Supply and Demand play a significant role in your marketing strategy, and if it doesn't currently, then it should right away.
Consider a hypothetical scenario of a brick and mortar store owner who finds that more people are buying their product. At the same time, supply is running low. For this scenario, we'll say the business owner sells cleaning products that can combat viruses like COVID-19. His supply and demand were generally well-balanced before the pandemic. However, since widespread hysteria consumed many buyers and resulted in excessive cleaning, sanitizing, and hoarding, the business owner is unexpectedly affected by higher demand for products with a low supply that can't immediately keep up.
Should he alter his marketing strategy?
Absolutely! But how?
That is where an understanding of supply and demand becomes invaluable.
Supply refers to the number of products and services available to meet consumer needs. According to Investopedia, "The assumption behind a market economy is that supply and demand are the best determinants for an economy's growth and health." The more you know about the economy's growth and health, the better suited your marketing strategy will be.
First, let's consider the importance of supply in marketing, then we'll dive into demand.
When Should Supply Matter to Marketing?
Supply matters to marketing when there is an abundance of supply to sell. While it can be beneficial for quicker response time and less risk of a shortage, vendors with physical products pay additional costs for storing extra products either in-store or in a warehouse. Not to mention, InFlow explains that "the more inventory you have on hand, the greater the amount of the business' capital is tied up. You will risk slowing down your business' cash flow." Additional risks can include your inventory becoming obsolete, items not selling, and higher insurance premiums.
On the other hand, supply shortage can also matter to marketing. When entrepreneurs believe there is a supply shortage, they are more likely to start a competing business to fill that hole in the marketplace. Your marketing strategy must adapt to compete with this new force. For instance, you'll want to alter your marketing strategy to distinguish your business from the competition (current and potential), so when customers are in the decision-making process, your products are the first to come to mind.
How Supply Impacts Marketing
As shown in the initial example of the hypothetical business owner in the sudden position of high demand and low supply, marketing is heavily influenced by the impact of supply. The business owner's low supply increases the need for a new marketing strategy that positions them in front of the new competition.
Had the owner detected an oversupply instead, they would still need to alter their marketing strategy to increase demand. In the latter scenario, 'perceived' supply is a vital factor to consider in your marketing strategy.
Perceived Supply versus Real Supply
An important distinction between 'perceived' supply and 'real' supply is whether other people know there is a supply glut. If consumers think your product is rare despite its accessibility and abundance, demand is likely to increase and resolve your excessive inventory problems. Take into account the perception of diamonds. Diamonds are relatively plentiful, but the perception is that they are rare, which makes them valuable.
When Supply is Increased or Decreased
If the perceived supply increases, use discounts and sales to drive purchases. Consumers believe the product is plentiful, so unless marketing can differentiate their offerings, they will have to compete based on price. If they can differentiate themselves, they can lower the perceived supply, as the example below shows.
If perceived supply decreases, use marketing to translate that perception into an increase in demand like diamonds. For instance, a business owner in the bourbon industry might market an 'rare' ingredient in their product. Due to this rare ingredient, supply is limited, but the product value is increased because it's a family secret consumers can't get anywhere else. The strategy drives buyers to find more value in the product, and demand, in turn, increases.
Your marketing strategy should be extremely sensitive to changes in demand at all times. Every scenario should be considered to prepare for unexpected increases/decreases in demand properly.
Khan Academy explains that at least two factors can affect demand at any time, "willingness to purchase...If you neither need nor want something, you will not buy it," competition prices on related goods, and "the size or composition of the population. [For instance,] The more children a family has, the greater their demand for clothing. The more driving-age children a family has, the greater their demand for car insurance, and the less for diapers and baby formula."
How does demand impact marketing?
First, there is the impact of new competition. Demand shocks can create openings for new businesses, making it essential to adapt your marketing strategy to fit the demand change. For instance, office cleaning companies have always been around, but COVID-19 has led to a major increase in companies that "disinfect" offices. Those office cleaning companies will need to change their marketing strategy to accommodate the new competition.
You'll want to use psychological tactics like exclusivity to make the product seem even more appealing to consumers. An increase in demand can also justify raising the price, which can go towards increasing the marketing budget.
Finally, there is the potential for a decrease in demand. Again, your marketing will be impacted by the change. It can drive you to position your product in a new way and rethink how you want to move forward. You may need to rebrand or reframe the product so that it has more appeal to audiences.
The Impact of Supply & Demand, and How You Should Respond
The impact of supply and demand depends on the product’s nature and whether the change is perceived or real. In the case of the hypothetical business owner selling 'cleaning products,' the increase in demand was very real, and the owner needs to respond quickly in their marketing strategy.
Covid-19 hit the industry with a substantial need for disinfectants, and new competition immediately becomes aware of the opportunity at hand. The business owner needs to adapt to a new strategy that no longer focuses on pre-covid factors but rather one that immediately sets their product apart from the new competition in the era during and post-covid. That way, when the industry becomes saturated with supply, consumers are more likely to stick with the product they know and trust.