One of the biggest mistakes an entrepreneur can make is assuming that everyone in the market will share the same enthusiasm for their business as they do. To be a successful entrepreneur, it is crucial to be objective and conduct research to determine the demand for your product or service. In this section, we will explore the importance of market research and understanding customer demand.
Understanding demand
To successfully sell your product or service, it is crucial to have a market demand for it. This means there must be a sufficient number of individuals willing to purchase your offering at a price that allows your business to generate a profit.
Additionally, it’s important to take into account the competition in the market. Consider the number of existing businesses that are already supplying a similar product or service. If the market is saturated and there is an oversupply of similar offerings, it can lead to price pressures and a decrease in your potential profits over time.
By assessing market demand and evaluating the competitive landscape, you can make informed decisions about the viability and potential profitability of your business idea. This understanding will guide your strategies for pricing, positioning, and differentiation, enabling you to capture a share of the market and achieve sustainable growth.
42% of businesses fail due to poor demand for their services or products.
George McIntyre from Fundera, 2020.
Assessing demand
Assessing demand for your business in the market can be done through various methods, such as competitor analysis and consulting with industry experts. It is crucial to undertake these assessments during the business planning phase, allowing sufficient time to refine your ideas if needed. Only when this process is complete should you consider allocating resources and capital to your business idea.
It is important to maintain records of all your ideas and continue monitoring the market even after estimating the demand for your business. Markets can experience rapid changes, requiring you to promptly respond to fluctuations in demand or adapt to evolving customer expectations regarding product or service delivery.
Having a wealth of ideas puts you in a better position to navigate the future. However, it is essential not to let enthusiasm blind you. Stay open to what your research reveals and be receptive to the insights it provides.
By following these practices, you can ensure a thorough understanding of market demand and position your business to adapt and succeed in dynamic market conditions.
Types of demand
Product demand isn’t as straightforward as you’d think. Products and categories are connected to each other, and sometimes demand comes from where you were least expecting it. Here are the most important types of product demand with examples.
Understanding these different types of demand allows businesses to identify market opportunities, develop effective marketing strategies, and tailor their products or services to meet specific customer needs. By recognizing the dynamics of demand, businesses can better position themselves in the market and capitalize on consumer preferences.
Direct demand
Direct demand refers to the demand for a product or service that is specifically intended for its own use or consumption. It is the most straightforward type of demand, where customers directly seek and purchase a particular product or service.
Example: A consumer purchasing a smartphone for personal use.
Indirect demand
Indirect demand is the demand for a product or service that is not intended for its own use but is necessary for the production or delivery of another product or service. It is often referred to as derived demand.
Example: The demand for computer chips by a smartphone manufacturer to produce their smartphones.
Joint demand
Joint demand occurs when the demand for one product is directly linked to the demand for another complementary product. These products are often used or consumed together.
Example: The demand for cameras and memory cards. When customers buy cameras, they also need memory cards to store the photos.
Composite demand
Composite demand refers to the demand for a product that has multiple uses or can be used in different ways. The demand for such products depends on the different applications or industries in which they are utilized.
Example: Steel, which can be used in construction, automotive manufacturing, and appliance production, among other industries.
Latent demand
Latent demand refers to the potential demand for a product or service that is currently unmet or unrecognized in the market. It represents the untapped opportunity for businesses to introduce new products or services that fulfill a latent need or desire.
Example: Before smartphones were introduced, there was latent demand for mobile devices that could perform various functions beyond making calls.
Derived demand
Derived demand refers to the demand for a product or service that is derived from the demand for another related product or service. It occurs when the demand for one product or service is influenced by the demand for a separate but connected product or service.
Example: The demand for tires is derived from the demand for automobiles. As the demand for cars increases, there is a corresponding increase in the demand for tires to equip those cars.
Developing your idea
To identify and assess the demand for your business idea, conducting careful research is essential. While it may require time, it doesn’t have to be expensive.
Start by gaining a thorough understanding of your current idea, including who it is for and why people would be interested in it.
Next, conduct market research to explore potential markets. Seek advice from industry experts and consider testing your idea to gather feedback. Throughout this process, regularly review each stage of product or service delivery and be open to making necessary adaptations based on your research findings.
It’s important to be open-minded and prepared to let go of your idea if the market indicates it won’t work. However, don’t lose hope. Even if you find limited demand for your original idea, the research process may lead you to discover a much better alternative that aligns with market needs and preferences. Stay persistent and embrace the opportunity to uncover new possibilities.
Expert Entrepreneur Advice
When conducting market research and assessing my capabilities for my first ever business idea which was a vegan food delivery service, I realized that it wasn’t the right path for me. I didn’t have a background in cooking and wasn’t even a vegan, therefore I had recognized that I wouldn’t be able to meet the high expectations of the local vegan community.
It’s crucial to understand that not every idea is a viable business option, and sometimes you may not be the right entrepreneur for a particular venture. It’s okay to acknowledge this and move on. Trust your instincts and keep searching. You’ll find the right opportunity when it aligns with your passion, expertise, and the market demand. Stay determined and be open to exploring new possibilities.
How to conduct demand analysis
Demand analysis is not about wild guessing; it’s about building a solid foundation of knowledge and structuring your research accordingly. It is a fundamental part of market research for new product development. Here are the steps involved:
1. Define your market
It is essential to identify who your potential customers are, how much disposable income they have, and where they currently allocate their spending. These questions are critical when defining your market. Defining your market should go beyond just describing personas or target audiences; it should also incorporate numerical data. Depending on the goal of your product demand analysis, you may also explore secondary markets where your product could be used by individuals outside your primary target audience.
2. Assess the maturity of the market and business cycle
Analyzing the market and business life cycle is important. You need to understand the stability of the market you are entering. Is it in the growth phase, mature and stable, or heading towards decline? Similarly, assess the maturity of your business. It is crucial to consider these factors in your product demand analysis. If you enter a growing market but cannot keep up with demand, it will be challenging to deliver enough products to generate profits.
3. Identify your market niche
Your market niche is the sweet spot where there is potential for you to enter and deliver value. It is not only about physical products or practical services; it should also align with values and unique selling propositions (USPs). Consumers are not just looking for products; they seek brands they can connect with. When conducting a product market analysis, be specific and avoid painting an overly optimistic picture by considering the entire market or too large a segment. Eventually, you will need to craft a targeted message that resonates with a specific subset of the market. Keep this in mind when defining the actual size of your market.
4. Calculate market growth potential
Having gathered data on the current market situation, it’s time to look into the future. Start by examining the market share distribution among your competitors since the market’s inception. Consider events and products that influenced changes in the market share. Look at related or similar markets during the same period. Based on this information, try to identify patterns and opportunities for future growth. Also, consider societal factors such as wages, costs of related products, and changes in tax regulations.
5. Evaluate the competition
Your competitors are likely conducting their own product demand analysis. They might be planning to launch a new product or trying to increase their market share through other means. Examine how they approached their previous product launches and how their target market responded. Analyze their sales numbers and learn from their experiences. Utilize smart competitor tracking tools to keep an eye on what is being said by and about your competitors.
