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Markets are where buyers and sellers converge to exchange goods and services. Businesses navigate a diverse landscape of markets, each with its own set of characteristics and internal dynamics. Understanding these market features is critical for companies to develop effective strategies and flourish in a competitive environment.
Types of markets
Broadly categorized, there are two primary market types:
- Consumer markets: These markets encompass the buying and selling of goods and services intended for final consumption by individuals or households. Examples include local grocery stores, clothing retailers, or even the salons down the street – all catering directly to consumer needs.
- Industrial markets: Here, the focus shifts to businesses buying and selling goods and services used for production purposes. Raw materials, machinery, and office supplies are all traded within industrial markets. Financial markets (stocks, bonds) constitute another category, facilitating the exchange of financial instruments.
Other classifications divide the market into two:
- Product market or goods and services market
- Factor market
Goods and services market: This is where finished goods and services are bought and sold. Businesses act as sellers, offering products to consumers (households) and other businesses. The food market and office supply market are good examples.
Factor market: This is where businesses buy the resources (inputs) they need to produce goods and services. These resources are called factors of production and include:
- Labor market: Businesses hire workers to perform tasks.
- Market for raw materials: Businesses purchase raw materials to use in production (e.g., cotton for clothing, lumber for furniture).
- Market for intermediate goods: These are already produced goods that are used to create a more finished good (e.g., flour for bread, steel for cars).
- Market for capital goods: These are long-lasting items used in the production process (e.g., machinery, buildings).
Market features – understanding the competitive landscape
Every market possesses a unique set of features that businesses must consider:
- Customer base: Understanding who buys (demographics, needs, buying habits) is crucial for tailoring offerings and marketing strategies.
- Competition: Analyzing competitors’ strengths and weaknesses helps businesses develop a strategic advantage.
- Location: Physical or virtual location significantly impacts a business’s reach and success.
Customer base
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
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 two main types of competition:
- Direct competition: Here, companies offer functionally similar products or services to the same customer group. For instance, Coca-Cola and Pepsi are direct competitors in the soft drink market.
- Indirect competition: Companies may compete for the same customer needs but through different products. Fast food restaurants like McDonald’s and Pizza Hut compete indirectly, even though they offer distinct menus.
Location
Markets can be classified based on the geographic area they cover. This is an important factor for businesses to consider, as it impacts their customer base, competition, and overall strategy.
- Local market: This is the most restricted scope, focusing on a specific region like a town, city, or small district. Local markets typically cater to daily needs and perishable goods, where transportation costs play a significant role. Think of your local bakery or farmer’s market – they primarily serve customers within a close radius.
- National market: This market encompasses an entire country. Businesses operating here have a broader customer base compared to local markets. National brands, like Coca-Cola or McDonald’s, are examples of companies that target a national market.
- Regional market: This category falls between local and national. It spans several countries within a defined geographic area, often sharing cultural or economic similarities. The European Union and the Association of Southeast Asian Nations (ASEAN) are examples of regional markets. Businesses operating here can leverage economies of scale while still catering to regional preferences.
- International market: This market transcends national borders, encompassing customers from multiple countries worldwide. International companies, like Apple or Samsung, operate in this vast market. Globalization, with advancements in communication and transportation, has made it easier for companies to enter international markets, offering significant growth potential but also presenting challenges like cultural differences and complex logistics.
Market dynamics – size matters
Market size refers to the total potential demand for a product or service within a specific market. It is measured from:
- Sales value: The total money spent if all consumers bought the product.
- Sales volume: The total quantity of all consumers who purchase the product.
Market size is an important metric for businesses to assess the feasibility of entering a market and set realistic goals. Companies measure it to calculate market share, which is the basis for setting marketing objectives. It also 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.
Market size is further segmented into categories:
- 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.
Another important dynamic is market growth. A growing market presents more opportunities for businesses to generate sales, while a shrinking market requires strategies to maintain revenue. 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 – the pursuit of dominance
Market share refers to the percentage of a market’s total sales captured by a particular company. 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. A high market share indicates a strong market position and influence. Here are some key players in the market share race:
- Market leaders: These companies hold the largest market share and exert significant influence on market dynamics.
- Market followers: These companies adapt to the leader’s strategies, aiming to maintain their position without challenging the status quo.
- Market challengers: These companies aggressively pursue market share growth, often targeting the leader’s position.
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.
A company’s market share expands when its sales outpace competitors. This growth can be achieved through three key strategies:
- Attracting new customers
- Increasing repeat business from existing customers
- Winning over customers from competitors
By effectively implementing these strategies, a company can capture a larger slice of the overall market pie.
Market strategies – tailoring solutions to specific needs:
Effective market segmentation is crucial for businesses to achieve sustainable success. This involves identifying distinct customer groups within a broader market and tailoring offerings to their specific needs. Two primary segmentation strategies emerge:
- Niche markets
- Mass markets
The optimal market segmentation strategy depends on a company’s specific goals, resources, and risk tolerance. Niche markets provide a focused approach with a loyal customer base, while mass markets offer high-growth potential but require a strong competitive edge. Carefully analyzing target markets and internal capabilities is essential to selecting the most suitable path for sustainable business growth.
Niche markets
Niche markets cater to a well-defined customer segment with unique needs and preferences. Imagine a company specializing in professional diving watches. This approach allows for a deep understanding of the target audience, enabling the company to develop highly specialized products and cultivate a loyal customer base. Advantages of niche markets include:
- Reduced competition: Niche markets offer a competitive landscape with fewer players, allowing for stronger brand positioning within the segment.
- Enhanced customer focus: By catering to a specific customer group, businesses can tailor their marketing, communication, and product development efforts to address their needs directly.
- Direct marketing opportunities: The well-defined nature of niche markets facilitates targeted marketing strategies, maximizing return on investment.
However, niche markets also come with limitations:
- Limited growth potential: The inherent size restriction of niche markets can constrain overall revenue growth for a company.
- Economies of scale: Niche markets often present challenges in achieving economies of scale, potentially leading to higher production costs.
- Product diversification: Focusing on a niche market might limit a company’s ability to diversify its product portfolio.
Mass markets
Mass markets encompass a broad customer base with relatively homogenous needs. Companies selling everyday products like toothpaste or bottled water exemplify this approach. While offering significant growth potential, mass markets present a fiercely competitive environment:
- High growth potential: The sheer size of the mass market allows businesses to achieve significant sales volume and potentially exponential growth.
- Economies of scale: Mass markets enable companies to leverage economies of scale, reducing production costs per unit.
- Large-scale operations: Operating in the mass market allows businesses to build large-scale operations, potentially creating brand recognition and market dominance.
However, the advantages of mass markets come with distinct challenges:
- Intense competition: Due to the vast number of competitors, differentiation and establishing a strong brand presence can be difficult.
- Price-based competition: Competition in mass markets often focuses on price, leading to lower profit margins.
- High marketing costs: Reaching a large and geographically dispersed customer base often necessitates significant marketing and distribution expenditures.