A farmer may choose to leave a field fallow for a season if market demand for his crops collapses.
Market demand is defined as the total amount of purchases of a product or family of products within a specified demographic group. Demographics can be based on factors such as age or gender, or involve the total value of sales generated in a specific geographic location. Assessing market demand is one of the most important ways companies decide what to sell and how to go about selling the products they produce.
If supply exceeds demand, companies can offer lower prices to entice consumers to buy a particular product.
Properly assessing the market demand for a particular product is very important. Failure to accurately design the desirability of a good or service can lead to production levels that exceed the number of units that will actually be sold. As a result, the company is left with a huge inventory of finished goods that does not generate any profit. In some cases, failure to adequately project market demand is enough to force a company into bankruptcy.
The most common way to assess the desirability of goods and services in a given demographic is to implement a structured market demand analysis. Essentially, this process seeks to identify consumers who are attracted to the products enough to actually buy them. As part of market analysis, research helps to identify the size of the market. This makes it possible to determine whether the company needs to cultivate consumer interest in a particular demographic to generate new business or cultivate several different markets at the same time as a means of staying profitable.
As market demand can change over time, companies invest resources in constantly checking the current status of consumer wants and needs. This ongoing process often allows companies to remain competitive with other companies that also target the same markets, as well as maintain the interest of current customers by making improvements to existing products and possibly introducing new products that are also of interest to these same customers. For example, a company that produces lawn mowers may introduce a special line of lawn mower blades if marketing research indicates that enough consumers would be attracted to the new product to make the effort profitable.
A solid market demand strategy can also help companies identify future trends ahead of the competition. For example, some office equipment manufacturers during the 1970s used findings from market research to project that typewriters would lose appeal as desktop computers became easier to use. As a result, these companies were able to devise strategies that allowed them to gradually reduce typewriter production while slowly implementing compact computer production. By properly assessing market demand, these companies were able to remain profitable through the 1980s and beyond, as the desktop computer became a staple both at home and in the office.