Unlocking Business Growth: Solving Supply and Demand Constraints

Understanding Supply and Demand Constraints in Business

Growing a business rapidly requires identifying and solving the right problems. Many businesses struggle because they're trying to fix issues that don't actually exist, while overlooking their true constraints. There are typically two core problems that limit business growth:

1. Supply constraints
2. Demand constraints

Let's explore how to identify which constraint your business faces and strategies to overcome them.

The Triage Question: Supply or Demand Constrained?

When evaluating a business, the first question to ask is: Is this business supply constrained or demand constrained?

Here's the key insight: You can either have too few customers or too little capacity, but never both simultaneously. Understanding which constraint you face is crucial for allocating resources effectively.

Signs of a Demand Problem:

• Empty restaurant tables
• Open slots in your calendar
• Products sitting unsold on shelves
• You've built it, but people aren't coming

Signs of a Supply Problem:

• Waiting lists for your services
• Turning customers away
• Can't produce products fast enough
• Unable to take on new clients due to capacity limits

The Simple Test

To determine which constraint you face, ask yourself this question:

If you doubled your marketing budget tomorrow (ads, outreach, content creation), would you be able to double your sales? Or would it just create chaos you couldn't handle?

• If it would create chaos, you have a supply problem
• If it would double sales, you have a demand problem

The difference between businesses that grow and those that stagnate often comes down to working hard on the right problem. As Warren Buffett says, "There's nothing worse than doing well something that shouldn't be done at all."

Examples of Supply and Demand Constraints

Let's examine several business scenarios to practice identifying constraints:

Example 1: The Overbooked Consultant

Scenario: A consultant is fully booked 3 months ahead, working 60-hour weeks, and constantly stressed. Despite the heavy workload, income has plateaued.

Question: Supply or demand constrained?

Answer: Supply constrained

Analysis: The consultant doesn't have a marketing problem - they have a supply problem that may also indicate a pricing issue.

Potential solutions:

1. Raise prices significantly (50-100%)
2. Change the service delivery ratio (group sessions vs. 1-on-1)
3. Hire and train additional consultants

By raising prices, even if 30% of clients leave, the consultant could make more money while working less. This creates a virtuous cycle:

1. Higher income
2. Fewer clients
3. More free time to expand capacity

The lesson: Sometimes the path to growth isn't more clients, but better clients.

Example 2: The Feature-Obsessed Software Company

Scenario: A software company that helps service businesses schedule appointments keeps adding new features. Existing customers love the product and retention is high. However, growth has stalled.

Question: Supply or demand constrained?

Answer: Demand constrained

Analysis: They've built a great product, but almost nobody knows it exists. They're fighting against irrelevance.

The company spends only 5% on marketing while competitors allocate 20-30%. They have a clear demand problem but are investing heavily in product development.

Potential solution: Reallocate resources from product development to customer acquisition. If the product is truly excellent, doubling the customer base could happen quickly without changing the core offering.

Caveat: For viral growth potential, the product needs high "surface area exposure" - users should naturally expose it to other potential users. B2C products often have this advantage over niche B2B offerings.

Example 3: The Inconsistent Restaurant

Scenario: A restaurant has 2-hour waits on Saturday nights but sits empty on Tuesday afternoons.

Question: Supply or demand constrained?

Answer: Mispriced - a mix of both constraints

Analysis: The restaurant has enough total capacity, but it's not allocated efficiently across the week. Simply adding more marketing would exacerbate the Saturday night problem while barely impacting slow weekdays.

Potential solutions:

1. Raise prices on Friday and Saturday (different weekend menu)
2. Allow customers to pay extra to skip the line
3. Extend hours on busy nights

Implementing these changes could potentially double profits. The key is solving the right problem - spreading demand to match capacity rather than just driving more traffic to peak times.

Pricing psychology tip: Instead of saying weekends cost 20% more, frame weekdays as 20% off. People prefer getting a discount to paying a premium.

Example 4: The Supply-Crunched Online Store

Scenario: An online fitness equipment store sees sales quadruple overnight during COVID. They quickly sell out of inventory and suppliers can't keep up. Instead of focusing on restocking, they keep running ads and marketing aggressively.

Question: Supply or demand constrained?

Answer: Supply constrained

Analysis: This is a pure supply constraint for physical products. Continuing to drive demand without addressing inventory issues only compounds problems like extended shipping times and angry customers.

Potential solutions:

1. Sell complementary digital products (e.g. workout plans, warranties)
2. Partner with app developers to offer white-labeled or affiliate products
3. Use new revenue to negotiate better terms with suppliers
4. Invest in supply chain improvements and redundancies

The lesson: In physical product businesses, supply chain management is a core competency. Neglecting it while driving demand can be disastrous.

