What’s it: Market growth refers to the percentage change in market size over a given period. It is marked by the rise and fall of total sales by all companies in the market. Therefore, growth is an important factor to consider in designing marketing plans and strategies.
Then, when a company enters a new market, its growth rate and prospects are also major considerations. Companies don’t just look at market size. If the market size is large, but growth is low, it may not be feasible. It could indicate a mature market, where competition is intense and has less potential to generate profits.
Growth also affects the competition intensity in the market. For example, when the market grows more slowly or even declines, the competition becomes fiercer. Existing players have to fight over the smaller market pie. They must be able to seize customers from competitors to grow positively and increase market share.
Conversely, a growing market means more cakes up for grabs, leading to less intense competition. As a result, companies can grow revenue without having to divert competitors’ customers.
Why market growth is important
Companies consider market growth when setting targets and designing marketing strategies. It also becomes the basis for evaluating product performance in the market. For example, successfully increasing sales when the market is down is a great achievement. It shows the company’s competitive strategy is effective.
Then, management also looks at growth before entering new markets. A high-growth market is preferable because the company has the potential to make a lot of money.
And, in general, market growth is important to consider for two reasons. It affects profitability and competition in the market.
Growing markets offer higher sales and profit potential. Thus, the company has more opportunities to earn more money.
On the other hand, high growth can also attract new entrants to enter the market. If they enter through acquisitions, it does not add new supply to the market. Incumbents are likely to be less reactive because it shouldn’t affect the market’s profitability.
However, suppose a new entrant enters the market organically by establishing a new subsidiary or production facility. In that case, it adds to the supply to the market. As a result, the market profitability is pressured downwards as more supply drives prices down. That usually provokes a competitive reaction from the incumbents. They may seek to deter new entrants by establishing strategic barriers to entry, for example, by lowering selling prices.
Market growth also has implications for the competition intensity. A growing market represents a higher opportunity to grow revenue and profitability without diverting customers away from competitors. As the market grows, more dollars are available for companies to fight for.
Conversely, when the market grows more slowly or declines, competition intensifies. Again, it is because fewer dollars are available for existing players to fight for. As a result, companies must seize customers and market share from competitors to grow sales.
Market growth over the product life cycle
Market growth shows different rate over the product life cycle. In the introduction stage, the market grows slowly because many consumers are not familiar with the product. Therefore, the first company to enter the market (the first mover) must educate consumers and persuade them to use the product. And, usually, few people are willing to take the risk to do so.
Then, during the next phase, the growth phase, the market grows exponentially. People have become more familiar with the product, thanks to aggressive promotions and word-of-mouth recommendations between consumers.
High growth attracts many new companies to enter the competition. However, competition is still not intense because many consumers have not used the product.
After a while, the market reaches saturation, where many customers already have the product. As a result, market growth is still growing positively but slower than in the previous phase.
Finally, in the decline phase, growth is heading into negative territory. Substitute products usually emerge and provide better offerings to meet consumer needs and wants.
Another factor is technological change. It makes the previous product irrelevant or not needed by the customer. For example, when the personal computer hit the market, it began to replace the typewriter.
Factors influencing market growth
Several factors influence the growth of the market, including:
- Population growth
- Economic growth
- Changes in consumer tastes
- Substitute product trends
- Current market penetration rate
An increase in population increases the number of potential customers. Therefore, when the population grows high, more new consumers become available to buy the product. For this reason, consumer product companies typically target countries with large populations with large productive-age populations. In addition to their high purchasing power, the productive age population also affects future demand prospects.
Economic conditions have an impact on consumer income, which in turn affects the dollars they spend. Although the market has a large consumer base, if they have less money, such as during a recession, the demand for the product is also less, leading to fewer sales. In addition, during this period, job prospects and household incomes are weak, making people prefer to save money rather than spend their money on goods and services.
Conversely, during a prosperous economy – the economic expansion – people have more disposable income to be spent on goods and services. It makes the market growth positively. The economy is growing, and businesses hire many new workers, improving job prospects and household incomes.
As consumer tastes change, so does their demand for products. For example, nowadays, consumers are more concerned about healthy eating. As a result, the demand for organic food increases, making its market finally enjoying rapid growth.
On the other hand, such a trend reduces the potential for market growth for junk food. Later, many fast-food restaurants changed their menus to include nutritional information and healthier eating options.
When substitute products emerge and provide better satisfaction, customers turn to them, reducing demand for a product. The effect can even be dramatic and rapid as it happens with technology products. For example, when touchscreen smartphones appeared like those introduced by Samsung and Apple, it had captivated many consumers, prompting them to switch from QWERTY phones like Blackberry in droves.
Market penetration rate
The growth rate also depends on the market penetration rate. It tells us how many customers in the market have used the product, relative to the total potential customers and expressed as a percentage.
If the product has reached many consumers, the growth rate is likely to be low. The market is saturated. Most consumers already have the product. Take washing machine sales in developed countries as an example. Its sales do not increase every year because most households already have them. Thus, new purchases are driven more by replacement purchases.
In such situations, companies find it difficult to grow sales by increasing new customers. So instead, they rely solely on repeat purchases. Or, they seize customers from competitors to grow their customer base and sales, intensifying competition in the market.
Conversely, if the penetration rate is low, the growth rate will tend to be high. This is because most potential consumers haven’t bought it yet. As a result, companies can grow sales by recruiting new customers instead of snatching customers from competitors.