A downward demand spiral is another name for a death spiral, a cycle in which fixed costs are spread over a shrinking volume of output, so the cost of each remaining unit rises, prices are raised or products are dropped, demand falls further and unit costs rise again. The main entry shows the arithmetic and how companies try to break the cycle.
Why demand is in the name
The name puts the emphasis on customers. When a company sets prices from full unit cost, higher allocated overhead leads to higher prices. Customers who have alternatives buy less, volume falls, the same overhead is divided among fewer units and the next round of cost-based prices is higher still. Each turn of the spiral is driven by lost demand.
The pattern is linked to pricing and capacity in industries with large fixed costs. In management accounting it is often used to show the weakness of cost-plus pricing based on volume-driven overhead allocation, and why measures such as contribution margin or activity-based costing (ABC) can give better guidance on which products to keep.
The same dynamic appears outside manufacturing. In insurance, if premiums rise and healthier customers leave, the remaining pool becomes costlier to cover, premiums rise again and more customers leave. Public transport systems and utilities that lose users can face a similar cycle, because their network costs do not fall in step with demand.