4 CHARACTERISTICS OF BUSINESS MARKET DEMAND

Four demand characteristics differentiate the business market from the consumer market: (i) Demand is derived, (i ) demand tends to be inelastic, (i i) demand is widely fluctuating, and (iv) the market is well informed

 DEMAND IS DERIVED

The demand for a business product is derived from the demand for the consumer products in which that business product is used. Thus the demand for steel depends partial y on consumer demand for automobiles and refrigerators. But it also depends on the demand for butter and CD players This is because the tools machines, and other equipment needed to make these items are made of steel

There are two significant marketing implications in the fact that business market demand is a derived demand. First to estimate the demand for a product a business marketer must be very familiar with how it is used. Second, the producer of a business product may engage in marketing efforts to encourage the sale of its buyers’ products. The idea is that increases in consumer demand will in turn trigger increases in derived demand for these business products.

DEMAND IS INELASTIC

Another characteristic of the business market is demand elasticity of business products. Elasticity of demand refers to how responsive demand is to a change in the price of a product.

The demand for many business products is relatively inelastic, which means that the demand for a product “a” responds very little to changes in price.

The demand for business products is inelastic because ordinarily the cost of a single part or material is a small portion of the total cost of the finished product.

The cost of the chemical is a small part of the price a consumer pays for paint. As a result, when the price of the business product changes, there is very little change in price of the related consumer products. From a marketing point of view, there are three factors that can moderate inelasticity of business demand.

i.    Price change must occur throughout an entire industry, not in a single firm

The second marketing factors that can affect the inelasticity of demand is time. Much of our discussion here applies to short-term situation. Over the long run the demand for a given industrial products is more elastic. The third factor is the relative importance of a specific business product in the cost of the finished good. The greater the cost of a business product as percentage of the total price of the finished good, the greater the elasticity of demand for this business product.

DEMAND IS WIDELY FLUCTUATING

The market demand for most classes of business goods fluctuates considerably more than the demand for consumer products

The main cause of these fluctuations is the individual businesses concern about having a shortage of inventory when consumer demand increases or being caught with excess inventory should consumer demand decline. Thus they tend to overreact to signals from the economy, building inventories when they see signs of growth in the economy and working inventories down when the signs suggest stagnation.

When the action of all the individual firms are combined the effect on their suppliers is widely fluctuating demand. This is known as the acceleration principle. One exception to this generalization is found in agricultural products intended for processing. Can you explain why this is so?

BUYERS ARE WELL INFORMED

Typically, business buyers are better informed about what they are buying than ultimate consumers. They know more about the relative merits of alternative sources of supply and competitive product for three reasons.

1. there are relatively few alternatives for a business buyer to consider.
2. the responsibility of a buyer in an organization is ordinarily limited to a few products; and
3. for most consumer purchase, an error is only a minor inconvenience. However, in business buying the cost of a mistake may be thousands dollars or even the decision maker‘s job!