Example 5: The Underperforming Home Services Business

Scenario: A plumbing company runs Google ads and keeps a full schedule. Vans are always on the road and technicians work overtime. However, profits are compressing despite being fully booked.

Question: Supply or demand constrained?

Answer: Neither - it's a sales/pricing problem

Analysis: The core issue is that technicians finish jobs quickly but rarely offer additional services or upgrades. They have a supply problem with sales skills rather than job capacity.

Potential solution: Teach plumbers basic sales skills and give them scripts to offer additional services. Role-play upselling techniques and track conversion rates to second jobs.

By selling 50% more services per visit, revenue could increase dramatically while costs remain similar. This highlights how businesses with thin margins often miss core revenue opportunities by not fully monetizing each customer interaction.

Example 6: The Struggling Online Course Creator

Scenario: A YouTuber sells digital courses with high completion rates and great reviews. However, they're barely breaking even after ad costs.

Question: Supply or demand constrained?

Answer: Demand constrained (but with pricing issues)

Analysis: The product is good, but they can't profitably acquire customers at current prices. This creates a cycle where they can't reinvest in growth.

Potential solutions:

1. Raise prices significantly (e.g. $1,000 to $3,000)
2. Create a high-end version (e.g. $10,000 tier)
3. Optimize ad creative using best-performing organic content
4. Improve landing page conversion rates

By tripling the main course price and adding a premium tier, average revenue per sale could increase from $1,000 to $4,000. This creates margin to reinvest in customer acquisition.

Example 7: The Invisible Mobile App

Scenario: A new mobile app company builds an incredible product with a world-class tech team. The app is fast, beautiful, and feature-rich. However, user growth is painfully slow with only a few thousand users instead of the millions needed.

Question: Supply or demand constrained?

Answer: Demand constrained

Analysis: The founders are blaming the product and considering adding more features. However, the real issue is awareness - they're spending almost nothing on marketing and relying on word-of-mouth growth.

Potential solutions:

1. Optimize app store listings for higher conversion rates
2. Invest in paid user acquisition
3. Pursue affiliate partnerships with complementary apps
4. Build a strong referral program

By shifting focus from product development to user acquisition, the app could potentially grow its user base 20-100x within a year.

The Constraint Cycle

It's important to recognize that supply and demand constraints are not static. As soon as you solve one, you often create the other:

1. Solve demand constraint → Create supply constraint
2. Solve supply constraint → Create demand constraint

This back-and-forth is the natural flow of business growth. Companies get stuck when they fail to recognize that the constraint has shifted and continue working on the wrong problem.

Identifying Your Current Constraint

To determine whether you're currently facing a supply or demand constraint, answer these questions:

1. If more customers showed up tomorrow, could you serve them at your desired standard?
2. Are you turning away business or putting people on waiting lists?
3. Are your most profitable time slots or products always sold out?
4. Do you run out of inventory or have long shipping delays (for physical products)?

If you answered "yes" to any of these, you likely have a supply problem.

Addressing Supply Constraints

If you're supply constrained, focus on:

1. Raising prices (fastest fix for supply problems)
2. Adding capacity
3. Improving operational efficiency

For service businesses, there are three main ways to increase capacity beyond pricing:

1. Technology: Implement systems that allow one person to do 5x the work
2. Training: Upskill B-level talent to A-level performance
3. Hiring: Bring on additional B-level talent to double output

Addressing Demand Constraints

If you're demand constrained, focus on:

1. Fixing acquisition channels (outreach, affiliates, ads, content strategy)
2. Improving conversion rates (landing pages, lead magnets, offers)
3. Enhancing sales processes
4. Refining your offer
5. Adjusting pricing (to enable profitable customer acquisition)

The Danger of Fixing the Wrong Problem

Addressing the wrong constraint not only wastes time and money but can actively make your situation worse:

• If you have a supply problem, more marketing creates chaos and unhappy customers
• If you have a demand problem, better operations won't help when there's no one to serve

The most successful businesses continually identify their current constraint, break through it, and move on to the next one. This isn't a one-time fix - it's an ongoing way of thinking about growth.

Conclusion

Understanding whether your business faces supply or demand constraints is crucial for sustainable growth. By correctly diagnosing your primary limitation and applying targeted solutions, you can break through revenue plateaus and scale more efficiently.

Remember that constraints shift as your business evolves. Stay vigilant in reassessing your situation and be prepared to pivot your focus between supply and demand as needed. With this framework, you'll be better equipped to allocate resources effectively and drive meaningful growth in your business.

Article created from: https://www.youtube.com/watch?v=sGv2BTUCcCM