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Supply and demand has a big impact on the competitiveness of a company. For example, if a firm loses access to supply, they are unable to satisfy customer needs and risk seeing them flee to a competitor. A plunge in demand for a product provides an opening for a competitor to offer an alternative to customers and take market share. A rival may also cut prices in an attempt to drive demand.
Example: Amazon has grabbed a stranglehold on the online retail market by driving prices as low as possible, often selling items at a loss. After subtracting the profitable Amazon Web Services and Amazon Prime portion of the business, the retail portion of Amazon loses billions of dollars annually. This has given Amazon the power to force many smaller retailers out of business and take over more market share in their absence.
An organization’s ability to expand is highly dependent on supply and demand. Greater demand for a product or service gives the firm the opportunity to grow the business, hiring more workers and increasing capacity to match the demand.
On the other hand, oversupply and low demand forces businesses to contract, laying off staff and closing factories. Companies must achieve the appropriate balance for consistent and sustained expansion.
Example: Blockbuster once owned more than 9,000 video rental stores across the nation, but by 2010 they had declared bankruptcy. The chain was done in by the fact that people no longer wanted to rent physical DVDs, thanks to competitors like Netflix, who created DVD-by-mail and eventually video streaming. Essentially, Blockbuster saw demand for their product drop to almost zero in just a few years and failed to respond quickly enough.
A company can drive demand for a product or service through marketing. A good marketing campaign can make a customer aware of a product or service and create a desire for it, causing demand to emerge out of nowhere. This creates a justification for a company to create a supply to fill that demand. Marketing and demand create a relational loop that feeds itself.
Example: When Apple’s iPhone came along, it filled a need people didn’t know they had. Through extensive marketing, Steve Jobs was able to convince the world that they needed more than a phone -- they needed a handheld computer that could make calls, play music, browse the Internet, and do all sorts of other tasks. Now, it’s hard to find a non-smartphone, even if you try.
Inventory is a major logistical challenge for all companies selling a physical product. Supply and demand greatly influences the profit margins of companies that have inventory -- oversupply and low demand results in high inventory costs for the company, while undersupply and high demand will cause the company to be constantly running out of items and displeasing customers.
Inventory management is critical for forecasting supply and demand and planning accordingly.
Example: Back during the Christmas season of 2011, Best Buy had a major catastrophe on its hands. Due to poor forecasting, it had failed to have the proper level of inventory to fill all orders customers had placed -- even those made as early as November. The company made an announcement just days before Christmas that many customers wouldn't get their gifts in time -- despite having been promised on-time delivery -- causing an explosion of outrage that made a major dent in the retailer's reputation.
Strong supply and demand increases the attractiveness of a company to investors, prompting banks, lenders, and inventors to offer their financial assistance to improve and expand the business in exchange for a stake in the company.
On the flip side, a lack of strong demand for a product or service will cause a company to struggle to attract outside investment to turn the company around. Successfully securing financing may help a company boost demand and build a stronger supply chain.
Example: Airbnb leveraged its success in creating a booming online home-rental business into a massive public investment spree. The company went public in December 2020, and on the first day of trading, its Initial Public Offering (IPO) topped a staggering $100 billion.
Strong demand and the supply to handle it will cause extra revenue to flow into a company’s coffers, giving it more freedom to pay higher salaries in an attempt to attract top talent.
Higher salaries lead to greater worker retention and satisfaction, and improve workers’ confidence in the business. This, in turn, can boost productivity and improve the performance of the business and its products -- which can further increase demand.
Example: In 2015, Gravity Payments CEO Dan Price made headlines by announcing that the company would raise the pay of all employees to at least $70,000 per year while cutting his own salary from $1 million to $70,000 to cover the increase. Today, he boasts arguably the most loyal staff in the country -- when the COVID-19 crisis hit and revenue plunged 50%, loyal employees offered to take pay cuts in the interim to keep the company humming, with about a dozen offering to take no pay at all. It’s hard to imagine that happening at a typical company.
One of the best small business tips you can get is to properly prepare your company for any scenario when it comes to supply and demand. Too many small business CEOs are caught up in the thick of putting out daily fires and don’t carve out time to really plan for the growth of their business.
