prices and thus the value would continue to fall.
Assets such as cryptocurrencies and stocks are another example. This market is very volatile and can be heavily influenced by statements made by individuals. For example, Elon Musk’s tweets recently caused the expectations of many people to change more frequently. This not only affected the price of his own company Tesla, but also the prices of cryptocurrencies. Similarly, one of his statements about Messenger Signal led many investors to invest in the stock of a company with the same name, but completely uninvolved.
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