Definition, Examples, and How to Calculate Market Demand

Any business that engages in manufacturing has a finite amount of production capacity. If it produces too much stuff, it wastes working capital and spends a lot of money on inventory management. 

Any business would prefer to keep costs under control and always meet client demand. As a result, determining market demand is critical for any business.

Definition

The quantity of units demanded by the total number of clients in the market is known as market demand. As a result, the more popular a company is, the greater the market demand for its products and the greater the quantity of units demanded by market customers.

We must distinguish between market demand and market potential. The total number of potential customers in a market is known as market potential. Market demand, on the other hand, is the actual demand for a product on the market.

For example, even in the cold, the umbrella's potential market encompasses all of the market's prospective clients. However, because there is no demand for the goods throughout the winter, market demand will be very low, notwithstanding the potential market. The market demand will only exist throughout the summer season.

Market Demand Examples

Demand may be seen in action in any shopping mall or store. A store that sells 1000 soaps each day has a 1000-soap demand. On weekends, however, when the number of consumers increases, demand may reach 1200. 

This is just one store's demand. Because soap is a required product, the need will be met regardless of the brand of soap provided. As a result, any brand that fails to match demand will lose money.

As a business, you must determine how many units of soap you produced were actually sold on the market. That was the demand for the soap you make on the market. And, in order to satisfy your present target market, you must meet that demand at all times (not the potential market).

So, if the market demand is 1000 units and your firm caters 300 units, your company's market demand is 300 units, while the prospective demand (market potential) is 1000 units.

Companies like P&G and HUL, who produce a large number of SKUs, must keep a continual eye on market demand to avoid overshooting production or missing out on opportunities to sell their products.

KFC has faced a case of poor market demand forecasting in the United Kingdom. The demand for KFC burgers was so great that 90 percent of KFC locations in England were out of stock. 

As a result, KFC missed out on a significant opportunity because potential consumers may have gone to McDonald's or Burger King instead. This demonstrates the importance of a company's market demand measurement.

Benefits of Market Demand Calculation

1. Expectations of Customers

The fact that your consumer expects you to keep the goods in stock for him is one of the most crucial benefits of assessing market demand. If I want to buy a specific brand of soap but it is not accessible in my local market (due to incorrect demand estimation), I will abandon the brand and look for something else. 

As a result, the soap company has lost a loyal client to a competitor's product. If the soap company had predicted market demand, the soap would have been created and delivered to the retailer in time for the client to purchase it.

2. A loss of opportunity is averted

If the market demand is calculated erroneously, there is a significant potential cost. Continuing with the previous example, if a corporation fails to correctly calculate market demand, it will fail to create the correct number of units that are required in the market, resulting in a significant loss of revenue that could have been gained from the market.

3. Financial savings

Overestimating market demand has a negative side as well. If the market need was one hundred units and I produced 200, I spent too much money on a product that was not required. I've lowered my working capital while also paying a significant sum for the storing of overproduced products. We can save a lot of money if we do the right demand measurement.

4. A laser-like focus

Measuring market demand also assists businesses in focusing on their target market. If a company has ten distinct items and two or three of them have significant market demand, the corporation can take a targeted approach and produce these two or three units in large quantities while also pushing them into the market.

What is the formula for calculating market demand?

Any product's market demand can be calculated in two ways.

1. Market demand at the product level

You can utilize the product level market demand method if you already know the geographic market you want to target. The market is broken down in terms of the total product that exists in the market in product level demand. 

Each product's market demand is assessed and discovered through market sources or market research. This study then provides us with an overall estimate of the product's demand. Naturally, it also provides us with an estimate of the market's potential.

For example, if I wanted to introduce a completely new shampoo, I'd have to figure out what the market demand and market share are for all of P&G and HUL shampoos. I'd do a market analysis to determine the total industry sales for these brands. I'd also like to know how much each product line sold for this particular brand.

The anti-dandruff shampoo and the conditioners, for example, are two different goods and product lines under the shampoos category. To genuinely determine the market demand for shampoos, I must first determine the individual market demand for conditioners and anti-dandruff shampoo in order to determine a net estimate of the possible market for these items.

So, in any business, if you want to find out the market demand for a certain product, all you have to do is do a market research study on the number of units sold for all brands, and you'll have a good idea of the market demand for the product.

2. Market demand at the regional level

A corporation that is looking to expand to foreign countries frequently uses the geographic level market demand. The corporation needs to know the demand for a given product in a specific geography in this form of market demand estimation.

Even with this type of geographic demand, the corporation conducts a market research study to determine the number of units sold in the market for a specific unit or SKU. In such circumstances, the company may already be operating in the target market or be aiming to do so in the near future.

So, if I were in the ice cream industry and wanted to launch a new ice cream brand in a new market, I would compute all of the existing ice creams and their market turnover. This is how the market potential is determined. 

From there, I'll figure out which ice cream is the most similar to my own in terms of taste and value. And the potential market demand for the ice cream is determined by its turnover.

In the cement industry, on the other hand, manufacturing drives the selling of the cement brand. If one brand's cement is unavailable, many purchasers will purchase another brand's cement since it is a necessity. 

As a result, the market potential for the product is nearly equal to the market demand for the product. The company that produces the most meets demand at all times and, as a result, expands the fastest.

Benefits of Market Demand Calculation

Calculating market demand allows companies to concentrate on their target market. You can't just offer things without any rhyme or purpose in these competitive times. You can begin focusing on a specific product once you are aware of the need for it.

If the market demand for a pencil is one hundred units, and you have been manufacturing one hundred and fifty units to date, you can save your organization money by calculating the market demand for that product. You must now lower the number of production units, which will result in a cost reduction.

If a company does not know what the market's genuine demand is, it will be unable to manufacture the requisite number of units, resulting in a loss of opportunity.

One of the most significant benefits of evaluating market demand is that you may learn about true customer expectations and respond accordingly.

The Market Demand Curve can also be used to gauge market demand.

The foregoing was a comprehensive explanation of what market demand is, the benefits of calculating market demand, instances of market demand, and methods for calculating market demand.

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