Market and Its Features
- Types of market
- Market features
The market is where sellers and buyers exchange goods or services. It may refer to a physical or non-physical location, such as e-commerce.
Types of market
The market could be:
- Consumer market
- Industrial market
The consumer market trades in goods and services for final use, for example, the market for personal goods such as shoes and clothing. Consumers buy for their own use or for family use. They don’t process it further, use it to make other products, or resell it.
Industrial or business markets trade goods and services needed by businesses, such as markets for raw materials and components. Companies sell their products to other businesses, perhaps to:
- Resold as done by retailers and wholesalers,
- Used directly to manufacture other products such as raw materials and components, or
- Used in daily operations such as office equipment.
The market is also divided into two:
- Goods and services market
- Factor market
In the goods and services market, businesses act as sellers. Meanwhile, households or other businesses act as buyers. Examples are the food market and the office supply market.
Meanwhile, in a factor market, businesses act as buyers. This market transacts inputs for production processes such as:
- Market for raw materials
- Market for intermediate goods
- Market for capital goods
- Labor market
Besides these two, there are financial markets and capital markets. Financial markets include the capital market and other financial securities and derivatives, including the money market. Meanwhile, the capital market trades long-term securities and only consists of the stock and bond markets.
A customer base is a group of consumers who are served and repeatedly buy products from a company. Companies seek to build and expand their customer base to increase sales. For example, they may acquire new customers or seize competitors’ customers.
Besides a large customer base, another critical factor is loyalty. A loyal customer base is important because customers will continue to flow revenue to the company. In addition, it is also cheap without having to bear the costs associated with acquiring new customers to generate sales.
Competition is all about rivalry in the marketplace. It is a condition where two or more companies fight over the same customers to generate sales. They beat each other and try to surpass each other.
Competition arises because companies target the same consumers to compete for profits. As a result, their products are mutually substitutes for one another in satisfying the same needs or wants. Thus, when a company can better satisfy customers and generate higher sales, it is at a loss for its competitors.
Competition impacts market profitability, where intense competition squeezes profit margins. How fierce the competition is in the market depends on factors such as:
- Number of customers
- Number of companies
- Market size
- Market growth
- Product type (homogeneous vs. differentiation)
- Competitive basis (price vs. non-price)
- Barriers to entry and barriers to exit
There are several different markets where each has a different degree of rivalry, including:
- Perfect competition
- Monopolistic competition
Price competition vs. non-price competition
Price competition implies low prices to attract customers. Companies in the market offer identical products (homogeneous products). Thus, the only reason consumers buy is at a low price.
Price competition requires companies to have a low-cost structure to be competitive. For example, a company achieves this by increasing economies of scale.
By having a lower cost structure, the company can sell products at a slightly lower price than competitors to attract consumers. Despite lower margins, profits remain high due to lower operating costs and higher sales volumes.
Meanwhile, non-price competition involves factors other than price to attract consumers. For example, companies offer higher quality products with sophisticated features. Or, they deliver superior after-sales service.
Direct competition vs. indirect competition
Direct competition occurs when two or more businesses provide the same product and compete for the same market. For example, Coca-Cola competes with Pepsi in the soft drink market. Alternatively, Apple and Samsung compete directly in the smartphone market.
Indirect competition occurs when two or more businesses serve the same needs but through different products. For example, bus operators compete indirectly with rail transport operators. Or Pizza Hut competes with McDonald’s in the fast food business even though they offer a different menu.
Another example is a camera manufacturer with a smartphone manufacturer. Even though their products are different. Still, when smartphone manufacturers incorporate high-resolution cameras, it can potentially divert consumer purchases from cameras.
Barriers to entry and barriers to exit
Barriers to entry refer to obstacles for new entrants to enter the market. They incur costs for newcomers. Therefore, they must overcome it to operate and compete with incumbents.
Barriers to entry could be:
- Strategic barriers to entry
- Structural barriers to entry
Strategic entry barriers are created by incumbents. For example, market leaders adopt predatory pricing by selling prices at significantly low levels. Its main objective is to reduce competition by forcing competitors out and preventing new entrants from entering the market.
Structural entry barriers stem from the market’s nature. For example, the electricity industry has significant barriers to entry. This industry requires few players, maybe just one company, to operate as it requires substantial economies of scale to lower costs and prices.
Barriers to entry have implications for competition. When barriers to entry are low, competition tends to be intense. New entrants bring new capacity to the market, increasing supply and depressing market profitability. In addition, it stimulates incumbents to retaliate to secure their market position.
Another related aspect is barriers to exit, which prevent existing businesses from leaving the market. Companies incur high costs when they leave the market, possibly higher than the costs they would incur if they remained in the market. These costs can be related to the following:
- Regulatory compliance
- Sunk costs
- Long term contract
- Asset write-off and closing costs
Like entry barriers, exit barriers also have implications for competition. If barriers to exit are significant, competition will likely intensify as existing companies are forced to remain in operation and continue to compete in the market. And the competition will get tougher if, at the same time, the barriers to entry are low.
Some companies may operate locally. Others target national, regional, or international markets. Customers in these geographic areas may have different needs and wants. Factors such as culture, economics, or history usually explain the differences.
Companies might target consumers in the area where their business is located. They usually use local media for advertising products.
The local market is small in size with limited growth potential. For this reason, this market is usually attractive to small businesses rather than large businesses.
Local businesses might expand their operations, targeting other regions. They target the national market.
The national market includes consumers in the area where the business is located and outside its geographic location but within the same country. As a result, the national market is larger than the local market and therefore offers higher growth potential.
