Market Demand Curve: What Is It and How Does It Help Demand Forecasting?

What is market demand?

Successful businesses require 2 things: people who want what you sell, and people who are willing to pay for it. In essence, that's market demand.

Think of it this way: Before you set up a lemonade stand, it's good to know how likely your neighbors are to buy your product, as well as how much they're willing to pay. This prevents you from spending money on lemons, only to learn that they'd rather have soda.

Market demand curve definition

The market demand curve is a graph that shows the relationship between the price of a product and the demand for that particular product. The price is typically shown on the Y axis of the graph while the demand is shown on the X axis. As you move to the right side of the graph, demand tends to increase and price tends to decrease. As you move toward the upper-left side of the graph, prices are higher but demand is typically lower. This is known as the law of demand: The higher the price of a particular good, the lower the demand.

How to understand the market demand curve

Understanding the market demand curve is an essential part of creating a business plan and allows you to find market demand. The market demand curve essentially shows you how the price of your product affects consumer demand, which allows you to find the optimal price point for your products in a competitive market.

Ideally, you want to set a product price that’s high enough to turn a profit, but not so high that you’re lowering demand. If you notice the market demand curve is especially steep at a certain price point, you can set your price just below that point to maintain a steady profit with high demand.

What is market equilibrium?

The opposite of demand is supply, which is essentially the quantity of a product that’s available. Market equilibrium is when the quantity demanded for a particular good is equal to the supply of a particular good, so there’s no excess supply.

Market equilibrium is important because it prevents price fluctuation. When supply surges and quantity demanded decreases, prices fall. When demand exceeds supply, prices shoot up. With market equilibrium, prices remain relatively stable as a result of equal supply and demand.

How to forecast market demand

By identifying market demand, you can create a product or service that people want (and one that's better than alternatives). In other words, you'll achieve product-market fit, which sets your business up to win big. Research should play a role in every stage of your business. But before you launch, our Senior Research Manager Chelsea Fletcher shares her top tips on how to:

• Identify a problem you want to solve
• Collect qualitative insights
• Find and analyze data
• Create an offering that sells

1. Start with a problem, not a product

As a leader on our research team, Chelsea analyzes how Mailchimp can help small businesses, as well as what small businesses are doing to help themselves. She's an advocate for market research that begins by identifying a problem rather than a product.

"We go out into the field to talk to small businesses, entrepreneurs, startups, and our service partners who work with small businesses, startups, entrepreneurs, and such. And we just listen," she says. "A lot of times, that uncovers a demand or a signal of demand for a challenge they have or a frustration point, maybe not just with our product but in doing their job."

This research informs the products that Mailchimp builds, and that's been the case from the beginning. The founders actually began as a web design company called the Rocket Science Group, and their focus was on serving big, corporate clients. But as they sought work, talked to people, and started to collect data on what they were doing, they noticed a glaring gap in the market. What they discovered was market demand for an accessible email marketing software that small businesses could use. Mailchimp was born. The business grew steadily, and now we offer way more than email in response to the market's evolving demand.

So once you've identified a problem you think your business could solve take a look at what already exists in your potential market. You need to know:

• Is there evidence for a problem that your concept might solve?
• Who else is trying to solve this problem?
• Who is doing it well?
• Within your market, what doesn't seem to work?

2. Gather qualitative insights

When you know what exists in the market, if there is one, you can start to collect more qualitative data. Start within your own network—try talking with friends or colleagues about the solution you hope your business offers, as well as their own experience with the identified problem. Their reactions can help you develop your concept, and they may point you in the direction of other people with valuable insights.

Outside of your personal relationships, you can also use social networks to find people who you think are in your target demographic. "You can find a captive audience on social media," says Chelsea. "I've seen people do really well with starting an interest group on social media or getting access to an existing group."

When talking with people in this audience, ask them:

• To explain the problem in their own words.
• If something could solve that problem, what would the end result look like?
• How would a solution to that problem help you?
• How important is it for you to solve that problem?
• How much would you be willing to spend to solve it?

During this qualitative analysis, you'll listen for a challenge or frustration point that your business could solve, as well as some indication of what it would need to do so.

Tip: Don't do focus groups. Chelsea suggests talking to people 1-on-1 or in small, comfortable groups. That way, they'll be more inclined to share. Also, by asking open-ended questions you can avoid confirmation bias and get a more honest insight into what matters to them.

3. Back your narrative with numbers

As you conduct interviews, a narrative about market demand should emerge. You can begin to imagine and describe your product or service based on those conversations. After that: You need quantitative data. "You always want to quantify market demand," says Chelsea. "It can't just be a series of conversations. It can in the early days—but eventually you want to know numbers."

At Mailchimp, numbers around market demand are often generated through surveys.

Send a survey to as large a targeted sample as you can find—meaning, as many people as you can access who have demonstrated interest in this market or niche. Ask them to rank on a scale of 1-5:

• How important is finding a solution to this problem?
• How much would it help you?
• How upset would you be if this solution went away?
• How willing are you to pay for a solution to this problem?

Chelsea recommends tools like SurveyMonkey, which make it easy to conduct these surveys, as well as to analyze the results. The hope, of course, is that your hypothesized problem and solution will stand out as the highest ranking. But if not, the higher-scoring problems and solutions may be worth incorporating into your plan. Check out how Mailchimp's free online survey maker compares to the competition.

Tip: Use insights to market. Gathering insights from surveys pays off in more ways than one—you'll not only learn whether your idea is viable, but you'll also be able to market to them when your business launches.

4. Create an offering that sells

Once you've collected qualitative and quantitative data, it's time to develop your product. That might begin with a sketch, prototype, or a trial of some sort.

And with each more fully developed iteration of what you plan to sell, check back in with your audience. Ask:

• How close is this to what you're looking for?
• How likely would you be to buy it?
• How much would you pay for it?
• What about it do you wish was different?

Use that research to fuel what you do next, starting with your launch and continuing as you grow. Although it might seem daunting when you're just getting started, finding a product-market fit can make all the difference.

"Running, growing, and marketing a business are all expensive endeavors—not just in terms of money, but also in terms of time," Chelsea says. "So you want to make sure you're spending your time and money in a way that increases your chances of success."

Forecast market demand to make better business decisions

Demand forecasting can be an effective way to find the right product-market fit for your business and set the right price point for your products. You can look at a demand curve examples to learn more about market demand, how to calculate market demand, and how individual demand curves affect your business.

Understanding the market demand curve is essential if you want to succeed as a business, but there’s more to it than that. With Mailchimp, you can get help with everything from building your website to email marketing and analytics. If you need help getting your online store off the ground, try Mailchimp and find out how our marketing solutions can help.