Managerial Economics 550
Making Decisions on Demand and Forecasting
For Domino’s Pizza
Professor Lundondo Mumeka
January 24, 2013
A demand analysis is a very vital tool when a company is starting a new venture in a new market or when it needs to introduce a new product in the market. It would indeed be impossible to forecast the profitability of any business venture without analyzing the demand and the sensitivity of the industry and more so based on the location that the company would wish to venture in. Many companies have failed to meet their goals after ignoring this vital component and commencing operations without the adequate information about the market and the industry. Since the sole purpose of any business organization is to provide products and services that add value to the lives of their customers and at the same time earn profit, it important to study the dynamics of the market and to formulate strategies that will help the company achieve its goals and objectives.
Domino Pizza, an internationally renowned establishment, cannot fail to conduct a demand analysis as it ventures out in Waldorf area. Failure of this venture would negatively affect the company`s image and would also be a huge financial loss as setting up operations requires a lot of capital to pay the contracted workforce, pay for advertising expenses ,pay rental fees and also buying the needed supplies. Domino`s has decided to venture out in Waldorf because the prospects look promising and the company hopes to entrench it presence in the area but only the demand analysis will reveal whether the company`s optimism is well founded or if should abandon this venture and choose another location. The variables that will be used to conduct the demand analysis include price, income, size of the population, competition and also the effect on advertising on demand (Mohaupt & Citizens Research Council of Michigan., 1945).
Domino`s will need to set the price of its products at a certain margin that will enable the company attain its profit margin and at the same time appeal to its target market. Price determines the success or failure of a business venture because it directly affects demand. If Domino`s sets the price of its products too high, it will reduce the demand for its products especially if the customers feel that there are other places where they can get a better bargain. However, when it comes to food, the factor of quality also comes into play. Most people will be unwilling to purchase food that is of low quality just because the price is low. The company should therefore strive to achieve a balance between quality and fair pricing. Being a reputable brand name, the company can also exploit its high standing amongst customers and set its price higher than those of the local Pizzerias because customers already associate the company with high quality thus they will be willing to pay more for their food (Detroit Free Press Co., 2002). Domino`s managers also have to analyze the price and availability of substitutes for its products because they are what the customer will opt for when they do not purchase the company`s products. The availability of many substitutes will lower the demand because customers are not dependent on only one product and have the freedom to explore other options, thus there is a deficit of potential customers when they choose to consume the substitutes. Price of these substitutes also pays an important role in demand because if the price differential is large, demand will be reduced.
Income is another variable that will affect demand. The average income of the residents in the proposed location is a critical factor. It determines the market`s buying power and thus the amount of money that...