Demand: How It Works

Not everyone wants to buy your product or service. There is a limited demand in your industry or business, and to understand your demand is the key to ensuring a profitable business. Demand is an economic term that relates to the consumers desire to purchase goods and services. 

An increase in the price of an item will tend to reduce the number of each one planned to be bought. Likewise, a decrease in the price will tend to increase the number of each item planned to be bought.

So it should come to no surprise that demand affects your pricing strategy

Understanding demand

Businesses tend to spend a considerable amount of money to determine how many people are actually interested a specific product or service. How much of their goods will they eventually sell at any given price?

Consequently estimation of demand is extremely important, and any loss of it can result in outstanding sales for companies. In this case, the demand helps fuel profits and the economy, therefore any potential decrease would not be beneficial to the company.

How do you measure demand?

In economic theory you measure in elasticity. The term “elasticity of demand” describes the measure of how much an increase in income or another economic factor will increase or decrease, or increase more, one’s demand. Such changes in demand has also been referred to as “price elasticity of demand.”

How demand is affected in products and services

If companies charge excessively for a product, the quantity demanded would be low and less product would sell, leading to a decrease in sales.

If a company’s suppliers charge too much money, the company may not be able to buy enough product to cover its costs, nor may be able to earn sufficient profits. Thus, a company could either price its goods too low or too high.

The are some factors that affect the demand for a service. One constraint when determining demand is the customer’s satisfaction with the service. Another factor to consider is the availability of other goods that compete with the good or service. 

What factors affects the demand?

The demand for a product will increase in certain instances and decrease in other instances, and this is often the result of several factors. For instance, products’ price, perceived quality, and consumer income are usually high and would affect the demand positively, purchasing would testify to this. As consumers’ income grow, they would inevitably have less capacity to buy.

Price exert substantial effects on demand. As usually prescribed, analysts should note that there is a clear link between the price of a good and the demand for it. In general, lower prices create higher demand, and higher prices create lower demand. This is due to the satisfaction levels of consumers in regards to their budget. If they simply cannot afford your product, they will not be in a position to buy.

But this concept is not as clear cut as it may seem. Because of behaviour economics or rather psychology, if a price is too low, the demand will not increase, but decrease. This is because the perceived quality is lower when the price is considered too cheap. 


What becomes apparent when thinking about demand is how you position your product and services can strongly impact the demand. A key of this is price, as we can see a direct correlation in demand, but this is also closely related to the elasticity of the product or service. 

That’s why you need to have a strong pricing strategy and a good understanding of your customers demographics.