How to Gauge Demand - Sizing up the Market for Your Product

Knowing the demand for your product is one of the cardinal rules in the book - you have to know how much to produce in a competitive market space. You can't afford to produce too much and under-producing will undercut profits; you have to get it right.


Luckily, its not rocket science. But you will have to do some research. Here are the ways:

1. By accessing publicly-available information on consumer spending patterns in your area (this can be from local university studies, health studies, business studies, federal information or other similar sources available online or at your local government office or library).

2. By commissioning a study, survey or inquiry targeting typical points-of-sale for your product including supermarkets, food markets, restaurants or other stores.

You NEED this information, and a little legwork won't hurt. Let's say your business involves producing packaged salted meats for local food stores. In this case you have to look up any available information about packaged meat consumption in your area. If no information is publicly available, you can schedule a visit to the largest store that stocks packaged meats in your area.

Ask to speak with the manager and explain your mission. S/he should be able to provide you with a general idea of the demand for your product AT their store. Be careful not to confuse this information with the actual demand for your product - it's not the same thing! Here's what you need to ask your contact:

1. What is the average number of visitors to the store per month? (let's call this variable V)
2. What is the average number of monthly visitors who buy packaged meats? (let's call this variable M)

Additionally, you need to know the population of your town or city (let's call this variable P). Now that we have all this information, we can estimate the demand with the simple formula below:

Demand (D) = (M/V)*P

or more generally, when gathering data from a large retail store, demand, D, is given by:

Demand = (average number of monthly visitors who buy product / average number of monthly visitors)*population of the area

The formula is based on the assumption that: 1. the store is very popular and large 2. the population is homogenous. Anyway, as long as you pick a big store in a central part of town, you should be just fine.

This should give you a good estimate of the demand for your product, so you know how to tailor your production and how best to combine your factors of production for maximum profit.

Hope this was useful!

Until next time, remember:

"Fortune favors the smart in small business."

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Best,

M.