Nature of Demand in Industrial Markets

The demand for industrial products and services does not survive by itself. It is  derived from the ultimate demand for consumer goods and services. Therefore,  industrial demand is called derived demand. Sometimes, the demand for  industrial product is called joint demand, when the demand for a product  depends upon its use along with the existence of other product or products.  Cross elasticity of demand exists for some substitute products in industrial  market. These concepts are detailed as follows:

Derived Demand

The single most important force in marketing of industrial products and services  is derived demand. Industrial customers buy goods and services for making the  use in producing other goods and services and finally produced product/service  sold to the consumers. In industrial marketing, the demand for industrial goods  and services is derived from consumer goods and services. For example, the  demand for precision steel tubes does not exist in market. It is demanded for the  production of bicycles, motorcycles, scooters, and furniture (steel tables and  chairs), which are consumed by the consumers. Thus, the demand for precision  steel tubes is derived from the forecast of consumer demand for bicycles, motor-cycles, scooters, and furniture. In case of capital goods, such as machinery and  equipment (e.g. machine tools, textile machinery, leather machinery, etc.) that  are used to produce other goods, the purchases are made not only for the current  requirements, but also in anticipation of profit; form the future usage. If  businessmen of feel that there may be a recession in near future, their purchases  will be drastically curtailed. On the other hand, if the attitude of businessmen is  favorable  (i.e. they feel the business is on the upswing) their investment in  capital goods and other industrial products will increase. Thus, the attitude of  businessmen is very important, as it reflects the optimism or pessimism about  the future. During the periods of recession, or reduced consumer demand,  industrial firms reduce their inventories/stocks, or reduce the production, or do  both. On the other hand, during the period of prosperity, there is an increased  production and sales of consumer goods, which results in an increased demand  for industrial goods. This may be the right time for price increases and building  stocks as ready availability and shorter delivery period becomes very important.

An industrial marketing firm should be in close touched customers purchase,  finance, quality, R&D and marketing departments, so as to get information on  changes in customers’ sales, new product development, financial condition, and  the quality of its products.

Joint Demand

Joint demand is common in the industrial market because it occurs when one  industrial product is useful if other product also exists. For example, a  pump-sets  cannot be used for pumping water, if the electric motor or diesel engine is not  available. Similarly, the department of telecommunication, which  requires a complete kit, consisting of different items, for joining the under  ground telecom cables, cannot buy only some of the items from a supplier as it  does not contented the kit. Thus, some industrial products do not have industrial  demand, but are demanded only if the other products are available from the  the  industrial supplier.

Cross-Elasticity of Demand

Simply, elasticity is the change in demand from a change in price. The demand  for most of the industrial goods can be inelastic (i.e. insensitive to changes in  prices) for a particular industry, but at the same time, highly elastic (i.e.  sensitive to changes in prices) for individual suppliers. This is because, the total  industry demand comes from the united needs of all the customers rather than  price, and hence it is relatively inelastic. Though, between the various suppliers,  a slight change in the price by one firm may create a major change in the  quantity and thereby, be highly elastic for anyone firm. Cross-elasticity of  demand is the reaction of the sales of one product to a price change in another  product. This concern present in both consumer and industrial marketing, but it  is more imperative in industrial marketing as it can have a dramatic impact on  the marketing strategy of an industrial firm. For example, the demand for  aluminum is related to the prices of wood and steel for the doors and window  frames, as they are close substitutes. Apart from other advantages of aluminum  doors and windows, the cost comparison with steel and wooden door and  window frames play an important role in the purchase decisions in the  construction of houses, commercial offices, factories, hotels, hospitals, and so  on. Aluminum extrusion companies regularly collect the information on cost of  steel and wood, and advertise the advantages of use of aluminum in terms of  negligible maintenance cost, elegant looks, environment, friendly in comparison  to wood, and so on. Whenever there is a change in the price of aluminum due to  changes in excise duty or other input costs, there is an impact on the sales of  doors and windows made out of wood or steel. The reverse is applicable for  changes in the prices of steel or wood. Thus, the marketing persons working in  the aluminum extrusion companies should recognize that the cross-elasticity of  demand exists for their products. If the cross-elasticity of substitute products is high, it indicates that these products compete in the same market. An industrial  marketer must know how the demand for his products is likely to be affected by  the changes in the prices of substitute products. Because of the unique  characteristics of derived demand, the industrial marketing persons would  anticipate any increase or decrease in the demand for their products, based on  the changes in the demand for their customers’ products. They must know that  existence of cross-elasticity of demand for their products so as to  recognize  both  direct and indirect competition.

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