Regional markets include several countries in the same geographical area and are close to each other. They may include broader economic groupings such as the European Union or ASEAN. Each region shares common characteristics, is distinguishable from other regions and requires a different marketing mix and strategy.
The international market includes countries around the world. However, unlike regional markets, international markets are not limited by geographic area similarities.
Companies sell their products to customers in other countries to generate more sales and profits. We know them as multinational companies (MNCs).
Targeting international markets is becoming increasingly important due to globalization. Reduction in trade barriers and capital flows, advances in information technology, and lower shipping costs have increased trade between countries. Thus, a company can target overseas customers more easily than before.
In addition to exporting, an entry strategy to international markets may involve:
- Joint ventures
- Strategic alliance
- Greenfield investment
Market size represents the total potential demand in a market at a given time. It is measured from:
- Sales value: The total money spent if all consumers bought the product.
- Sales volume: The total quantity if all consumers purchase the product.
Size is critical to assess whether a particular market is feasible, in addition to other factors such as barriers to entry. In addition, companies use it to calculate market share, which is the basis for setting marketing objectives.
Lastly, market size correlates with the competition. Small market sizes, such as niche markets, tend to have less competition because big players are unwilling to enter due to low scale.
Some terms related to market size:
- Potential market includes all individuals who have a desire to use the product. Some have the ability to pay, while others do not.
- Available market contains individuals who have the desire to use the product plus have the ability to pay. In other words, they have effective demand because they want the product and have the money to buy it.
- Qualified available market is an available market where consumers are permitted to purchase and use products. For example, alcoholic beverages are only sold to specific age groups, although others also want and have the money to buy them.
- Target market is the qualified available market in which the company is trying to serve it.
- Penetrated market comprises individuals who have purchased or used the company’s products.
Market growth refers to changes in market size over time. It may be measured by the total value or sales volume realized by all companies in the market or by a potential size.
Market growth is important in business. Companies look at market growth trends to develop marketing plans and strategies. For example, more opportunities exist to generate more sales when a market grows. As a result, the company may plan to increase production and spend more on advertising to optimize sales.
In addition, market growth also has an impact on competition. For example, competition tends to be less intense when market growth is high. A company does not need to seize competitors’ customers to increase sales.
Conversely, if market growth decreases, the market’s sales potential decreases. As a result, companies must seize competitors’ customers to maintain the same revenue as before. This situation finally intensifies the competition.
Market growth is influenced by the following:
- Population growth: an increase in population adds more consumers to the market.
- Consumer income: higher income increases the consumers’ ability to buy products.
- Changes in consumer tastes and preferences: Shifts in tastes or preferences may present opportunities to increase market size – because more consumers are attracted to buy – or vice versa.
- Technological progress: inventions and innovations can drive growth or, conversely, accelerate a market into a decline phase.
Market share shows how big a company’s sales are compared to market size (total sales by all firms in the market). We can calculate it with the following formula:
- Market share = (Company’s sales / Total sales by all companies in the market) × 100
Market share is used to measure the company’s market position. Companies with a strong market position have a high market share. Thus, their operations and strategies can affect the market and other players.
A market leader points to a company with the highest market share. It becomes the largest and has a major influence on market output and competitive strategies carried out by competitors.
Some competitors adapt to the market leader’s strategy and become market followers. Others may challenge the market for leadership positions.
- Market followers seek to keep the status quo and current market position without challenging or upsetting the market leader. They adapt to every strategic action by market leaders. Thus, the gap between their market position and the market leader remains unchanged.
- Market challengers try to replace the market leader. They usually have the second-largest market share. They struggle to increase their market share and rely on an aggressive strategy to dominate.
Having a dominant market share is important for several reasons:
- Achieve better economies of scale by selling more products
- Decreased unit costs through higher economies of scale
- Better ability in pricing
- Less threatened by competition
- Stronger bargaining power over suppliers and other stakeholders
A higher market share usually translates to higher profits. The positive correlation between the two lies in the potential to lower costs through higher economies of scale. However, this positive correlation does not always apply to all cases.
Increasing market share
Market share increases if the company’s sales grow higher than competitors. And it can be achieved by:
- Acquire more new customers
- Increase repeat purchases from existing customers
- Snatch customers from competitors
Meanwhile, the strategies can be increasing advertising spending, developing innovative products, or improving customer service.
Niche market vs. mass market
A niche market refers to a part of a larger market with specific customer needs. It is relatively small in size. Customers have unique needs, preferences, or identities, which set them apart from the mainstream market.
There are many niche markets. An example is the market for professional diver’s watches. Typically, defining a niche market is based on the following aspects:
- Prices, for example, the market for luxury or discounted products.
- Quality level, for example, the market for economy, handmade, or premium products.
- Psychographics (values, interests, attitudes), e.g., the market for organic vegetables.
- Demographics, for example, the market for women’s shoes
Working in a niche market offers several advantages, including:
- Relatively low competition
- Can focus on customer needs
- Get closer to customers
- Allows direct marketing
But, niche markets also have limitations, such as:
- Low economies of scale
- Not suitable for businesses with many products
- Low growth potential
- Only suitable for small businesses
A mass market is a market with many customers and relatively homogeneous needs. As a result, companies sell the same product across markets without trying to target separate groups.
Mass market has the following characteristics:
- Has a large market size
- Many customers available
- Relatively homogeneous and standardized product
- Low switching costs
- Price based competition
Targeting the mass market offers several advantages, such as:
- High growth potential
- Higher potential for economies of scale
- Allows companies to operate on a large scale
- Higher chance of product being sold
But working with the mass market also has some drawbacks, including:
- More companies compete
- Relatively low-profit margins
- Requires high advertising, promotion, and distribution costs