Market Demand: How To Identify and Calculate It for Your Product

Entrepreneurs need more than a hunch to prove their product idea is viable. Understanding market demand is a critical step to starting a business, whether to validate your own idea or to secure funding.

Nancy Twine knew this when she founded hair care company Briogeo. “If I was going to leave my career in finance to start my own company, I wanted to feel really good about what I was going to embark on,” she says in an episode of the Shopify Masters podcast.

So she headed to the library to analyze market trend reports. “I wanted to make sure that I was launching in an industry that was growing and that had a large addressable market so that I had people to sell my products to,” Nancy says.

Calculating market demand means understanding your target audience: their purchase behaviors and preferences, and what influences them. Ahead, learn the basics of determining demand for a product or service before committing to your big idea.

What is market demand?

• Factors influencing market demand
• Why is market demand important?
• What is the difference between individual and market demand?
• What’s a market demand curve?

Market demand is the total quantity of a product or service that consumers are willing and able to purchase at various price levels in a given time period. Understanding market demand is crucial for businesses to inform things like production levels, pricing strategies, and marketing efforts that align with consumer needs and trends.

The law of demand is a basic rule in economics that says, if all factors remain unchanged, higher prices lead to people buying less, and lower prices lead to people buying more. On a demand curve, a graph that shows the relationship between price and demand in a period of time, represents this as a downward curve.

Factors influencing market demand

Several factors can influence market demand, including:

• Buyer’s income. Changes in consumer income can shift the entire demand curve. As incomes rise, demand for “normal” goods typically increases, while demand for “inferior” goods (low-cost alternatives) decreases.
• Prices of related goods. Changes in prices of substitute or complementary goods can affect demand for the original product.
• Consumer preferences. Changes in tastes, trends, or societal values can significantly impact demand. For example, skinny jeans were in style in the early 2010s but started to lose favor by 2016.
• Consumer expectations. Anticipation of future price changes or availability can affect current demand. For example, a hurricane warning can drive people to stock up on toilet paper and water.

Total market demand can fluctuate over time—in most cases, it does. This could be due to a variety of factors, some seasonal and predictable, others more out of one’s control, like a natural disaster.

Why is market demand important?

When more people want a specific type of product, the quantity demanded increases, and retail prices typically go up. When market demand decreases, prices typically follow suit. With any truly competitive market, there will always be ebbs and flows of supply and demand.

One common business mistake is not considering market demand for your venture, especially when it comes to product development. You don’t want to invest too much in products that no one will buy—sitting stock eats at your profits and takes up warehouse space. You also want to account for economic factors so you don’t overstock products.

On the flip side, you want to make sure you always have enough inventory to serve your customer base. Out of stocks are costly issues and could spoil your chance to snag a new lifelong customer.

What is the difference between individual and market demand?

Individual demand is what a single person or household wants to buy, while market demand looks at the bigger picture, generalizing trends and buying habits for many individuals in a particular segment. A person who is passionate about dogs is more likely to pay more for products meant for dogs than someone who has an average or minimal interest level. That person’s preferences might not reflect the trends of your entire target market. General market demand is also often referred to as aggregate demand.

The distinction is important to note while doing market research. To estimate demand, you need to survey many individuals—not just the individuals who have the most passion for your industry or product. If you forecast based on individual demand, you might have skewed data and make yourself vulnerable to significant losses.

What’s a market demand curve?

The market demand curve is a graph that shows how product pricing affects buying. You map all of the individual demand inputs onto a line graph to create the market demand curve.

On the y-axis, you have different price points. On the x-axis, you have the number of times the product has been purchased in a given time period at that price point. You’ll have several lines, one for each individual, that typically slope downward. This is because when a product is priced higher, there’s usually a shift in demand, as people are likely to buy less of it. On the flip side, if a product is priced lower, the supply curve slopes upward.

Market equilibrium is where supply meets demand. This intersection is the price where the quantity of a product that consumers are willing to buy matches the quantity that suppliers are willing to sell.