They don’t take time to ask themselves the big questions. What are the factors impacting demand in my business? What are the potential disruptions to supply? What backup plans can I create to weather -- and even thrive in -- any storms?
Take some time in the coming days to sit down and plot a new path forward for your business. Conduct a business impact analysis to determine what threats are out there and how you can respond. Draft a gap analysis to determine where you are and where you’re going. It will give you peace of mind to know that your company is prepared for anything.
DP Taylor is a business software expert writing for The Ascent and The Motley Fool.
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A demand and supply analysis is a vital tool used in economics to inform business decisions. When it is done accurately after considering factors such as trends and seasons, a supply and demand analysis can anticipate the effects of market shifts.
At the core of a supply and demand analysis are two laws: the law of demand and the law of supply. According to The Business Professor, the law of demand stipulates that the quantity of demanded goods and services lowers with the rise of prices. Conversely, the law of supply stipulates that the number of goods and services supplied increases with a rise in price.
Britannica explains that a supply and demand analysis indicates the relationship between the quantity producers want to sell at various price points and the quantity consumers will buy. Including a demand and supply analysis in a business plan is one of the best tools business owners can use to predict their next moves. By analyzing various factors that affect supply and demand, businesses can predict the amount of product they should produce at a particular price point to yield the most profit.
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The concept of supply & its uses in business, what happens to price when supply decreases, relationship between level of prices and demand, what can make a demand curve shift, what is the market analysis of a supply and demand curve, how to interpret supply and demand.
In a graph, the demand curve is represented by a downward curve based on the relationship between what consumers want and what they can pay. As prices rise, demand decreases. If consumers cannot afford a product, they won't be interested in buying it. When plotted on a graph with price on the vertical axis and demanded quantity on the horizontal axis, the demand curve slopes downward as price increases and quantity decreases. The steepness of the curve depends on the current influences on demand.
In a supply analysis, the supply curve is plotted onto the same graph – with prices on the vertical axis and quantity on the horizontal – as an upward sloping curve. Based on the number of goods produced, the supply curve factors in input resources, labor, technology and regulations to accumulate its data.
The equilibrium is the point where the two curves meet. This point indicates where the market balances and the quantity supplied matches the demand. Businesses can adjust their prices or supply to find the equilibrium point and use workforce planning to meet an upcoming predicted demand.
Many factors influence supply and demand trends. Five common factors that influence demand are consumer preference, income level, substitute prices, complementary goods and future expectations.
Many products become popular based on trends; However, trends don't last forever. As consumer preferences shift, demand for formerly popular products will likely decrease. Similar to trends, future expectations also influence buyer habits. For example, if the consumer expects prices to decrease, they may wait to purchase later, such as buying holiday decorations after the holiday season has ended.
However, complementary goods, which are items that are traditionally bought together, affect demand differently. If one item becomes cheaper, such as pancake mix, the demand for maple syrup is more likely to increase. Production costs, technology advances, the number of suppliers and government regulations can all affect supply trends. For example, advances in technology can influence supply by cutting costs in the production chain, making it cheaper to produce more product.
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A lot of preparation goes into starting a business before you can open your doors to the public or launch your online store. One of your first steps should be to write a business plan . A business plan will serve as your roadmap when building your business.
Within your business plan, there’s an important section you should pay careful attention to: your market analysis. Your market analysis helps you understand your target market and how you can thrive within it.
Simply put, your market analysis shows that you’ve done your research. It also contributes to your marketing strategy by defining your target customer and researching their buying habits. Overall, a market analysis will yield invaluable data if you have limited knowledge about your market, the market has fierce competition, and if you require a business loan. In this guide, we'll explore how to conduct your own market analysis.
In your market analysis, you can expect to cover the following:
Industry outlook
Target market
Market value
Competition
Barriers to entry
Let’s dive into an in-depth look into each section:
Before you begin your market analysis, it’s important to define your objective for writing a market analysis. Are you writing it for internal purposes or for external purposes?
If you were doing a market analysis for internal purposes, you might be brainstorming new products to launch or adjusting your marketing tactics. An example of an external purpose might be that you need a market analysis to get approved for a business loan .
