Monday, 28 February 2011

Supplier Induced Demand - should you lead or follow your customers?

Many people take the view that a big part of the secret of success lies in knowing the needs of your customers better than anyone else.  As a result they place great store in analysing feedback and transaction data and in studying industry trends.  Of course this is based on the assumption that your customers are relentless optimisers, pursuing rational economic logic to identify their best outcome.

During the last month I've had the opportunity to talk to people from a wide range of professions and one theme has emerged repeatedly to challenge this consumer demand-led approach - Supplier Induced Demand.

Supplier Induced Demand arises when suppliers have an advantage over consumers in their knowledge of their product or service and are therefore able - knowingly or subconsciously - to encourage their customers to buy regardless of the needs of the customer.  This effect is most apparent in markets in which the products and services are complex (such as medicine, financial services), or where the consumer is distracted by other factors such as fear or shortage of time.

I'm struck how widely across sectors the effects of supplier induced demand manifest.  It's clear that in complex markets such medicine and financial services, regulators try hard to counter the effects by encouraging transparency and the disclosure of vested interests, as well as the alignment of incentives.

So if you (like me) are designing business propositions to address consumer markets, it's worth considering whether your intended market is characterised by supplier induced demand.  If it is, you need to know how and you can seek to induce your own demand.  If it is not, you need to master the art of determining what the demand of your customers is - and your best tools will be data analytics, competitor analysis and customer feedback.

A medical example

Supplier Induced Demand was most clearly articulated to me by an eminent epidemiologist, who explained how different healthcare commissioning models can result in predictable biases in the provision of certain operations and medications.  For example, he cited the fact that current NHS policies tend to encourage inputs rather than outputs - number of surgical procedures completed within 18 weeks rather than number of patients reporting reduction or elimination of pain.  In a more extreme example of market failure following from supplier induced demand, and the associated concentration of power in the hands of the commissioning doctors, he reported that a liver transplant in the US currently costs $2 million, while the same operation in the UK costs only $70,000.  For an illustration of comparable effect in the cost of drugs in healthcare, see the recent Economist article illustrating how Big Pharma holds the French and US healthcare systems in hock.

A retail example

But during the last month I've also had the opportunity to talk to several retail experts, and it's clear that even relatively straightforward products can be pushed on unsuspecting consumers (and some would argue that they should be).  For example, the decision to stock a new line in an established retail outlet represents a supplier bet that the demand will follow the increased supply - build it and they will come on a small scale.  This incremental approach to retail stocking, of course, works best when the retailer has a deep knowledge of the consumer market and can deliver informed, market-leading insights.  I've been struck how strong the instinct for this is in three retailers in particular that I have spoken to recently.  These are not followers - they are the makers of fashion!  An effective retailer can quickly create demand where none previously existed.

A contrasting consumer marketing example

Two weeks ago I spoke to a successful entrepreneur who is developing a business to collate aspirational purchase data - wish lists of items that people would like to own.  This is an example of consumer induced demand.  The entrepreneur wants to collate this demand data and then sell it (sensitively to the privacy of the individuals) to retailers who may be able to meet the demand.  As we talked, I wondered whether the aggregation of this information would provide a sufficiently concentrated opportunity for retailers.  Organisations like Groupon attempt to induce demand by offering discounted volume sales to retailers, but making the market from the other direction - from consumer to retailer - requires very agile retailers who are prepared to chase very niche and typically low-volume opportunities.  In defence of his idea, the entrepreneur cited the sale of Mint for $400 million.


As a supplier the balance between inducing and responding to demand will reflect your confidence in your market knowledge, your willingness to gamble on over-stocking and your freedom within your regulatory environment.  It's possible by be successful both as a leader and as a follower - after all while the early bird gets the worm its the second mouse that gets the cheese.  The trick appears to be to pick the products in which one has a particular advantage in terms of supply or demand knowledge, and lead confidently with these, while monitoring other lines and joining the fray when demand levels are established.

If you have a view on the whether you should lead or follow your customers, please share them here.

1 comment:

  1. Fascinating stuff, Ben. I've been particularly immersed in the same questions recently in the public & aid sectors.

    Ex KPMG partner Paul Kirby has just been appointed as No. 10's Head of Policy Development. Last year he wrote "Payment for success" which argued for a really radical move in the public sector to paying for outputs instead of inputs.

    He says it will break up state monopolies, create competition and improve value for money. I'm not sure how compelling the evidence is. But the idea is here in a big way - and there are some huge opportunities as a result.

    Let's hope that consumer induced demand can deliver some of Paul's expectations.