It is a simple economics concept. If we examine the typical supply and demand graph, we see that if supply in a market for a particular product is high, then the demand for it will be lower than usual, since the consumer knows (in theory) that there is plenty of that product available. On the contrary, if supply for a particular product is low, then demand would be high, since the consumer knows that there is very little of the product available.
Therefore, brands can charge a higher price when supply is low, versus when it is high.
For our standard BMA readers, this economic logic is elementary; of course you all understand the nature of the standard business environment.
We simply want to frame the conversation.
When advertising — or 'product differentiation' — comes into play, what exactly is its role? In short, if advertising's goal is to make a sale, advertising should focus on ramping up demand in order to sell all the products a business offers.
When supply is low, brands have it easy; they can use advertising to remind consumers that product is still available and that they should come as soon as possible to purchase the product.
When supply is high, however, brands have options.
A brand can panic and take the easy way: slash prices and tell customers about it. But that’s not necessarily what the brand should do immediately.
1) With low demand and high supply, a business can attempt to generate more demand with advertising.
2) With high demand and low supply, a business can attempt to generate "perceived" demand in order to stimulate more sales using advertising.
3) With low demand and low supply, a business can use advertising to lift its brand and product awareness to get noticed and reach the situation facing #2.
4) With high demand and high supply, the business can really keep steady by using advertising to continually keep the consumer aware of the goods and services offered. This business is on stable ground.
A brand always has options. Don't get forced into a corner and feel like you have to fight out through outlandish activities.
Dwayne W. Waite Jr. is partner and principal at JDW: The Charlotte Agency, a marketing and advertising shop in Charlotte, NC. He enjoys consumer behavior, economics, and football.
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