STRATEGY

The Demand Economy

How to locate deep pools of demand in a shrinking marketplace
With consumers and businesses pinching pennies, there's only one way to survive: target needs, not wants.

Andy Ryan

OPPORTUNITY KNOCKS: oDesk has revenue of $120 million and a three-year growth rate of 1,058 percent. CEO Gary Swart says demand is "unbounded."

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Not long ago, entrepreneurs expressed their faith in the relative balance of production and consumption with a movie quote: If you build it, they will come. Those days are over. Now, if you build it, it will sit in inventory until the holding costs eat you alive.

Welcome to the demand economy, in which the great thirsty sponge of consumption has shrunk to the size of a sink scrubber. Demand, in the most general terms, is what people will buy at a given price. In a demand economy, people are unwilling to buy much at any price, and the resulting drop in consumption becomes the preoccupation of business. The culprit, of course, is the state of the economy. The number of long-term unemployed is at a historic high, total consumer credit is negative for the first time since 1969, and the U.S. household savings rate -- which hovered around 2 percent just three years ago -- is 6.1 percent, with each percentage point representing $109 billion in spending stripped from the economy.

These kinds of conditions, which have persisted for two years now, are leading to dramatic changes in the spending habits of both consumers and businesses -- changes that may be here to stay. "The longer and deeper the downturn, the more likely that coping behaviors people have adopted to deal with having less money will become ingrained," says John Quelch, a professor of marketing at Harvard Business School. Among such behaviors: More Americans are joining the ranks of what Quelch calls simplifiers -- people who choose to live below their means.

Up until a few years ago, "you could create supply and go in search of demand to absorb the supply," says Rick Kash, CEO of the Cambridge Group, a consulting firm in Chicago and co-author with David Calhoun of the new book How Companies Win: Profiting From Demand-Driven Business Models No Matter What Business You're In. "But efficiencies and technology have given us oversupply at the same time that demand is contracting. Today, you first have to understand demand. Then you take your current or new supply and align it with the demand that gives you the most profit."

Understanding demand requires knowledge of macroeconomic trends and the demographics and psychographics of one's particular market. In the former category, John Gerzema, chief insights officer at the advertising giant Young & Rubicam, sees opportunities in what he considers overlooked mass audiences, such as the developing world's middle class (projected to be larger in 2030 than the populations of the United States, Europe, and Japan combined) and households headed by single women, particularly in the United States and Latin America. Psychographically speaking, Gerzema spies potential in products that help people make sense of an increasingly complex and data-driven world. He is a fan, for example, of Flipboard, a Palo Alto, California, business that aggregates the content posted by members of multiple social networks. He also likes services that provide personal feedback, such as Mint.com, the personal finance website, and Bodybugg, which lets users track their calorie intake.

The new primacy of demand doesn't render innovation any less important. Kash advises those with sufficient funds and chutzpah to seek bonanzas in emerging and latent demand -- desires so embryonic, consumers have yet to express them. "No one went to Sony and said, 'Can you make music portable?' " says Kash.

Providing consumers with things they don't yet know they need requires equal measures of imagination and realism. At Inc.'s request, Kash and his team brainstormed several such offerings. Among the most intriguing: storefront health care offices, staffed by nurses and co-owned by Nurses and entrepreneurs, that would replace crowded and dreary clinics. (The nurses would also make house calls.) Another: Companies that don't just repair things but refurbish them so they don't have to be replaced. Such businesses would send out service people on a schedule -- two or three times a year, perhaps -- to perform checkups, maintenance, and updates on cars, appliances, and other big-ticket purchases.

So how can you identify nonobvious pools of profitable demand? Big, complicated problems are good bets, because they benefit from diverse avenues of attack. Consider, for example, the 17 million people in the United States without bank accounts; the 34 percent who are overweight; the 884 million worldwide without access to safe drinking water. You might look for inspiration abroad -- an approach that has paid off handsomely in the food, fashion, and reality-TV industries.

The seven companies profiled in the pages that follow have identified deep wells of demand in a parched marketplace. They range from a prelaunch start-up to a 26-year-old family business. Some pounced on opportunities, while others gestated their ideas for years. What they share is a nuanced understanding of who their customers are and what they want, need, and are willing to pay for. Now all they have to do is supply it.

Hot Market: The Aging Population

By 2030, 71 million Americans will be over age 65, according to the U.S. Census. Currently, 30 percent of elderly Americans who are not in assisted living live alone, and 90 percent say they want to grow old in their homes, according to AARP. Home health care, much of it for the elderly, is one of the fastest-growing segments in the country'sfastest-growing industry. Read More

Hot Market: Eco-Friendly Homeowners

Americans' ideal home size, which peaked at 2,400 square feet a few years ago, has fallen to 2,000 square feet, the first decline since the 1950s, according to the real estate website Trulia. Thirty-six percent of homeowners expect their next residence to be smaller than their present one, a survey by Better Homes and Gardens found. And the U.S. green building market will expand from $71.1 billion today to $173.5 billion in 2015, according to EL Insights, a trade publication. Read More

Hot Market: Consumer-Friendly Financial Services

Forty percent of americans say they have very little confidence in traditional financial institutions, according to a survey by the global PR firm Edelman. About one-third say they have more faith in PayPal and other online services, according to a survey by Cisco. And by 2014, an estimated 80 percent of families led by Gen-Yers will do their banking online, Forrester Research has found. Read More

Hot Market: Locavores

In 2007, the New Oxford American Dictionary crowned locavore word of the year. The number of farmers' markets has more than doubled in the past 10 years, according to the USDA. A third of all adults in the U.S. say they regularly buy natural and organic food when possible; and 59 percent say they buy local whenever possible, according to Mintel, a research firm. Read More

Hot Market: Insomniacs

Roughly 40 million Americans suffer from chronic long-term sleep disorders, another 20 million experience sporadic sleeplessness, and sleeplessness is rising as the population ages, according to the National Institutes of Health. The market for over-the-counter sleep aids is expected to hit $759 million by 2013, according to ReportBuyer.com, a market research firm. Read More

Hot Market: The Outsourced Work Force

Some 40 percent of the U.S. working population could do at least part of their jobs from home, and roughly 30 million work from home at least one day a week. Although 75 percent of managers say they trust employees, a third of that number would like the ability to monitor remote workers, according to the Telework Research Network. Meanwhile, 74 percent of business leaders say outsourcing can help a company survive, according to Capgemini, a consulting firm. Read More

Hot Market: Bike Commuters

Half of all americans believe that automobiles are the main cause of air pollution in their communities, and 65 percent are concerned about congestion on their roads, according to the Bureau of Transportation Statistics. Forty percent of those surveyed by the publisher Rodale said they would commute by bicycle if storage facilities were available. Read More

Last updated: Nov 1, 2010

LEIGH BUCHANAN | Staff Writer | Editor at Large, Inc. Magazine

Leigh Buchanan is an editor-at-large for Inc. magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture.




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