The comprehensiveness of your market analysis will depend on your objective. If you’re preparing for a new product launch, you might focus more heavily on researching the competition. A market analysis for a loan approval would require heavy data and research into market size and growth, share potential, and pricing.
An industry outlook is a general direction of where your industry is heading. Lenders want to know whether you’re targeting a growing industry or declining industry. For example, if you’re looking to sell VCRs in 2020, it’s unlikely that your business will succeed.
Starting your market analysis with an industry outlook offers a preliminary view of the market and what to expect in your market analysis. When writing this section, you'll want to include:
Are you chasing big markets or are you targeting very niche markets? If you’re targeting a niche market, are there enough customers to support your business and buy your product?
If you develop a product, what will its life cycle look like? Lenders want an overview of how your product will come into fruition after it’s developed and launched. In this section, you can discuss your product’s:
Research and development
How do you see your company performing over time? Calculating your year-over-year growth will help you and lenders see how your business has grown thus far. Calculating your projected growth shows how your business will fare in future projected market conditions.
This section of your market analysis is dedicated to your potential customer. Who is your ideal target customer? How can you cater your product to serve them specifically?
Don’t make the mistake of wanting to sell your product to everybody. Your target customer should be specific. For example, if you’re selling mittens, you wouldn’t want to market to warmer climates like Hawaii. You should target customers who live in colder regions. The more nuanced your target market is, the more information you’ll have to inform your business and marketing strategy.
With that in mind, your target market section should include the following points:
This is where you leave nothing to mystery about your ideal customer. You want to know every aspect of your customer so you can best serve them. Dedicate time to researching the following demographics:
Income level
Creating a customer persona can help you better understand your customer. It can be easier to market to a person than data on paper. You can give this persona a name, background, and job. Mold this persona into your target customer.
What are your customer’s pain points? How do these pain points influence how they buy products? What matters most to them? Why do they choose one brand over another?
Information without data are just claims. To add credibility to your market analysis, you need to include data. Some methods for collecting data include:
Target group surveys
Focus groups
Reading reviews
Feedback surveys
You can also consult resources online. For example, the U.S. Census Bureau can help you find demographics in calculating your market share. The U.S. Department of Commerce and the U.S. Small Business Administration also offer general data that can help you research your target industry.
You can use either top-down analysis or bottom-up analysis to calculate an estimate of your market value.
A top-down analysis tends to be the easier option of the two. It requires for you to calculate the entire market and then estimate how much of a share you expect your business to get. For example, let’s assume your target market consists of 100,000 people. If you’re optimistic and manage to get 1% of that market, you can expect to make 1,000 sales.
A bottom-up analysis is more data-driven and requires more research. You calculate the individual factors of your business and then estimate how high you can scale them to arrive at a projected market share. Some factors to consider when doing a bottom-up analysis include:
Where products are sold
Who your competition is
The price per unit
How many consumers you expect to reach
The average amount a customer would buy over time
While a bottom-up analysis requires more data than a top-down analysis, you can usually arrive at a more accurate calculation.
Before you start a business, you need to research the level of competition within your market. Are there certain companies getting the lion’s share of the market? How can you position yourself to stand out from the competition?
There are two types of competitors that you should be aware of: direct competitors and indirect competitors.
Direct competitors are other businesses who sell the same product as you. If you and the company across town both sell apples, you are direct competitors.
An indirect competitor sells a different but similar product to yours. If that company across town sells oranges instead, they are an indirect competitor. Apples and oranges are different but they still target a similar market: people who eat fruits.
Also, here are some questions you want to answer when writing this section of your market analysis:
What are your competitor’s strengths?
What are your competitor’s weaknesses?
How can you cover your competitor’s weaknesses in your own business?
How can you solve the same problems better or differently than your competitors?
How can you leverage technology to better serve your customers?
How big of a threat are your competitors if you open your business?
Writing a market analysis can help you identify some glaring barriers to starting your business. Researching these barriers will help you avoid any costly legal or business mistakes down the line. Some entry barriers to address in your marketing analysis include:
Technology: How rapid is technology advancing and can it render your product obsolete within the next five years?
