Question

Why is knowing (or estimating) the product demand so crucial for a firm? In your response, include an example of a business that has suffered from poorly estimating the demand of its products. Evaluate how or why the business made such a mistake.

Answer 1

Yes, estimating demand is quite important for any company for any particular product. It is because the estimation of demand helps the company to plan its operation. In the absence of demand estimation, the company generally bears the loss. It could be understood with an example, a company, Merit Water, has not estimated the demand for its new water purifier and produced 1 lakh units. However, it could only sell 60,00 units and a new improved version is already demanded by the customers. So, the company has to bear a loss of 40,000 units. Similarly, a company produced only 60,000 units of water purifier but the demand was of 1 lakh unit. The company could not produce enough units because of a lack of estimation and a competitor has availed the opportunity.  Therefore, the estimation of demand is crucial for the company.

The company managed this mistake by lowering the price of the units left with it. It had to sell those units at lower than production prices in order to minimize the loss. Also, it had to employ many salesmen to dispose of those left water purifier. If the company could have estimated the price before getting into production, it could have earned a good revenue.