What is Effective Demand?
Adam Smith, known as the father of modern economics, defined effective demand as the ability and willingness of consumers to purchase a good or service at a given price. In other words, it's not just about what people want—it's about what they can afford and are willing to pay for. For digital product managers, this means understanding the balance between user desires and their capacity to engage with and pay for your product.
Effective Demand in a Digital Context
Effective demand still holds in today’s digital marketplace but with a modern twist. The crucial factors are how users interact with products, the pricing models available (subscriptions, freemiums, etc.), and the barriers to entry. As product managers, it’s crucial to design features that users need and ensure they are accessible and valuable enough for users to commit to.
Applying Effective Demand to Persona Development
When building personas for your product, it’s not enough to define what a user wants. You must also consider their ability and willingness to engage with your product meaningfully.
For example, you may design a product targeting small business owners, but if your pricing model is too high or your feature set is too complex, there’s a disconnect between what they need and what they can afford. Understanding effective demand ensures you align your product’s value proposition with the actual buying power of your target personas.
Contemporary Examples of Effective Demand
Streaming Services (e.g., Netflix):
While users may want access to an extensive library of content, effective demand is demonstrated by their willingness to pay for different tiers of subscriptions. Netflix uses this concept to offer various pricing options, each catering to other segments of its user base—casual viewers or avid binge-watchers.
SaaS Products (e.g., Slack, Zoom):
Many SaaS companies provide free versions of their product but offer premium features for paying customers to meet effective demand. This freemium model allows users to experience the value before deciding whether the additional cost is worth it, reflecting their ability and willingness to pay for enhanced services.
Mobile Apps (e.g., Headspace, Calm):
Meditation apps often follow a similar pattern. Users want to relax and improve their mental health, but not all users are willing to pay immediately. These apps use free trials and tiered pricing models to cater to different levels of effective demand, converting free users into paying customers over time.
Conclusion: Leverage Effective Demand in Your Product Strategy
As digital product managers, it’s crucial to understand and apply the concept of effective demand when building and refining your personas. This perspective ensures that your product meets user needs and engages with them in a way that users can. By balancing user desires with their capacity to pay, you can design a product that drives adoption and long-term success.
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