Why does the demand for a product require consumers to be willing and able to purchase them at each given price?

Excited about a new product idea but not sure if anyone else will be?

Sometimes ecommerce entrepreneurs need more than a gut check to prove their business venture is viable. Whether it’s for your own reassurance or to build a strong case for a business funding application—or something else entirely—knowing the supply and demand in your niche is critical to informing your business plan.

Calculating market demand does more than confirm there’s an audience for your product: it informs pricing strategies, marketing initiatives, purchasing, and more.

What is market demand?

Market demand is how much consumers want a product for a given period of time. Market demand is determined by a few factors, including the number of people seeking your product, how much they’re willing to pay for it, and how much of your product is available to consumers, both from your company and your competitors.

Market demand can fluctuate over time—in most cases, it does. This could be due to a variety of factors, some seasonal and predictable, others more out of our control, like a natural disaster or even a pandemic.

When more people want a specific type of product, this is an increase in market demand. Under these circumstances, prices typically go up—more people want it, and more people are willing to pay for it. But when market demand decreases, prices typically follow suit. It gets more complex than that, but we’ll get into it later.

One common business mistake is not considering market demand for your venture, but especially when it comes to product development. You don’t want to invest too much capital in products that no one will buy—sitting stock eats at your profits and takes up warehouse space.

On the flip side, you also want to make sure you always have enough to serve your customer base. Out-of-stocks are costly issues and could spoil your chance to snag a new lifelong customer.

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What is the difference between individual and market demand?

As you might guess, individual demand refers to a single person or household, while market demand generalizes trends for many individuals in a particular segment. An individual who is passionate about dogs is more likely to pay more for a dog product than someone who has an average or minimal interest level. That individual’s preferences might not reflect the trends of your entire target market.

So why is this important? It’s important to understand that when you do your own market research to estimate demand, you need to survey many individuals—not just the individuals who have the most passion for your industry or product. If you forecast based on individual demand, you might have bad data and make yourself vulnerable to significant losses. Market demand is basically a bunch of individual demand data points put together.

What’s a market demand curve?

The market demand curve is a visualization of demand based on product pricing. Essentially, you map all of the individual demand inputs onto a line graph to create the market demand curve.

On the y-axis, you have the different price points. On the x-axis, you have the number of times the product has been purchased in a given time period at that price point. You’ll have several lines, one for each individual, that typically slope downward. This is because when a product is priced higher, people are likely to buy less of it. On the flip side, the supply curve slopes upward.

You can also find inspiration in Google Trends by typing in keywords, phrases, and topics to see how frequently users search these and related terms. You can filter by time period, country, and even city. It’ll also reveal where those searches are trending.

Much like the trending countries, the specific cities searching for our potential product give us insight into the distribution of interest and can give you insight into where you should focus your marketing efforts should you decide to move forward.

Check out Google’s “recently trending” page for emerging topics. Here, we can see there’s been some interest in the new iPhone. Ecommerce entrepreneurs might look at that as a way to drill down further into iPhone accessories specific to this model.

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How do you calculate market demand for a product?

Ready to put all this information to work? Let’s crunch some numbers in a hypothetical example.

We’ll go back to the iPhone accessories idea—we want to sell “Billie Eilish iPhone cases,” which was another one of our long tail keywords we found in Google’s Keyword Planner.

A quick look on Google Shopping shows that these phone cases go for anywhere from less than $1 to as much as $25 per case. These are important data points.

Now, we look at individual demand. How many Billie Eilish iPhone cases do people buy and at what price level?

Riley, our first customer, likes to switch out her phone case frequently—and she also breaks it a lot. She typically buys a new iPhone case every month—over the course of a year, six of those feature Billie Eilish. Our second customer Sandra makes her cases last longer, so she only buys two a year. Both of those are Billie Eilish.

However, as we adjust the given price, we also influence both Riley and Sandra’s behavior. Increased prices will make them both purchase iPhone cases less frequently.

Here’s what that looks like for a full year:

Notice how as prices go up, demand goes down. That’s pretty much universal for all products and all markets (though there are always exceptions). To get an idea of total market demand, you’d repeat the above process for each customer.

Learn more: How to Start a Phone Case Business

Bringing it all together