Supply and Demand 101: Understanding Supply & Demand
Supply and Demand 101: Understanding Supply & Demand by Market Action Research
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No matter which way you look at it – whether you’re working for a Fortune 500 company, a small business, or anywhere in between – at the end of the day, everyone is a consumer. If you are wondering whether you are a consumer, here is a simple litmus test to determine if you are a consumer. Do you buy products? If you said “yes”, then you are a consumer.
Having the opportunity to speak with various clients from different backgrounds has afforded us the opportunity to listen, learn, and help resolve some of the toughest issues that businesses are facing today. In fact, these “tough” issues have ever been present since the first farmers in the field were bartering corn for goods.
When boiled down to the roots there are two items that need to be examined: Supply vs. Demand, and Necessity vs. Desire. We will cover the shift in Necessity vs. Desire in a later post, but today we will begin with Supply vs. Demand.
For some this may be a simple overview but is nonetheless a great way to get a refresher on the traditional, as well as unorthodox, approach to viewing supply vs. demand.
Let’s start by defining the terms
Supply: “A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.” – Investopedia
In other words: Supply is the total amount of products or services that is available. So let’s pretend you have a lemonade stand business, and you have enough resources to make 32 cups of lemonade. That means that for the sake of this example, you have a supply of 32 cups of lemonade.
Demand: “An economic principle that describes a consumer’s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa.” – Investopedia
In other words: Demand is intangible and much harder to measure than supply, as it can only be measured theoretically. Unlike supply, you cannot definitively quantify demand because it is influenced by individualistic, non-constant variables specific to a consumer (i.e. consumer confidence, necessity, and social and economic status, demographics, etc.) and can be influenced by perceptive mediums (i.e. advertising, word of mouth, social media, etc.). There is also one key item to be observed in Investopedia’s definition is the phrase “holding all other factors constant”.
Law of Supply and Demand
“A theory explaining the interaction between the supply of a resource and the demand for that resource, the law of supply and demand defines the effect that the availability of a particular product and the desire (or demand) for that product has on price. Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.” – Investopedia
In other words: More supply and less demand will lead to lower prices. Thus the inverse is true; less supply and more demand leads to higher prices.
How Does Supply and Demand Affect Consumers?
Assuming you answered “yes” to the question in the first paragraph, you are a consumer and have, without a doubt, been subject to the laws of supply and demand. If you are still skeptical, here is a more modern illustration. Have you ever known someone who just had to be the first person to own the iPhone 5? Or perhaps know someone that will be first to get the iPhone 5S, than the iPhone 6? Has this person ever been you? Then it is possible that you or someone you know has been affected by the laws of supply and demand.
Apple’s equation for product launches in past years has been quite predictable. For example, Apple advertises that they have a new smartphone that is “coming soon;” in turn, consumers flock to the website to register early to be the first to know about it. We are willing to bet that Apple has some pretty smart cookies (or apples, ha!) working for them, and they have figured to take into account the total number of pre-registrants, historical purchase records, data from apple users who regularly upgrade, carrier contract terms (and their expirations), buzz on social media, and their estimated growth rate to accurately forecast the cost of phone based upon the alleged demand. Thus creating the perfect storm of product hype, Apple gives themselves the opportunity to calculate supply, or lack thereof, to determine demand or artificially increase demand by limiting supply.
More often than not, there is little that changes about the phone after it launches. Ever wonder why the price decreases for the same exact phone over time? It’s a decrease in demand! Yes, there are other factors such as new products and time, but when boiled down, it’s a decrease in demand with similar supply.
Theoretical Lessons Based on Apple’s Supply and Demand Strategy
Although we have never worked with Apple in any strategic consulting for Supply and Demand, we would like to. So if you work for Apple, and like what you see, be sure to give us a shout! Back to what we theorize to be lessons that can be learned from Apple’s Supply and Demand Strategy.
Data is Important – Gather as much existing data as possible including, but not limited to: sales data (purchase history and forecasts), demographic information, web site analytics, etc.
Search for New Ways to Collect Data – Do you work in an industry that you know well in advance that a new product is arriving? If “yes”, utilize pre-registrant collection methodologies to gauge initial interest. Want a custom landing page for your business, get started here!
Conduct a Consumer Research Study – Probably one of the best ways to gauge interest in a new product or service is to ask. This will help you more accurately estimate demand and discover the right marketplace for your product or service. Interested in starting a consumer research study? Contact us!
Take a poll – Don’t have the resources to conduct a consumer research study? Then create a poll and ask people to participate. It’s better to have less data than no data at all. This is similar to it being better to be shooting arrows in a dimly lit room than in the dark.
Data collection is extremely important but is truly only the first step in understanding the demand of your marketplace. There are many more ways than the methods described above to collect data, and the manner in which you collect the data may skew your outcome towards a certain direction. There is nothing more hurtful than inaccurate data collection which is why we recommend consulting with a professional before initiating the study. It takes careful analysis of the data to accurately conclude what story the data is telling. Furthermore, once the data is analyzed you are left with the question, “Now that you know, what will you do about it?” We cannot tell you, since solutions would be unique to the situation. One thing, however, is for certain: You Must Take Action.
Consumer Digest
The laws of supply and demand govern our daily lives. It is critical for all businesses to understand the laws of supply and demand in order to maintain profitability. The most daunting task for most businesses is to accurately forecast demand since demand cannot be definitively quantified. The precepts of data collection aforementioned are the start to better understanding who, what, when, where, and why you should be marketing to your consumers. Finally, regardless of your data analysis, it will take action to achieve the results you desire.
To consult with a market research professional, contact the MARS Team.
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