As a CPG company, one of the biggest challenges you face is anticipating demand. If you put out too much product, you could wind up with unusable stock sitting in a warehouse. Products with a best-by date can go bad before consumers have a chance to purchase them. On the flip side, if you don’t have enough stock, consumers can switch to your competitors, and they may not come back. (A lesson many CPG manufacturers learned during pandemic panic buying.)
So, understanding the elements that go into product demand is hugely beneficial. Fortunately, we’ve compiled a list of the top seven factors affecting demand. Let’s break them down.
1. Tastes and preferences
Consumers can be fickle, particularly when shopping for CPG products. Tastes and preferences can change within a market for a wide array of reasons. Some of these reasons can be intrinsic, while others are external.
For example, the tastes of single shoppers and families are vastly different. A family will likely buy child-friendly products, while a single person is only shopping for themselves. Other influences can include:
- Marital Status
Breaking down each component can provide a clearer picture of each demographic so that you can plan accordingly.
2. Consumer’s income
As a rule, the more money consumers have, the more they like to spend it. Not only do wealthier groups shop more frequently, but they tend to prefer high-quality, pricier products. The opposite is also true, meaning that changes in consumer demand can ebb and flow along with general economic stability. During a recession, consumers will spend less than they do in a boom.
3. Availability of substitutes
No matter what you sell, there will always be competition. You have to pay attention to your competitors, as they can eat into your market share if you’re not careful. When talking about the availability of substitutes, the factors that influence it can include:
- Price Gaps – How much are your products compared to others?
- Distribution – Do competitors offer more items in a similar product line? Are those products more widely available?
- Relation of Substitutes – Are these products a direct one-to-one translation, or are they just similar? For example, coffee and tea are unique, but if the price of one falls, the demand for it increases, reducing the demand for the other.
4. Number of consumers in the market
In this case, demand is determined by how many people are buying a particular product. Therefore, the more consumers available, the greater the demand. In some cases, this number increases because of population changes. In other instances, demand goes up because the product appeals to more demographics. In that situation, the number of consumers is technically the same, but more of them are buying than before.
5. Price of product
One element we should discuss is the price elasticity of demand (PED). As a rule, when the price of a good goes up, demand goes down. Price elasticity is usually a negative number, like -0.5. So, with that example, if the price of a product goes up by five percent, its volume will go down by 2.5 percent.
While there are tons of factors that can help determine the elasticity of a product, knowing that number can help you anticipate demand more precisely.
6. Consumer’s expectations
Another reason that anticipating demand can be so challenging is that you have to pay attention to both habits and expectations. Unfortunately, it’s much harder to predict or understand these expectations. Overall, it’s much easier to look at past data to figure out what could happen in the future.
Many things can influence consumer expectations. If we take the COVID-19 pandemic, for example, fears drove consumers to buy toilet paper and hand sanitizer in massive quantities. Pre-pandemic, it would have been difficult to anticipate that kind of reactionary spending.
7. Elasticity vs. Inelasticity
We discussed price elasticity, but this concept affects both prices and consumer demand. Elastic goods are those that are affected by driving factors. Prices, availability, and competition can have a positive or negative correlation, depending on the situation. As we illustrated, price elasticity is usually negative. However, if the driving factor is wider distribution, it would create positive elasticity as your volume would also increase.
By comparison, demand for inelastic goods doesn’t fluctuate much (if at all) from external factors. For example, if the price of Product A goes up, but the sales volume stays constant, that product is inelastic.
Key takeaways for CPG brands
Knowing these seven factors is only the first step. How can you utilize this information to move your brand forward and expand your market share? Here are some ways to internalize this information.
Anticipate consumer needs
Many smaller CPG companies are reactive to the market, not proactive. Brands have to use past data to make informed decisions, but that information is not always insightful. Once you can dive deep into the factors that influence consumer demand, you can anticipate their needs more accurately. From there, you can adjust your product offerings and capitalize on shifting tastes to increase your sales.
Not only can this data help you understand your current customers, but it can also provide insight into new demographics and market potential. If you’re looking to expand to new areas or retailers, you’ll need to know what to expect.
Create better promotions
If you’re not maximizing your promotional spending, you’re hurting your bottom line. Once you know more about your customers and why they shop for your products, you can develop marketing materials to appeal to their tastes and sensibilities.
Getting data from all seven factors can help you develop more precise marketing materials that can spur action. Plus, showing that you understand your customers can help build brand loyalty, which is always a massive benefit in the CPG world.
Find your place in the market
When building your brand, it helps to see your company on a macro level so that you can figure out where you stand in the marketplace. Gathering data from these seven factors can enable you to get a bird’s eye view of yourself and the competition so that you can determine a better path to growth. Otherwise, you could be flying blind and making decisions that may or may not strengthen your bottom line.
Picking the right analytics solution for your CPG company
Having tons of data is only helpful if you can analyze it, digest it, and turn it into actionable goals. Byzzer by NielsenIQ has all the tools necessary to help your business understand your customer’s tastes and preferences, including how they change over time. With our comprehensive reports, you can have all the right data at your fingertips, including breakdowns and insights to help you understand what it all means.