“Derived Demand” is an early topic in the study of B2B marketing but the concept remains fuzzy to students and industry alike. If you Google “Derived Demand” you are at once launched into a bunch of economics concepts that do not explain clearly what the term means for B2B marketers. So here is an attempt to make the concept clearer.
Derived demand refers to demand for your product or service that depends on the demand for where you product is used and then ultimately consumed at the B2C level. Thus if, as Investopedia puts it, when the California Gold Rush (1848-1855) was going on, you could be sure that there will demand for picks and shovels used to prospect for gold.Going a little backwards in the supply chain, picks and shovels should improve the demand for iron/steel for the metal part of picks and shovels used in gold prospecting alongwith the demand for wooden handles. So if you generally made wooden handles for any application ( for example, as broom handles) and generally thought of broom making companies as your B2B customers- the news of the California Gold Rush would have motivated a 19th century wooden handle maker to develop a new product , ie the pick and shovel handle and mobilize the sales force to reach out to manufacturers who might need a better wooden handle.
Fast forward to 21st century and the very same principles operate for goods and services:
- New Housing Demand: Is a great leading indicator not only for construction jobs but also for all kinds of building materials and derived demand for appliances like cooking ranges, refrigerators etc. Any business supplying parts to appliance makers can expect an increase in demand.
- Digitization and services demand: As more and more activities have an increased digital component, you hear of the need for programming skills to write and modify domain specific software programs. These are derived demand scenarios that can be useful to software providing firms, education and training providers as they try to map out the opportunities of the future.
So where do B2B businesses miss out? Here are some thoughts:
- B2B Businesses think ex-factory not customer’s customer: Most organizations are so caught up in their production process ( yes software writing is a kind of production) that what they would like most is to sell “ex-factory,” i.e. no concern what happens next in the value chain of their product or service. Instead B2B folks should really care about what the final consumer is going through. Thus, a component supplier to a machinery maker must at least be interested in where the machine is used, what is produced and how consumers experience the final consumer product. For ultimately, there is a consumer who pays for everything.
- Value Chain Market Research : Ongoing value chain market research can help and this is simple to do today with the Internet. Just think of your customer’s customer and check how that industry is doing. For example, if you supply carpeting for new housing, some quick Internet searches gives you the formal new housing trends expected by economists and the kinds of carpets prefered from the interior decorating industry. Armed with this information when you can get your next meeting with a major builder, you can get guidance that is very specific and difficult to find on the web.
Focussing on providing value to your B2B customer by trying to understand your customer’s customer is a useful step in staying on top of derived demand in your industry.