Understanding Supply & Demand in Small Business

Supply and demand is an important concept in economics it is the relationship between the quantity of goods that producers wish to sell at various prices and the quantity that consumers wish to buy. It is the main model used in price determination not just with products and services but also in stocks and forex. It is often used on a macro level by economists, today I am looking at it on a micro-level when it comes to small business and why it is very important when starting a business.

Supply is basically the amount of goods (and even services) available in a marketplace. Demand is the amount of willing buyers or units that buyers are willing to purchase. Understanding both is key to success in business. This is a big topic as it traverses a lot besides understanding supply and demand you need to understand accompanying concepts such price sensitivity so you can take full advantage.

If you look at a typical small business plan:
Value Proposition
Market Need
Your Solution
Target Market
Sales Channels & Marketing Activities
Financials: Budgeting & Forecasting
Funding Needs & Use of Funds

When starting Demand is the Market Need, Supply is the existing Competition. Somewhere between there, fulfilling demand is the sweet spot to success.

When we write the Market Need part of our business plan. We ask ourselves what “problem” are we solving for our Target Market.
Demand is usually divided into creating or satisfying demand. To create a demand your Marketing Activities needs to explain to people why your Value Proposition is superior to that that is already on the market.

Satisfying demand means having the right product at the right place at the right price but that is not so easy because you almost always have existing competition, often with lots of experience, economies of scale and deep pockets. One of the biggest advantages in business is to be able to predict demand. For established businesses, this usually means looking at your previous year’s sales and see what was popular when and optimising your Operations accordingly. You can also make a lot of money in a new business by predicting where demand will be next by keeping your ears to the ground.

COVID-19 Predicting and Satisfying Demand
When the coronavirus was declared a pandemic in March 2020 the price of sanitiser, masks, thermometers skyrocketed because demand far exceeded supply.  It’s a once in a century pandemic and most people – even governments were caught off-guard, yes there were some news reports making the rounds that people in Wuhan in China in November, December 2019 experienced some kind of pneumonia is was all very vague because the WHO parroting China said that there was  “no clear evidence of human-to-human transmission”. However, people who kept their ears to the ground started stockpiling even before 30th January 2020 when it was declared a “Public Health Emergency of International Concern” and were able to make a lot of money as panic buying ensued – helped by the fact that many factories were shut down. Once the Chinese got it under control, factories came back online so did supply and supply caught up and now supply exceeds demand and prices have collapsed from their highs.

After you have come up with a business idea, you have to establish a market need and this is essentially the “problem” you are solving, that your clients have and are paying you to solve. This “problem” has a sweet spot somewhere between supply and demand. Let me explain: At its simplest business can be distilled to “Where are you going to buy something (supplier) and where are you going to sell it (client)”.

Food salvage – When demand exceeds supply

The food salvage business is a great business, it solves a problem for both your supplier and client by taking stock off the hands of manufacturers, importers, wholesalers, retailers that they can’t sell, it can be damaged packaging, close to expiry or even expired and also frees up space, it also solves a problem for consumers in that they are buying products they really need well below its retail value.

However, here is what makes this a popular business: demand exceeds supply. Companies go out of their way to avoid spoilage, to avoid their products ending up in the salvage stream, where they only reclaim a fraction of its value. On the other hand, consumers are struggling, the vast majority of South Africans live in poverty, and every cent matters. The sweet spot of the food salvage business is securing enough supply; it is building a list of suppliers to continually provide you with stock (or one big one). That is the sweet spot for success is the salvage business.

Stay tuned for Part 2

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