Demand risk refers to the possibility of experiencing financial loss or other negative consequences due to a discrepancy between the forecasted and actual demand for goods or services. It is common for businesses to base capital investments, marketing, sales, and supply chain decisions on demand forecasts. However, if these forecasts are incorrect, it can lead to losses or suboptimal performance. Demand risk can be caused by a variety of factors, including changes in market conditions, consumer behavior, and competition. To mitigate demand risk, businesses can implement risk management strategies such as conducting market research, monitoring market trends, and maintaining flexibility in their operations to adapt to changing demand. The following are common types of demand risk.
Demand that falls short of a forecast. This often occurs with new products as it is possible for a product launch to generate no demand whatsoever.
A product or service that is in demand but customer’s can’t obtain it. This can occur due to price and distribution issues. For example, a product that is too expensive for its target market or is unavailable where they shop.
Demand that rises and falls sharply along seasonal patterns. For example, a fashion brand with a popular Spring/Summer line that has far less demand for its Fall/Winter products each year. This can occur if the brand is associated with a summer activity such as surfing.
Excess demand is when demand exceeds supply. Many firms aim for excess demand as it tends to be good for brand image and pricing. As such, excess demand is typically a good thing if you’re selling. Where excess demand is a risk is if you’re buying. For example, excess demand can make it difficult to secure parts, materials and inventory.
Demand that rises extremely fast and then suddenly collapses. This can cause a firm to invest in expensive capacity expansions only to see demand collapse and its supply chain flushed with excess inventory.