Dissecting Demand and Its Four (4) Stages

What do we think of when we discuss demand?

We tap it, capture it, deliver it, and get people to pay for it, but do we really know what it is? 

We equal demand with how long a line is at a restaurant, or by the sheer number of customers at a shop.  We say a product is in high demand when it is chronically unavailable at a store or by the higher price it fetches versus rival items. 

We categorise demand by how many items we sell or ship.  The higher the sales; the higher the demand. 

We see demand as a need.  We need food, water, companionship, and health care.  When we need to be satisfied, we demand it. 

We base demand on surveys and try to rationalise it with mathematical and economic algorithms.  We put trust in market research studies that determine what people seek. 

We talk a lot about demand, but we define it differently.  And because we define it differently, we manage our businesses differently. 

Some of us who are enterprise owners wait for demand to happen.  Supermarkets, for example, wait for shoppers to buy items off the shelves.  Retailers count on customers walking into their stores to buy items on display. Hospitals and clinics wait for their patients who seek medical assistance. 

Some of us chase demand.  Peddlers go door-to-door to sell their wares to would-be buyers.  Some send spam email or text messages to push their products, hoping a fraction will get interested and buy. 

Some of us attract demand.  Soft-drink producers pitch different variants of drinks (e.g., sweetened, no sugar, non-calorie, caffeinated) in the hopes people will find favour with their products and choose them when they shop.  Fashion companies periodically offer new clothes styles & designs to woo people to buy and wear.

Some of us create demand.  We invent items we hope people will want or need.  We didn’t think of needing personal computers before the 1960’s, before Olivetti manufactured the first desktop computer.  We really got interested when IBM in 1980 introduced its desktop computer with the Windows DOS operating system.  More than forty years later, we can’t imagine living without computers and the technologies that came with it (laptops, tablets, smartphones, the Internet). 

What is demand, anyway? 

The dictionary defines demand as:

  1. An urgent requirement;
  2. The desire and means to purchase goods;
  3. The amount of goods purchased at a specific price;
  4. The state of being wanted for purchase or use.

As a verb, demand is wanting or needing something.  As a noun, demand is the amount or quantity of what we want or need. 

For those of us who are businesspeople, demand represents what and how much people want, need, and pay for.  Demand is what our businesses depend on for revenue, income, and growth. 

We seek demand from the market, that community of people who are the potential buyers of our products & services.  We persuade people of the market to pick & buy our items.  We call it marketing and it includes the activities of inventing, advertising, promoting, peddling, and displaying our items, in which we aim to realise demand. 

Demand begins with interest or urgent need, proceeds to choice, and moves to the act of obtaining.  It starts with “we like this” or “we need this,” to “we want this,” to “we will buy this.”  Demand does not end, however, with the customer’s desire to buy an item; it ends with the sale, the customer’s purchase, payment, and gaining possession & ability to consume or use of the item: “we are ordering this item,” “we are obtaining the item,” “we are using the item,” and “we are paying for the item.”

Marketing is about getting people to choose an item.   Sales is about getting people to buy, pay, possess, and use the item.  We call this process of marketing to sales: demand creation.  We generate demand from the market we target and translate it into sales. 

We get confused with defining and measuring demand when we are not clear which stage of the process we are talking about.  What a customer prefers (we like this) is not the same as how much a customer will buy (we are ordering this).  And what a customer may want to buy is not a sale, at least until it is paid for.  If a customer returns an item, the sale is for naught.

Each stage of demand has its own set of drivers.  A driver for demand by interest (we like this), for instance, would be a product’s features (e.g. a high-resolution camera in a smartphone).  Drivers for choice would include the offered price and an item’s superior advantage over rivals.  Drivers to obtain an item would include the customer’s urgency to acquire or satisfy a requirement.  And drivers to close the sale would be the finally agreed price, delivery promise, and agreed-to terms & conditions. 

Knowing demand at every stage is beneficial to how we manage our businesses. 

Case in Point:  Ferrari

Ferrari knows that many people like their sport cars.  Just about every young car enthusiast would just love to have a Ferrari sports car.  Demand based on preference (I love this) therefore would be very high.  But because most young drivers can’t afford Ferrari sports cars, demand in terms of choice (I want this) would be much lower.  Sales therefore would be a small fraction of how many interested people there are to own a Ferrari. 

Ferrari wouldn’t lower prices or raise production capacity to boost sales; it would rather limit availability and keep prices high.  Ferrari knows that as long as there is a large preference for its cars, it would be able to sell cars to a certain few who would choose, wait, and pay for them at a very high price (and at a very high profit margin for Ferrari).   

Case in Point: the Kornik Vendor

A vendor on a busy Manila street sells kornik, a Filipino snack food made from deep fried corn puffs.  The vendor hands out free samples and counts on passers-by to like and buy his cooked kornik, which he sells in small bags.  For so many years, even through the coronavirus pandemic of 2020 to 2022, people, both regular customers and new, have bought dozens of kornik bags from the vendor. 

The kornik vendor competes with many rivals near and far from him.  Steady demand for his kornik is due to its taste which his customers very much prefer (I like this) and the price which can go as low as PhP 20 (40 US cents) for a small bag (I will buy this).  The vendor cooks his kornik via his own recipe and counts on people preferences to continually buy his product. 

Case in Point:  The Electric Company

Before we can use the electricity in our homes, we likely need to apply to an electric utility company to get connected to the power grid.  In some countries, we can choose which electric company to source our electricity from.  We can prefer, for instance, a company that is tapping renewal energy (e.g. solar, wind) or one that uses cleaner fuel (e.g. natural gas vs. coal). 

The process of demand for electricity, thus, can begin with preference for what energy company or source (we like this), to choosing the company (we want this), to the processing of our application for an electric connection (we are ordering this much electric load capacity).  The actual sale happens when we use the electricity (i.e., turning on lights & appliances). 

The electric company would estimate demand from what energy sources customers prefer and how much load they would be applying for.   The company will invest in facilities and negotiate supply contracts based on that estimated demand.

Case in Point:  The Prescription Drug Business

When we have an ailment, we go to our doctor who often prescribes us medicine to buy from the drug store.  As the doctor’s prescription dictates the details of what drug to buy, we usually just go straight to ordering the item we need.  We hardly think about preference or choice; we just fill the prescription and hope for medical relief or cure. 

Drug companies peddle their brands and products to doctors and not patients.  The first stage of demand creation when it comes to prescription pharmaceuticals is getting doctors to like the drugs the companies are marketing.  Doctors then prescribe their preferred medicines to their patients.  Succeeding demand stages follow with their patients’ purchases at the drug store. 

Because we define demand differently, we manage our businesses differently.  Demand varies depending on what stage it’s in, from interest or requirement (we like this, we need this), to choice (we want this), to intent to obtain (we want to buy this), to the sale (we are ordering, availing, and paying for this). 

Each demand stage has its drivers which influence how we market and sell our items to potential customers. 

The stages of demand and how we translate them to sales make up the process of demand creation.  It lays down the path to the next step:  demand fulfilment

About Ellery’s Essays

Published by Ellery

Since I started blogging in 2019, I've written personal insights about supply chains, operations management, & industrial engineering. I have also delved in topics that cover how we deal with people, property, and service providers. My mission is to boost productivity via offering solutions and ideas. If you like what I write or disagree with what I say, feel free to like, dislike, comment, or if you have a lengthy discourse, email me at ellery_l@yahoo.com ; I'm also on LinkedIn: linkedin.com/in/ellery-samuel-lim-40b528b

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