Variable Demand
All businesses have some degree of variable demand.
This occurs when your customer base (demand) is not constant over any given period of time. This period could be hours, days, weeks, months, or even seasons. Businesses don’t want to lose demand during the peak times but also don’t want to have excessive costs when business is slow (off-peak).
Two examples of big businesses with this problem are airlines and hotels. Although airline business travel tends to be fairly constant during the year, vacation travel is usually not. Airlines have the ability to fly their airplanes to some other route during the off peak and to add flights or bigger airplanes to a route during peak times. The hotel industry suffers from this same vacation travel variability, but they can’t move their hotels or add more rooms.
Small businesses also suffer from this demand-variation problem. Coffee kiosks have early morning caffeine-fix customers and another peak at noon. We all know about the Christmas season, with it’s huge demand, making or breaking a retailer’s year. Other peak times include Valentines Day, Mothers Day, summer, winter, Thanksgiving Day, etc. Annetta Butler, owner of Northwest Costumes in Bremerton has told me that 40% of her sales comes at Halloween. This variation puts a lot of economic stress on labor, space, equipment, and financing. What can small businesses do?
The simple answer is easy. During the down times, you either raise revenue or lower costs. The implementation is difficult.
Many small businesses are good at increasing their capacity to produce during peak times. Extra staff can be hired for the summer, Christmas, weekends, and lunchtime. People are more flexible than facilities. However good staff is hard to let go during the down time, as training and hiring cost are high.
One of the hardest decisions for business is whether to build capacity for the peak time so they don’t miss the rush, but not to have so much capacity during the down time that you lose all that you have gained. Independent contractors can help increase capacity but planning is required as they are also busy. Some businesses are successful in building inventory during the low months, but this incurs holding costs. This is difficult for those in the service sector.
One concern is having too much overhead. You have to pay for this fixed cost every month whether your demand is high or low. Having low overhead is good in general, but it is more significant if your business has highs and lows in demand.
What about revenue?
Sometimes reducing your price works, but only if you have enough gross margin to cover this reduction. Research has shown that you need a 40% or more reduction in price to create demand. People just don’t buy something additional if the price is lowered by 10-20%. Lowering your prices can work if you offer a perishable product such as food, vacations, B & B lodging, or entertainment. However, if you offer a non-perishable product you must watch out for an economic term called “diversion”. People just buy your product when your price is low rather than at their regular time.
Trying to get into another market with different products or services during down times can work. However this causes problems with your market niche. Customers become confused. These additional products or services must be complimentary to your core business.
Dealing with demand variation is difficult. However recognizing what will and won’t work can help.
This article was written by Seattle SCORE Chapter member Fred Parkinson for the Kitsap Sun in Bremerton.