Demand in business markets differs from consumer demand. Most demand for business-to-business products is derived, inelastic, fluctuating and joint. Understanding these differences in business-to-business demand is important for marketers in forecasting sales and in planning effective marketing strategies.
Derived Demand
Consumer demand is based on a direct connection between a need and the satisfaction of that need. However, business customers don’t purchase goods and services to satisfy their own needs.
Business-to-business demand is derived demand because a business’s demand for goods and services comes either directly or indirectly from consumer demand.
Consider an airline carrier such as KLM (from the Netherlands). Demand for the purchase of aircraft (Boeing or Airbus orders) comes from the demand for air travel and holidays. Likewise, demand for a marketing textbook is likely to come from the demand for business and marketing education.
As a result of derived demand, the success of one company may depend on another company, and it could be in a different industry. The derived nature of business demand means that marketers must be constantly alert to changes in consumer trends that ultimately will have an effect on business-to-business sales.
Inelastic Demand
Inelastic demand means that it usually doesn’t matter if the price of a business-to-business product goes up or down – business customers still buy the same quantity.
Demand in business-to-business markets is mostly inelastic because what is being sold is often just one of many parts or materials that go into producing the consumer product. It is not unusual for a large increase in a business product’s price to have little effect on the final consumer product’s price.
For example, you may be able to buy a basic specification BMW 530i for about 40,000 Euros. To produce the car, BMW purchases thousands of different parts. If the price of tyres, batteries or stereos goes up or down, BMW will still buy enough to meet consumer demand for its cars. As you might imagine, increasing the price by 30, 40 or even 100 Euros won’t change consumer demand for this type of car, so demand for parts remains the same.
But business-to-business demand isn’t always inelastic. Sometimes, producing a consumer good or service relies on only one or a few materials or component parts. If the price of the part increases, demand may become elastic if the manufacturer of the consumer good passes the increase on to the consumer.
Steel, for example, is a major component in cars. Vehicle manufacturers will need to pay a lot more for steel should its price rise.
An increase in the price of steel can drive up the price of vehicles so greatly that consumer demand drops, and eventually decreases the demand for steel.
Fluctuating Demand
Business demand is also subject to greater fluctuations than consumer demand. There are two reasons for this.
First, even small changes in consumer demand can create large increases or decreases in business demand. Take air travel for example – even a small increase in demand for air travel can cause airlines to order new equipment, creating a dramatic increase in demand for planes.
A product’s life expectancy is another reason for fluctuating demand. Business customers tend to purchase certain products infrequently. Some types of large machinery may need to be replaced every 10 or 20 years.
Thus demand for such products fluctuates. It may be very high one year when a lot of customers’ machinery is wearing out, but low the following year because everyone’s old machinery is working fine. One solution for keeping production more constant is to use price reductions to encourage companies to order products before they actually need them.
Joint Demand
Joint demand occurs when two or more goods are necessary to create a product. For example, the BMW 530i needs tyres, batteries and spark plugs (a range of products). If the supply of one of these parts decreases, BMW may find it difficult to manufacture as many vehicles, and the company may not buy as many of the other items either.
