1.2.1 Demand

Demand

Key Definitions:

Demand: The amount of interest customers have in a product or service, but it depends on how much the customer is willing to pay for the product or service. 

Branding: The way a business makes either itself, or its goods and services memorable through promotional activity and USP.

Complementary Goods: Goods that are traditionally bought together, such as tea and milk.

Inferior Goods: Goods that see a sales decrease as household incomes increase, but see an increase as people struggle financially.

Luxury Goods: Goods that see a sales increase as household incomes increase, but see a decrease as people financially struggle.

Normal Goods: Goods that see no change in sales when household incomes increase or decrease.

Seasonal Variation: When certain variables, for example sales figures, vary due to seasonal changes.

Substitute: A product from a rival company that is similar to an already existing product that it could be bought or used as an alternative to the original.

Overtrading: When a small business grows so fast that it struggles to generate enough cash to pay bills due to rising production costs and levels.

Demographics: The way population data is broken down into categories, such as age, ethnic group, gender etc.

Demand Curve: A line that shows the demand for a product or service when offered at different prices

Introduction

There are lots of factors in the world that affect consumer demand for products. Many methods are used by business owners to try and control these factors that affect the demand for their products- if they can control the demand, they can use this to boost their sales. This topic links to the market, supply and demand, and pricing strategies. 

What are the Factors that Affect Demand?

Price

The price of goods affect demand in 3 key ways:

1. Income

Everything has a price. If your income cannot cover that price then, obviously, you cannot buy the products. The higher the price of something, the less people there are who can afford to buy it. The mass majority of consumers are "price sensitive" - they look at the cost of the product before anything else, so if something is considered expensive they may choose to buy the cheaper alternative option.

2. Value

The higher the price of a product, the less likely the product will be seen as good value. This may deter people from buying the product as they prefer to buy products that are of good value. A consumer would not buy something that costs £15 if they can get the same or a similar quality product for just £7.

3. Quality

It is also important to consider the product quality when it comes to pricing. Something priced at 99p is highly likely to be considered cheap - this could also make it seen as a low quality and reduce sales, no matter how the business promotes its "value for money" directive. This means that, when aiming to boost sales. businesses should always be wary of making their goods too cheap and find the right balance between value and quality image.

Price of Substitutes and Complimentary Goods

The price of alternative products is also something important to consider, especially when it comes to demand on a highly competitive market with many substitutes avaliable to the public. If one company had to increase their prices for a reason (such as rising cost of production) and there are a lot of cheaper substitutes avaliable then the company could lose customers to a cheaper rival.

The price of complimentary goods is also something important to consider. If the price set by a complimentary goods producer is good and not too expensive (set at the price that the products would be purchased at in high demand) then both the original good and the complimentary good would be high in demand.

Changes in Consumer Incomes

The British economy grows at about 2.25% per year, meaning that the average UK income doubles approximately every 30 years. As the economy grows the demand for most products and services also grows. 

Cars and cinema tickets are classed as "normal goods", so the demand for this increases as domestic incomes also increase. Sometimes the demand for certain goods can increase at a faster rate, and these goods can be classed as a "luxury good"- an example of this is a foreign holiday. 

Other goods behave in a different manner when consumer incomes change.  Goods that have sales decrease when consumer incomes improve are called "inferior goods", an example of this is an own-brand product, such as Tesco-brand orange juice. 

Fashion, Tastes and Preferences

Consumer tastes and trends vary over time. Very few brands stay in fashion forever, however some do (such as Nike, Jack Daniels, and Chanel) so value is added to these brands. Tastes can be fickle and constantly changing, however as in some markets there is a "core of stability" that helps companies feel confident about having an ongoing demand. This demand may suffer during a recession, however certain markets, such as the fitness market, have such an ongoing consumer preference and high consumer demand that they can withstand the pressure of recession.

Advertising and Branding

The amount a company spends on its advertising can significantly boost demand, however product branding is by far more important that advertising. If the brand is memorable to the consumer (it is a brand that the consumer can identify with and be proud to be associated with) then the payback to the brand owner could be huge. In 2014 Google was ranked as the most valuable brand in the world, with a net brand value of $159 billion. The value of a brand links to its ability to command a higher price for its products and to be able to achieve high levels of customer loyalty. 

Demographics

Demographics involves breaking down population data into groups, such as into age groups, ethnic groups, gender etc. In 2014 the UK yoghurt market 2 of the top 10 brands are focusing their brand on children (Petit Filous and Munch Bunch), and these types of demographically-based brands have transformed the demand in this market. In the 1970s the UK market for yoghurt consisted solely of plain unsweetened yoghurt sold in a glass jar, and the sales were worth just £5 million - contrast this with nowadays, where the market is worth more than £2000 million. 

Fast forward to 2017, and the most exciting area for demographic-based branding is to target older people. The UK consists of an aging population, and the "Grey Pound" is increasing - the "Grey Pound" is the name given to the money spent by older people over the age of 60. The older generation have more money to spend on things like holidays and day-trips, so many brands may take the opportunity to target these people in order to get them to spend more on their products. 

External Shocks

Most businesses will have to deal with some form of "external shock" on a fairly regular basis. These can come in various forms, including natural disasters, changes in government policies, sudden changes in demand, and so on. There was a ban on the export of beef from the UK in the 1990s due to an outbreak of foot-and-mouth disease, and situations like this can reduce demand because of the fact that people do not want to purchase goods that can put their health and safety at risk. 

Seasonal Factors

Most businesses experience noticeable variations in their sales throughout the year, especially seasonal markets such as the ice-cream, soft drinks and seaside hotels, who boom in the summer months but see a slump in the winter months. Other markets, such as the perfume, liqueurs, greetings cards and toys boom in the Christmas months. 

There are other markets who still have seasonal variations, but they are less obvious. These markets include the car, cat food, carpet, furniture, TV, and newspaper markets, and this seasonal variation comes from patterns on consumer behaviour, and nothing can be done to alter these habits. A well-run business can make sure that it understands and is able to predict the trends in seasonal variations in demand, and it would be able to create a contingency plan for coping. 

Demand Risks

There are 2 situations that a good manager should be aware of: 

1. Undiversified Demand 
This happens when business is dependent on the sales of just one product or brand to make their money. Massive costs can occur if the brand cancels the order of the product, which could cause other cash flow products for the business. A small business would struggle, and the answer to the problem would be to try and diversify in order to spread the risk and find new or additional methods of sourcing their demand. 

2. Overtrading
This happens when a business grows too fast, so they don't generate enough cash to pay off their bills as a result of having continued rising production levels. The problem with overtrading comes from the fact that to meet next month's demand levels, the business needs to spend more of its cash flow on things like materials, components etc. 

Drawing a Demand Curve

A demand curve is drawn to show how demand decreases when consumers are asked to pay less for a good or service. It is drawn on the basis that consumers are price sensitive, so they will not demand an expensive product as much as they would if it were cheaper. It also ignores the price elasticity of demand. An example of a demand curve is below: