How to interpret the demand curve

How to interpret the demand curve

04/27/2020 - Dynamic pricing

For any eCommerce business, the demand curve is one of the most effective tools for studying the effects of prices. This is a graph that shows the relation between the price of a concrete product or service and the level of consumer demand. When creating this graph, the product demand is placed on the horizontal axis and the price on the vertical axis. Companies can use this to obtain valuable information about product acceptance and analyse the general situation of the market in which they’re located.

In this graph, you can also observe the elasticity of demand, that is, to what extent the demand for a product varies as a result of changes in its price. This indicator is especially important for companies that implement dynamic pricing strategies to modify the prices in their catalogues under different circumstances. The demand curve will allow them to study how these changes in price affect customers.

In general, the higher the price of a product or service, the lower the demand. This can change due to different factors, though.

Shifts in the demand curve

To know how to interpret the demand curve, you must be aware that demand isn’t static. It’s constantly changing and not only because of prices. There are additional external factors that can produce changes in the levels of sales for some products and services. In the graph, these changes can be seen as shifts in the demand curve to the left or the right.

These displacements can be caused by any of the following factors:

  • Changes in the prices of related products.

    An increase in the price of one product can affect another. This is especially true for substitute or complementary products. In the case of substitute products, an increased price on one will increase the demand for the other. In other words, by raising your price, customers will choose to buy from a competing company.

    On the other hand, in the case of complementary goods, the increase in the price of one can cause a decrease in demand for both. These are usually products that are purchased together, like cereal and milk or mobile phones and screen protectors. This is how decisions made by another company can affect your level of sales and the general functioning of the market.

  • Changes in income and user taste.

    Customer behaviour also affects the evolution of the demand curve. Normally, an increase in user income is synonymous with higher demand, regardless of the price of products or services. Changes in user tastes or preferences can also occur, which lead users to replace their habitual items with new ones. This tends to be caused by marketing and advertising campaigns, many of which are currently based on the recommendations of social media influencers.

  • Changes in customer volume.

    The number of customers for certain goods can vary based on the social tendencies at any given time and the specific targets the product is aimed at. A clear example of this can be seen in smartphones and mobile apps, which have been aimed at increasingly younger users over the past decade. Being aware of the structural changes in society and adapting to them by changing your portfolio and price catalogue will allow your company to increase its sales as the number of people interested in the brand grows.

Category: Dynamic pricing

Tags: demand curve, elasticity, ecommerce

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Angela de la Vieja
Content Manager

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