B2B Marketing

Unit 2 – Demand Issues

Important Demands for Industrial Marketing
• Derived Demand
• Stimulating Demand
• Joint Demand
• Fluctuating Demand
• Inelastic Demand
• Cross Elasticity Demand

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Derived Demand
• Derived demand is an economic term, describing the demand for a good / service,
resulting from the demand for an intermediate or related good / service. 
• Example: Demand for ‘Milk Packaging Material’ (Plastic Packets, Tetra Packs), goes up if the
demand for ‘Milk’ goes up.
• It is a demand for some physical or intangible thing where a market exists for both
related goods and services in question.
• Example: Automotive industry requires outsourced components (Lubricants, Tires etc.). This type
of components also have an independent demand.
• The derived demand can have a significant impact on the derived good's market
price.
• Derived demand can be long term or short term.
• Example: Long term (Industrial Packaging Material), Short term (Seasonal Packaging Material)

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Examples of Derived Demand
• An early example of derived demand was the ’pick-and-shovel strategy’, which was
developed in response to correlating market forces.
• During the gold rush (US), the demand for gold prompted prospectors to search for
gold.
• These prospectors needed picks and shovels, as well as other supplies, to mine for
gold.
• It is arguable that, on average, those who were in the business of selling supplies to
these prospectors fared better during the gold rush than the prospectors did.
• The demand for picks and shovels was derived, to a large degree, from the demand
for gold at that time.

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Examples of Derived Demand
• A more modern example exists within the computer marketplace.
• As more business became dependent on technology and households expand home
computing capabilities, the demand for computers rises.
• Derived demand may be shown in the areas of computer peripherals, such as
computer mouse and monitors, as well as in the components required to produce
the computers.
• The components can include items such as motherboards and video cards, as well
as the materials used to produce them.

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Stimulating Demand
• Because of the nature of industrial demand, the influence of final consumer is being
recognized.
• One way which industrial marketers attempt to increase sales is by stimulating
increases in demand of ‘ultimate’ consumers.
• By directing advertising to ‘ultimate’ consumers, industrialists can often increase
consumer demand for final products, which in turn, increases their industrial sales.
• Industrial advertising to ultimate consumers is also a method of increasing goodwill
and achieving a favorable position with an industrialists immediate customers.
• Example: Washing Machines & Washing Powder, Motorcycles & Engine Oil

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Joint Demand
• Joint demand occurs when one product requires the existence of others.
• Most products require several components, parts or ingredients.
• Example: 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.
• Example: Roadside vendors change the recipe of their fast food offerings (Samosa), by
fluctuating between ‘white pees’ and ‘peanuts’, depending of the price of these commodities.
• Industrial customers often prefer to buy from one supplier rather than purchase
individual products from different suppliers.
• The individual products required do not have individual demand, but are demanded
only if the “other” products are available in the supplier line.
• Example: Nuts & Bolts

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Fluctuating Demand
• The demand for ‘business ‘goods and services tend to be more volatile than the
demand for ‘consumer’ goods and services.
• This is especially true of the demand for new plant and equipment.
• A given percentage increase in consumer demand can lead to much larger
percentage increase in the demand for plant and equipment necessary to produce
the additional output.
• Economists refer to this effect as the ‘acceleration effect’.
• Sometimes a rise of only 10% in consumer demand can cause as much as 200%
Industrial demand for products in the next period.

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Inelastic Demand
• The total demand for many Industrial goods and services is inelastic, that is not
much affected by price changes.
• Example: Shoe manufacturers are not going to buy lesser amount leather, if the price of leather
rises. Unless they can find satisfactory leather substitutes.
• Demand is especially inelastic in the short run because producers cannot make
quick changes in their production methods.
• Demand is also inelastic for Industrial products that represent a small per cent of the
total cost of the item.
• Example: Fillers in the Bathing Soap Industry

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Cross Elasticity Demand
• Cross elasticity of demand is the responsiveness of the sales of one product to a price
change in another.
• It can have a dramatic impact on the marketing strategy of an Industrial firm.
• Cross elasticity for substitutes is always positive i.e., the price of one good and the quantity
demanded of the other always more in the same direction.
• Example: Higher production of cars will lead to higher demand for tires, and will lead to the increase in the
pricing for car tires.
• The more positive is this ratio the larger the cross elasticity and more definite it is that the
products compete in the same market.
• Cross elasticity for complements is negative-price and quantity move in opposite directions.
• The more negative this relationship the more closely the demand for the products is related.
• Example: Roadside vendors change the recipe of their fast food offerings (Samosa), based on the price of
‘white pees’ and ‘peanuts’, depending of the price of these commodities.

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Bull Whip Effect
• The ’Bull Whip 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.
• The concept first appeared in Jay Forrester's Industrial Dynamics (1961), and thus it is
also known as the ’Forester effect’.
• The ‘Bull Whip Effect’ was named for the way the amplitude of a whip increases down
its length.
• The further from the originating signal, the greater the distortion of the wave pattern. In a
similar manner, forecast accuracy decreases as one moves upstream along the supply
chain.
• Example: Many consumer goods have fairly consistent consumption at retail but this signal becomes
more chaotic and unpredictable as the focus moves away from consumer purchasing behavior.

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Bull Whip Effect
Amplitude

Suppliers

Consumer
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Economic Linkages to Demand Studies
• Supply (Backward Linkages)
• Raw materials used
• Access to credit facilities
• Process of manufacture
• Level of technology use
• Availability of basic services such as electricity, water etc.
• Type of ownership
• Education and skill requirement
• Supply of labor
• Locational characteristics (home-based, open space, squatter settlements)
• Wages provided to laborers

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Economic Linkages to Demand Studies
• Demand (Forward Linkages)
• Price and quality of products / services
• Marketing procedure adopted
• Economic development levels (at the macro level)
• Purchasing power of consumers

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