How to Find Market Demand

Written on February 18, 2020
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There are a lot of economic concepts that govern the way people do business. Some of them are simply working in the background as you successfully run your company; others require a more hands-on approach. Market demand falls into the latter category—it’s a crucial concept for any business owner to know in order to manage their company effectively. 

We’ll look at how to find market demand and implement the concept to more effectively forecast your sales and run your business.

What Is Market Demand?

Market demand, also called “demand forecasting,” is a way for business owners to predict how much desire there is for their product or service based on the market to which they’re selling. It’s a sophisticated concept and not an exact science. However, it’s important for business owners to understand its framework, since the predictions you make can affect your operations and how you spend capital.

Why Market Demand Is Important

The main reason you want to understand how to find market demand comes down to your business operations—which, if run incorrectly, can ultimately affect your solvency as a company. The predictions you make will have bearing on your cash flow, expenditure, margins, and more. Incorrect demand forecasting can put your business at risk for spending capital in the wrong way, which has a domino effect on other components of your operation.

For example, say you take a guess on how much demand there is for your product. As a result, you overproduce the goods you’re planning to sell. Then you’ll have a surplus of inventory. That will cut into your cash flow and potentially leave you with dead stock, which you might have to liquidate or sell at a loss. Similarly, say you underestimate demand—you could leave customers upset, drive them to a competitor, or pay a premium to try to restock as quickly as possible.

The Foundation of Demand Forecasting: Supply and Demand 

To understand how to find market demand, you’ll want to try to think like an economist. 

You likely know the concept of supply and demand: It’s the relationship between how much customers want of a product or service and how much there is available. This, in turn, affects pricing—less demand but more supply will drive prices down; limited supply with high demand will drive prices up.

This relationship among demand, supply, and pricing is often graphically represented as “curves,” or charts that show this relationship. Their intersection is called market “equilibrium,” which is the point at which the demand and supply equal each other in the market. That’s what you’re hoping to find. 

Having a strong grasp on the concept of supply and demand will help you understand how to find market demand as well as price your products in the market. 

How to Find Market Demand in 4 Steps

Demand forecasting has a few components. You’ll likely need to do some research to come to a prediction, which can seem daunting. But the effort you put into understanding your market and the factors that affect its behavior will ultimately get you closer to an accurate assessment.

1. Choose the Type of Forecast

There are multiple ways you can approach how to find market demand, which involves figuring out the detail and scope of your inquiry. For instance, are you going to look at demand in the market for your product as a whole? Are you going to look at a specific customer profile and segment? Are you trying to forecast for a specific season? You get the idea.

With this in mind, you can also choose to forecast based on the time period—long-term or short-term—depending on the type of demand you’re looking to ascertain.

2. Define Your Market

When you’re calculating market demand, it’s important to define whether you’re sizing up the entire market for a product or service versus a niche that demands a subsection of your product or service.

For instance, if you sell cupcakes, are you trying to find the market demand for cupcakes as a whole or just red velvet cupcakes? This will change your calculations since different factors influence different markets and submarkets.

A component you might not think to consider: Are the people in your market segment looking for one exact product, or will they be okay with a comparable product? For instance, if we look at the red velvet cupcake example, will they accept blue velvet as a substitution, or are they looking only for red velvet? Or, if you’re looking at the wider market, will they accept cake pops as an alternative to cupcakes?

If you’re unsure, you might want to conduct some market research to find out how your customers will behave. 

3. Dig Into the Numbers

It’s important to note that market demand isn’t a number: It’s an estimation of consumer desire and behavior. So, you’ll be getting a sense of what customers might want and how much of it they will want depending on the conditions of your sales environment.

Your methods for how to find market demand don’t have to be complicated. You can look at prior consumer cycles to determine the seasonality of certain products to forecast future demand. For instance, was desire higher in the summer than it was in the winter? You’ll want to be sure to answer higher demand with more production or offerings.

This will mean spending time with your past sales data. For instance, did you sell through inventory from the last production cycle? If yes, there is likely more demand than you earlier anticipated. 

We’ll discuss this more in the next section, but as you get into the sales figures and consumer trends, you’ll want to consider how market conditions have impacted demand for products and services due to episodic reasons, such as external market factors that correlate with a change in your own sales. Or, perhaps a competitor opened near you who is taking a share of your business. This might mean your market demand is lower than it was in the past.

Additionally, part of getting into these details can be conducting market research. Putting time and effort into research might sound like a daunting task to undertake, especially when you’re busy running a business and everything that comes along with it. But this input is hugely important when determining market demand so that you’re making informed decisions.

4. Understand the Factors that “Move the Market” and Influence Market Demand 

Demand is what’s called “elastic,” which means that consumers respond to different factors that influence demand. This so-called “market elasticity” means that even when you have a demand forecast number that you believe reflects market demand, there are some outside factors to take into consideration before you make decisions based on it.

Here are a few examples:

  • Price of raw materials changes: In this case, if your cost to make a product goes up, and you need to increase the price in order to maintain your margins, this might affect demand. That’s because you may have a lower market demand at a higher price, especially if your consumers are very cost-conscious.
  • Economic conditions change: If the economy moves in a significant way, your market demand might be affected. For instance, if people are not spending as much, or are more price-sensitive (say, due to an increase in interest rates or higher unemployment), then your market demand might go down. The same is true for the inverse, which could positively affect market demand.
  • Trends shift: If your product or service is affected by trends—say, the demand for boutique fitness classes, which are currently enjoying a wave of interest—then you should take into account how your market demand might change if trends go in a different direction. 

As you are getting a hold on how to find market demand, try to take these factors into consideration. You’ll be making predictions, of course, but doing some research or surveying will make your estimates more accurate.

Bonus: Talk to Consumers

Finding market demand isn’t useful if your predictions are off. It might be worth doing some extra legwork with consumer surveying to prove your hypotheses about your market demand. That could include asking them questions about how they view the market, pricing, and their tastes. The more information you have, the more you’ll be able to confirm your assessment, or accurately update it to reflect market conditions.

The Bottom Line

As you can see, there are a lot of intangibles in finding market demand. Still, even though demand forecasting isn’t an exact science, you can greatly help your business with things including production and pricing if you give it a shot—it’s better to be prepared than caught flat-footed.

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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