In a free market (an economic system based on supply and demand outside of government control), prices naturally move toward equilibrium, where supply meets demand. Understanding where this equilibrium lies can help you set the right prices for your products and maximize profits.

It’s critical to keep an eye on the demand curve over the course of the year so you can adjust your business strategy appropriately. When demand increases, this is often an opportunity to raise the price of your products, but you don’t want to raise prices so much that your customers opt for your competition.

How to identify market demand

• Keyword research tools
• Google Ads
• Social listening
• Surveys and interviews
• Data and market trends
• Competitive analysis
• Sales data

There are several ways to learn whether there is a market for your product. Here’s where to start:

Keyword research tools

Keyword research tools give you insight into the number of searches for specific terms over a set period of time, which can give you a sense of how many people want a product. Since some of them offer near real-time results, the tools can be helpful when researching newer trends. You can get a lay of the land before doubling down on a product idea inspired by trends.

Here are a few tools you can try:

• Keyword Surfer. This free Google Chrome add-on from Surfer SEO provides information directly from search engine result pages (SERP)—no dashboard or login required.
• Google Keyword Planner. Keyword Planner allows you to determine the average monthly search volume on Google for a search term and related terms. If you type “iPhone accessories,” Keyword Planner gives you a list of similar keywords that can serve as inspiration for product ideas and validation for market demand.
• Google Trends. This free SEO tool shows relative search volume, so it’s useful for understanding demand over time. Use it by typing in keywords, phrases, and topics to see how frequently users search these and related terms. You can filter by time period, country, and even city.

Google Ads

Keyword research can tell you how many people are searching for your product idea, but it won’t tell you how many people are actually interested in buying it. If your product is in an emerging category, one way to test demand is to take out Google Ads that lead to an interest form.

That’s what Hero Packaging did to test demand for a compostable mailer. “Anyone that was typing in ‘sustainable packaging,’ we were hitting them with this landing page and they would get a free sample,” cofounder Anaita Sarkar says in an episode of the Shopify Masters podcast.

“We thought at that time, you know, we’re gonna get about 30, maybe 40, sign-ups to get some free samples of eco-friendly packaging. And in a week we got a thousand people. And that was the first sign where we said, ‘People are interested in this.’”

You don’t necessarily need to give away samples of your product like Hero Packaging did. You can direct people to sign up for your email list so they will be the first to know when your product or brand launches.

Social listening

Social listening involves monitoring social media conversations about products, industries, and brands. You can do this the old-fashioned way, by reading comments and posts related to your product, or you can use social listening tools that can filter conversations, target specific geographic locations, and pull summarized analytics reports you can use in combination with other data.

Joanna Griffiths, founder of leak-free underwear brand Knix, turns to social media to learn about her audience’s needs. “One of my favorite things to say is that ‘The answers are in the comments,’” she says on an episode of the Shopify Masters podcast. “Most of our great product ideas come from comments and suggestions that come from our customers.”

Surveys and interviews

Getting your target customers’ opinions can help you learn whether they are interested in your product idea and what features they need so they feel comfortable making a purchase. You can set up interviews or share surveys. You can gather opinions by using social media or asking people you know to participate and let others know.

Data and market trends

Market demand is about more than just evaluating interest in a product. It’s also about understanding your target market and what they’re willing to purchase.

Nancy of Briogeo went to the library to access trend reports to learn more about a nascent field. “I did a lot of research to understand if clean beauty was just going to be a short-lived trend or was it here to say,” she says.

Competitive analysis

Understanding the effects of pricing on market demand is also a critical step. Competitive analysis during your research will help you determine the retail prices of products in your market.

Genna Tatu, the crochet artist behind Crochet by Genna, uses competitive analysis to help price her crochet patterns. “I like to look at the market,” she says. “I like to go on Etsy and search similar patterns [for] what I’m coming up with. I like to go see what the competition is doing and then place myself within the average.”

Genna uses this technique because she learned that while you can learn more for each pattern, you end up attracting fewer buyers.

