Demand Issues in B2B Markets

Session Coverage
• Concepts of Derived Demand
• Short Term and Long Term Demand Issues
• Nature of derived demand, cross elastic
• demand, fluctuating demand, bull whip effect,
• Inelastic demand, stimulating demand.
• Economic Linkages to Demand Studies
 What is Demand and how it is
created?
• Market Demand is a function of 2 Dimensions
1. Ability of Customers to buy product/service
Or Affordability
2. Willingness of customers to buy product
• Creating willingness among customers and
offering product or service at affordable
prices to target segment is a major challenge
for marketers
 Industrial Products & Services
Demand
• Demand for Industrial Goods & Services is More Complex than for
Consumer Goods
1. Derived Demand
2. Fluctuating Demand
3. Stimulating Demand
4. Joint Demand
5. Cross Elasticity of Demand/Reverse Elasticity of Demand
 1. Derived Demand in Business
Markets
• Definition:
• Demand of your product/service depends on where your
product is used and ultimately consumed at the B2C level.
• Examples:
• New Housing Demand: Construction Material, Cooking
Range, Refridgators
• Digitization and services demand: Need for programming
skills to write and modify domain specific software
programs.
• These are derived demand scenarios that can be useful to
software providing firms, education and training providers
as they try to map out the opportunities of the future.
 1. Derived Demand
• Demand of CRM Software
• Demand for Mobile Phone:
• lithium-ion batteries
• Touch sensitive glass screens
• microchips, and circuit boards
• Gold
• Copper
• DEMAND OF INDUSTRIAL GOODS AND SERVICES
DERIVED FROM DEMAND OF CONSUMER GOODS
 1 Derived Demand
• Demand for Tyres will depend on demand for
Cars, trucks, tractors, two-wheelers
• One step up-Demand for natural rubber will
depend on-several household
products, tubes, conveyor belts
• Tinplates Demand would depend upon:
• Metal Containers for food items, milk powder,
 Derived Demand Example
• A Standard Refrigerator needs:
• Copper: 1.5-3.8 Kg
• Plastic: 8-15 Kg
• Steel: 25-40 Kg
• Paint: Half a litre
• Manufacturers of these product would try to estimate
demand of their products......
• Multiply annual production of refrigerators in India/ year by
requirement of their product for each unit.
• Derived Demand: Demand for Industrial Products (B2B) is a
function of demand for end products in B2C markets
 2. Joint Demand
• Joint demand occurs when one product requires
the existence of others to be careful while
exceptions may be found.
• Pump set and Diesel Engine and Electric Motor
• Inverter and Batteries
• A bakery require flour, salt, preservatives, yeast in
the production of bread. If one of the ingredients
cannot be obtained other purchases will be
curtailed or discontinued. Joint demand
situations can also be affected by changes in
product specifications.
 2. Joint Demand
• Industrial Companies prefer to buy from one
supplier rather than purchase individual
product from separate suppliers
• These individual product do not have
individual demand, but are demanded only if
the other products are available in the
supplier line
 3. Fluctuating Demand
• Found that demand of many industrial products
fluctuate more than the demand of consumer
products
• Example: Demand for white goods increase by 10
%
• Demand for industrial products like
paints, steels, electrical motors likely to go up by
100%
• Recession: 10% fall in consumer demand, may
have a near collapse in the demand of industrial
product
 Fluctuating Demand
• A persisted fall in demand can result to a great
depression with high mass unemployment
 4. Stimulating Demand
• As demand for industrial products is derived from
consumer product market, it is logical that
business marketers should carry out promotional
programs that directly reaches out consumer
markets
• SAIL Carried out Ad campaign in Newspapers and
TV targeting households: Use of Steel for
household.
• Stimulate demand of your product by stimulating
demand for your customer products: Intel
microprocessors “Intel Inside”
 Price Inelasticity of Demand
• In Business Markets, demand remains price inelastic
• This means businesses would continue to buy the
product even if price goes up as it is essential to run
their plant and produce their end product.
• IOC/Reliance Industries cannot stop buying Crude oil -
$40 or S 150 per barrel
• Tata motors would have no choice but to keep buying
tyres
• Due to this buyers do not have any bargaining power
• These are situations, where there are no substitutes
 6. Cross Elasticity of Demand
• Elasticity of Demand: It is a relationship between
price and quantity, generally measured in terms
of percentage.
• Cross Elasticity of Demand: Relationship between
price and quantity of two different goods. How
change in price of one good affects the quantity
of other good
• Products can be Substitute Products or
Complementary Products for cross elasticity to
exist.
 6. Cross Elasticity of Demand
• Substitute Goods:
• Cross elasticity of demand for substitute goods is always
positive because the demand for one good increases when
the price for the substitute good increases. For example, if
the price of coffee increases, the quantity demanded for
tea (a substitute beverage) increases as consumers switch
to a less expensive yet substitutable alternative.
• Complementary Goods
• Alternatively, the cross elasticity of demand for
complementary goods is negative. if the price of coffee
increases, the quantity demanded for coffee stir sticks
drops as consumers are drinking less coffee and need to
purchase fewer sticks.
 6. Cross Elasticity of Demand
• Doors: Aluminium, Wood and Steel
• Apart from advantage of Aluminium doors, cost
comparison with steel and wooden doors plays an
important role in purchase decision in construction of
houses, commercial offices, factories, hotels, hospitals.
• Aluminium companies regularly collect information
about price of substitutes.
• Advertise Advantage: Low maintaince cost, elegant
looks, environment friendly.
• Whenever there is change in price of aluminium
(exercise duty or input costs), impact on sales
 5. Cross Elasticity of Demand
• Demand for Industrial Goods is Relatively
more Inelastic as compared to Consumer
goods.
• Concept of Cross elasticity is much more
important in Business Marketing versus
Consumer Marketing as it can have a more
significant impact on Business Strategy of the
firm.
 Reverse Elasticity of Demand
• A positive percentage change in price implies
a negative percentage change in quantity
demanded, and vice versa.
 Bull Whip Effect
• The bullwhip effect is a distribution channel
phenomenon in which forecasts yield supply
chain inefficiencies. It refers to increasing swings
in inventory in response to shifts in customer
demand as one moves further up the supply
chain
• A retailer sells 20 units of bread on an average,
one day he sells 70 units assumes customers will
start buying more product, and responds by
ordering 100
 Bull Whip Effect
• Distributor may then respond by ordering
double, or 200 units, from the manufacturer
to ensure they do not run out.
• The manufacturer then produces 250 units to
be on the safe side. In the end, the increased
demand has been amplified up the supply
chain from to 100 units at the customer level
to 250 at the manufacturer.
 Bull Whip Effect
• It also happens when manufacturing
organizations, sensing a shortage or price
increase in the future, start building their
inventories and buy much more than their
normal requirement.
Bull Whip Effect