Branding: You need to establish your brand identity to stand out in a saturated market.
Cost of entry: Startup costs, like renting a space and hiring employees, are expensive. Also, specialty equipment often comes with hefty price tags. (Consider researching equipment financing to help finance these purchases.)
Location: You need to secure a prime location if you’re opening a physical store.
Competition: A market with fierce competition can be a steep uphill battle (like attempting to go toe-to-toe with Apple or Amazon).
When starting a business, it’s your responsibility to research governmental and state business regulations within your market. Some regulations to keep in mind include (but aren’t limited to):
Employment and labor laws
Advertising
Environmental regulations
If you’re a newer entrepreneur and this is your first business, this part can be daunting so you might want to consult with a business attorney. A legal professional will help you identify the legal requirements specific to your business. You can also check online legal help sites like LegalZoom or Rocket Lawyer.
We wouldn’t be surprised if you feel overwhelmed by the sheer volume of information needed in a market analysis. Keep in mind, though, this research is key to launching a successful business. You don’t want to cut corners, but here are a few tips to help you out when writing your market analysis:
Nobody likes 30 pages of nothing but text. Using visual aids can break up those text blocks, making your market analysis more visually appealing. When discussing statistics and metrics, charts and graphs will help you better communicate your data.
If you’ve ever read an article from an academic journal, you’ll notice that writers include an abstract that offers the reader a preview.
Use this same tactic when writing your market analysis. It will prime the reader of your market highlights before they dive into the hard data.
It’s better to keep your market analysis concise than to stuff it with fluff and repetition. You’ll want to present your data, analyze it, and then tie it back into how your business can thrive within your target market.
Markets are always changing and it's important that your business changes with your target market. Revisiting your market analysis ensures that your business operations align with changing market conditions. The best businesses are the ones that can adapt.
Your market analysis helps you look at factors within your market to determine if it’s a good fit for your business model. A market analysis will help you:
Markets are always shifting and it’s a good idea to identify current and projected market conditions. These trends will help you understand the size of your market and whether there are paying customers waiting for you. Doing a market analysis helps you confirm that your target market is a lucrative market.
The best way to serve your customer is to understand them. A market analysis will examine your customer’s buying habits, pain points, and desires. This information will aid you in developing a business that addresses those points.
Starting a business, especially if it’s your first one, requires startup funding. A good first step is to apply for a business loan with your bank or other financial institution.
A thorough market analysis shows that you’re professional, prepared, and worth the investment from lenders. This preparation inspires confidence within the lender that you can build a business and repay the loan.
Your research will offer valuable insight and certain advantages that the competition might not have. For example, thoroughly understanding your customer’s pain points and desires will help you develop a superior product or service than your competitors. If your business is already up and running, an updated market analysis can upgrade your marketing strategy or help you launch a new product.
There is a saying that the first step to cutting down a tree is to sharpen an axe. In other words, preparation is the key to success. In business, preparation increases the chances that your business will succeed, even in a competitive market.
The market analysis section of your business plan separates the entrepreneurs who have done their homework from those who haven’t. Now that you’ve learned how to write a market analysis, it’s time for you to sharpen your axe and grow a successful business. And keep in mind, if you need help crafting your business plan, you can always turn to business plan software or a free template to help you stay organized.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.
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The most common example of demand and supply is the price fluctuation of securities. Stock market analysts study both the demand and supply of stocks to predict future price trends. Let us assume that the demand for a particular security is high.
1. Define Your Objectives. Clearly articulate the goals of your market analysis. Are you aiming to understand customer preferences, assess competition, or identify market trends? Defining...
To do so, you will need to walk the reader of your business plan through the ins and outs of your target market: who are the customers, why do they buy, who are the main players (competitors, suppliers), what are the rules and regulations, what are the key trends, etc.
A successful business adapts to supply and demand and even influences it. This guide will help you understand supply and demand and why it matters for your business.
A demand and supply analysis is a vital tool used in economics to inform business decisions. When it is done accurately after considering factors such as trends and seasons, a supply and...
Your market analysis helps you look at factors within your market to determine if it’s a good fit for your business model. A market analysis will help you: 1. Learn how to analyze the...