The distribution of good and services based on something other than price

Market factors affecting demand of consumer goods

The demand for a good increases or decreases depending on several factors. This includes the product’s price, perceived quality, advertising spend, consumer income, consumer confidence, and changes in taste and fashion. Understanding the many varied elements and the small CPG landscape that affects product demand is hugely beneficial. Fortunately, we’ve compiled a list of the top seven factors affecting demand for you. Select each factor below for a detailed breakdown.

• 1. Price of product

  Price of product

  The single-most impactful factor on a product’s demand is the price. In general, there is a clear connection between the price of a good and the demand. Higher prices create lower demand and lower prices create higher demand. This is due to the satisfaction levels of consumers. If they can’t afford your good, there won’t be much demand for it. This means understanding CPG pricing is vital.

  This is also called the price elasticity of demand (PED). Price elasticity is usually a negative number, like -0.5. So, with that example, if the price of a product goes up by five percent, its volume will go down by 2.5 percent.

  There are tons of factors that can help determine the elasticity of a product. But, knowing that number can help you anticipate demand more precisely. Sometimes a simple change in price can make all the difference.

• 2. Tastes and preferences

  Tastes and preferences

  Consumer tastes and preferences have a direct impact on the demand for consumer goods. Unfortunately, preferences can change within a market for a wide array of reasons. Some of these reasons can be intrinsic, while others are external. This is especially true in the CPG industry, where consumer’s expect more from their brands.

  For example, the tastes of single shoppers and families are vastly different. A family will likely buy child-friendly products, while a single person is generally only shopping for themselves. Other influences can include:

  • Age
  • Geography
  • Marital Status

  Breaking down each component can provide a clearer picture of each demographic so that you can plan accordingly. Understanding how to use POS data vs. panel data can make all the difference.

• 3. Consumer’s income

  Consumer’s income

  As a rule, the more money consumers have, the more they like to spend it and buy more. Not only do wealthier groups shop more frequently, but they tend to prefer high-quality, pricier products. The opposite is also true, meaning that changes in consumer demand can ebb and flow along with general economic stability. During a recession, consumers will spend less than they do in a boom.

• 4. Availability of substitutes

  Availability of substitutes

  No matter what you sell, there will always be competition. You have to pay attention to your competitors, as they can eat into your market share if you’re not careful. When talking about the availability of substitutes, the factors that influence it can include:

  • Price Gaps – How much are your products compared to others?
  • Distribution – Do competitors offer more items in a similar product line? Are those products more widely available?
  • Relation of Substitutes – Are these products a direct one-to-one translation, or are they just similar? For example, coffee and tea are unique, but if the price of one falls, the demand for it increases, reducing the demand for the other. This is even more important when supply dwindles and consumers begin looking for alternatives.

• 5. Number of consumers in the market

  Number of consumers in the market

  In this case, demand is determined by how many people are buying a particular product. Therefore, the more consumers available, the greater the demand. In some cases, this number increases because of population changes. In other instances, demand goes up because the product appeals to more demographics. There, the number of consumers is technically the same, but more of them are buying than before.

• 6. Consumer’s expectations

  Consumer’s expectations

  Another reason that anticipating demand can be so challenging is that you have to pay attention to both habits and expectations. Unfortunately, it’s much harder to predict or understand these expectations. Overall, it’s much easier to look at past data to figure out what could happen in the future.

  Many things can influence consumer expectations. If we take the COVID-19 pandemic, for example, fears drove consumers to buy toilet paper and hand sanitizer in massive quantities. Pre-pandemic, it would have been difficult to anticipate that kind of reactionary spending.

• 7. Elasticity vs. inelasticity

  Elasticity vs. inelasticity

  We discussed price elasticity, but this concept affects both prices and consumer demand. Elastic goods are those that are affected by driving factors. Prices, availability, and competition can have a positive or negative correlation, depending on the situation. As we illustrated, price elasticity is usually negative. However, if the driving factor is wider distribution, it would create positive elasticity as your volume would also increase.

  By comparison, demand for inelastic goods doesn’t fluctuate much (if at all) from external factors. For example, if the price of Product A goes up, but the sales volume stays constant, that product is inelastic.

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