Defining Demand

Since the time Adam Smith wrote about the notion, economists have sought a succinct way to describe what they mean by demand. Their definition is often as simple as stating that demand is the quantity sought at a given price. We have found the concept of demand to be far more profound, and one that is closely related to, but distinct from, the concept of physiological need.

While need is purely physical in nature, demand includes physical, psychological, and emotive components, backed by economic purchasing power. Demand is both near term and longer term, not just the instantaneous fulfillment of a need.

For example, a person might need a glass of water to quench his thirst on a warm day, but he could demand much more from a bottle of water. In addition to addressing the body’s physiological requirement with the latter, he might care about portability, derive reassurance and pleasure from the knowledge that the water’s source is a pure spring nestled deep in the mountains, and appreciate the aesthetic contours of the container in which the water is held.

Step into the minds of people who buy bottled water—and there are many—and you will learn of this multidimensional calculus in their heads as they walk into a store to purchase a bottle. It is why the need for water translates into the multibillion dollar demand for bottled water, and indeed, it is why, for something so humble and basic, there is such a profusion of sources, shapes, compositions, brands, and— importantly—price points, for what is thought to be, simply a bottle of water. Just so, an enterprise seeking simply to serve the physiological need will get a purchase and not much more, whereas one that understands and properly addresses the demand stands to gain far more in pricing power, undying loyalty, and lifetime value.

Demand is multidimensional in other ways and can also be classified as current, latent, and emerging. To understand the difference between those three types of demand, consider the history of competition for the Internet. In 1995, as the Web was just emerging as a major new consumer market, a small company, Netscape, became a business phenomenon by commercializing a Web browser program originally developed by the University of Illinois Urbana Champaign under the name Mosaic.

Netscape Navigator, as it was now called, enabled the new generation of Web users to more efficiently “surf” the Web, and it quickly gained millions of users. Microsoft, which was the largest supplier of software to the personal computer industry through such products as the underlying operating system (Microsoft Windows) and professional productivity tools (Microsoft Office, especially Word), was caught napping by this Web browser revolution, and scrambled to respond.

With a vast market already established by Netscape, Microsoft was faced with the challenge of responding to current demand. It did so by developing its own similar Web browser, Internet Explorer, and then drove that product into the marketplace by (controversially) embedding it in its already dominant Windows OS. By 1999, Explorer had surpassed Navigator in users—and by 2002 had reached 95 percent market share.

About the same time that Internet Explorer was overtaking Netscape Navigator, two Stanford graduate students, Sergey Brin and Larry Page, sensed that a growing number of people were sharing their own frustration with searching the rapidly expanding Web for the right Web sites. The solution they developed, which they called “Google,” revolutionized the search by looking at total viewers rather than just key words.

Google, as everyone knows, was almost an instant phenomenon, not just because it was free, but because it fulfilled a need that millions of Internet users had but had yet to fully articulate. As such, it was a classic example of latent demand: millions of people never knew they wanted Google . . . until they saw it. And then they instantly incorporated it into their daily lives. Google became the first great tech company of the new century, with revenues of nearly $24 billion in 2009.

The Google model of a free service that creates communities of users proved hugely influential with the rise of a new generation of Internet companies—the so-called Web 2.0 social network firms such as MySpace and Facebook—in the years after 2000. One small company created to deliver podcasting services, Odeo, was acquired by Web veterans Jack Dorsey, Biz Stone, and former Google employee Ev Williams through Obvious Corp. in late 2006. One day, finding themselves in a creative slump over new product ideas, the team held a group brainstorming session. What came out of that meeting was an idea for an extremely simple group messaging service, an idea that Obvious Corp. cofounder Jack Dorsey had been ruminating over for years. They called it Twitter.

Twitter was never really meant to be more than a minor application. Instead it became a worldwide phenomenon, the fastest growing Web site on the Internet. Four billion tweets were sent in the first quarter of 2010.

What explains Twitter’s success? It was simple and free, for one thing. But even more important, it tapped into a vast reservoir of demand that was just emerging: “smart phone” users who had spent the previous decade becoming acculturated to the daily use of emails, instant messages, and Facebook chat. Twitter, rather than being a revolutionary idea, was in fact a small and comfortable next step. Its simplicity and limited power (no more than 140 characters) proved to be an advantage rather than a limitation, and millions of users quickly found its use so familiar as to be almost second nature.

Order OnlineBuy on amazon.comOrder on amazon.comOrder on bn.comBuy on indieboundOrder from Borders BooksOrder from Rainy Day BooksOrder from
Bulk Orders: Multiple Copy Discounts