Sales data

If you’ve already launched your brand, you can analyze your sales data to determine how your products are selling at the specific price point and whether there are ebbs and flows. Shopify Analytics offers real-time data on your store.

Calculate market demand for your product

• Collect individual demands
• Add up individual demands
• Plot points on a graph
• Use the demand formula

To calculate market demand for your products, you need to look at individual demands.

In this simplified hypothetical example, you sell “Taylor Swift iPhone cases,” which was a long-tail keyword that you found through Google’s Keyword Planner when you searched “iPhone accessories.” Here’s how you’d calculate market demand for your phone cases:

Collect individual demands

Individual demands are how many products each consumer purchases at different price points. In your case, you have three customers:

Add up individual demands

If you wanted to know what the market demand was at $15, you would simply add up all the purchases for that amount. In this case, Rile would buy four cases, Sandra would buy one, and Olive would buy zero. Therefore, the market demand for your store at $15 would be five.

Plot points on a graph

After adding up individual demands to calculate market demand at each price point, you can plot market demand on a graph where price is the y-axis and quantity is the x-axis. You should get a downward-sloping curve like this:

Use the demand formula

Say you want to know the demand for a product at every price point—not just $10, but $10.99. For that, you need to use the demand formula:

Qd = a - bP

Where:

• Qd is quantity demanded, or the amount of products consumers will buy at a certain price.
• a is autonomous demand, or the quantity demanded when the price is zero. This represents factors outside price that influence demand.
• b is the slope, or rate of change. This is how responsive demand is to changes in price, and in a demand curve, it’s always negative because increases in price lead to decreases in demand.
• P is the product’s price.

Market demand examples

To determine market demand, these brands put their ideas through a number of tests. Learn how they used research to find a market for their products before building successful businesses.

Ridge

When the team at Ridge, a company known for its metal wallets, decided to launch men’s rings, its strategy was to capture a small part of a growing market. As Ridge CEO Sean Frank was shopping for a wedding ring, he realized there was an opportunity. “The men’s ring business used to operate as an add-on business at the jewelry store,” he says on an episode of the Shopify Masters podcast.

This meant stores weren’t catering to online shoppers, so Ridge filled that gap. “Rings didn’t exist in 2022 for us,” he adds. “And in 2023, they were an eight-figure business, and they’re going to grow.”

Hatch

Hatch is a clothing line for before, during, and after pregnancy. Founder Ariane Goldman realized pregnancy was still a taboo subject. “People were hiding it, not telling their bosses in fear of losing their jobs,” she says on an episode of the Shopify Masters podcast.

This made Ariane realize there was a gap in the market she could fill, especially as someone with first-hand knowledge of the issue. “There’s an incoming freshman class of new pregnant women [all the time], and you know that there’s demand there and there’s definitely room to speak to them and provide them with stuff and it’s a really big market. In speaking to my needs, I was able to create a brand that was speaking to other women.”

P.F. Candle Co.

When P.F. Candle Co. launched, founder Kristen Pumphrey would go to craft fairs with her partner, who noticed an opportunity for gender-neutral candles. “He worked the booth, and he’d be at all these craft fairs. And he’d say, ‘You know, there’s not a lot of stuff for guys here,’” Kristen says on an episode of the Shopify Masters podcast.

That gave Kristen an idea to develop a unisex candle and tap into an underserved customer base. “I was developing the look of the container candle to create something that was unisex, and that actually created our niche in the market,” she says. “Because of that, we were able to have this large [male] customer base. When we started, I think it was probably 5%, 10%, and now we’re up to 30%.”

Finding demand for a product is your key to success

It’s always great to be excited about your small business ideas. It’s equally important to logically and objectively analyze the viability of your product by determining whether there’s aggregate demand for it. When you understand market demand, it’s easier to accurately forecast so you don’t fall victim to purchasing too much or too little inventory. Backed with the results of your market research, you can confidently launch your idea to a market that demands it.