Any company which takes part in manufacturing has a limited manufacturing potential. If it manufactures too much material then it is wasting working capital and also spending a huge amount to manage the inventory. Any company would like to keep costs under control and to match customer demand at all times. This is why determining the market demand is very important for any company.
What is Market Demand?
A Very simple explanation of market demand is that it is the number of units demanded by the total number of customers in the market. Thus the more popular a company is, the more will be the market demand for its products & the more will be the number of units demanded by the customers in the market.
We should not confuse market demand with market potential. Market potential is the total number of potential customers in a particular market. However, market demand is the actual demand for the product in the market.
For example – Even in winters the potential market of umbrella includes all the potential customers in the market. however, in winters there is no demand for the product and therefore the market demand will be very less even though the potential market is there. The market demand will only be here during the season that is the summer season.
Examples of Market Demand
Go to any mall or any store and you will see demand in action. A store which sells 1000 soaps daily, has a demand of 1000 soaps. But on weekends, when the number of shoppers increases, the demand might be 1200. This is just the demand of one store. The demand will be completed irrespective of the brand of soap available because it is a necessary commodity. So any brand not meeting the demand will see a loss of revenue.
As a company, you need to find out how many quantities of soap you manufactured actually sold in the market? That was the market demand of the soap you manufacture. And you need to meet that demand at all times to satisfy your current target market (not the potential market).
So if the market demand is 1000 units and your company is catering 300 units, then the market demand for your company is 300 units whereas the potential demand (market potential) is 1000 units.
Companies like P&G and HUL which manufacture so many SKU’s need to have a constant grasp of market demand so that they do not overshoot production or do not miss the opportunity of selling their products in the market.
An example of poor forecasting of market demand was one which KFC faced recently in the UK. The demand for KFC burgers was so high that KFC did not have burgers to sell in 90% of its outlets in England. As a result, there was a huge opportunity loss to KFC because the potential customers of KFC might have gone to McDonald’s or Burger King. This proves that measuring market demand is very important for a company.
Advantages of Calculating Market Demand
1) Customer Expectations
One of the most important advantages of calculating market demand is the fact that your customer expects you to keep the product in stock for him. If I want to buy a particular brand of soap and the soap is not available in the local market (because of wrong demand calculation) then I will give up the brand and search for something else. As a result, the soap company has lost a hard-earned customer to some other brand. If the soap company had estimated market demand, then they would have had the soap manufactured and delivered to the retailer so that the customer could purchase it when he requires.
2) Opportunity loss is avoided
There is a huge opportunity loss if the market demand is calculated incorrectly. Continuing the above example, if a company does not calculate the market demand correctly then it will not produce the right amount of units which are required in the market and as a result, it will lose a lot of revenue which it could have generated from the market.
3) Cost savings
There is also a negative side of overestimating market demand. If the market demand was a hundred unit and I have manufactured 200, then I have invested too much amount in the product which was not needed. I have reduced my working capital and at the same time, I would be paying a good amount of money for warehousing of the products which have been overproduced. By doing the correct demand measurement we can save a lot of such costs.
4) Focused approach
Measuring the market demand also helps companies focus on the target market. If a company has 10 different products and the market demand is high for two or three products, then the company can have a focused approach and produce these two or three units in huge volumes and also push them in the market.
How to Calculate Market Demand?
There are two ways to calculate the market demand for any product
1) Product-level market demand
If you already know the geographic market which you are going to Target, then you can use the product level market demand method. In product level demand, the market is broken down in terms of the total product that exists in the market. The market demand for each individual product is calculated and found out via market sources or via market research. This research then gives us a total estimation of the demand for the product. Naturally, it also gives us an estimation of the market potential as well.
For more clarity, read the article on Market demand curve.
For example, if I was going to launch a brand new shampoo in the market I will have to calculate the market demand and the market share of all the shampoos been sold by P&G and HUL. I would do a market research study and find out what was the total industry sales for these brands. I would also like to find out what was the product line sales for this particular brands.
For example, within the shampoos category, the anti-dandruff shampoo, as well as the conditioners, are two different products and two different product lines. To truly find out the market demand of shampoos, I will have to find out the individual market demand of conditioners as well as anti-dandruff shampoo so that I can find out a net measure of the available market for these products.
So any industry that you are in, if you want to find out the market demand of particular product you just have to do a market research study on the number of units selling for all the brands and this will give you of a fair example of the market demand for the product.
2) Geographic level market demand
The Geographic level market demand is very commonly used by a company which is planning on expansion to Foreign regions. In this type of estimateion of market demand, the company wants to know the demand for a particular product in a specific geography.
Even in this geographic type of demand, the company conducts a market research study for the number of units being sold in the market for a particular unit or SKU. In such cases, the company might already be present in the target market or it may be planning to establish itself in the target market.
So if I was in the Ice cream business and I wanted to start a new brand of ice cream in a new market, then I would calculate all the other ice creams and their turnover in the market. This becomes the market potential. From that, I will calculate, the ice cream which is closest and nearest in value to my own brand. And the turnover of that ice cream is the possible market demand that I can achieve.
Alternatively, In the cement industries, the manufacturing drives the sale of the cement brand. If the cement of one brand is not available, many buyers will buy the cement of another brand because it is a necessity. As a result, the market potential is almost equivalent to the demand in the market for the product. The company which manufactures the most caters to the demand at all times and therefore grows the fastest.
We can also measure market demand via the Market demand curve.
The above was the complete explanation of what is market demand, the advantages of market demand calculation, examples of market demand as well as the ways to calculate market demand.