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Let's focus on the place where a business must compete; the place where buyers and sellers come together. We're talking about the market.

Quite simply, a business is bound to fail unless it has a reasonable understanding of its target market. What does the business need to understand?

  • The needs and wants of customers, and how these differ
  • The buying behaviour of customers – why, what and how they buy
  • The ways in which a market is split up into different parts to serve different customer needs – these are known as market segments
  • The nature of demand in the market – how are prices set & the factors that influence the quantity of demand
  • The size and growth rate of the overall market and its segments
  • The proportion of market demand that is taken by competitors – an important concept known asmarket share

Defining a market

Let's start with a definition:

A market is anywhere where buyers and sellers come together to transact with each other.

The traditional image of a market is a physical place where buyers and sellers come together in one place. This still happens, of course. Take a drive along any main road on a Sunday and you will come across car boot sales – the classic example of a physical market in action. The UK has many towns that are referred to as "market towns", so-called because they host a town-centre market on regular dates throughout the year.

However, the term market has a much wider relevance when it comes to business studies. A market exists whenever buyers and sellers come together. The buyer and seller don't have to be in the same place in order to conduct transactions with each other.

Do you sell or buy items on EBay? Have you bought products from Amazon.co.uk, bought tracks from iTunes or iPhone apps from the App Store? Have you bought something from a catalogue by making a phone call? In all these examples, you have participated in a market, although you were not physically with the other party to the transaction!

So, there are many different kinds of market. Here is a summary of the main market categories:

Geographical markets

The two main categories of geographical markets are:

Local markets
Definition:
Where customers are a short distance from suppliers

Common for the sale of fresh and locally-sourced products and the delivery of locally-supplied services. The car boot sale is a great example of a local product market. The use of local services (e.g. franchise operations, hairdressers) is another good example. Your local high street or retail park is another example, where consumer goods are sold to people who tend to live pretty close.

Businesses operating in local markets enjoy several advantages. They are physically closer to their customers, so are better placed to understand local cultural issues and traditions. It is also easier to develop relationships with local customers, to engage in market research and to respond quickly to changes in the market.

The main downside to operating in local markets is that the market size may be relatively small.

National markets
Definition:
A market where customers are spread throughout the country or over a large area

National markets are very common in the UK. Here, the same product or service is offered to customers who are spread around the country. A business may have several (or many) locations in the country in order to reach those customers.

One way to illustrate this is to think of businesses that seem to be everywhere as you travel round the UK.

For example, you'll see BT phone vans, BSkyB satellite dishes, Tescos, McDonalds and Subway branches in just about every town and city in the UK. These businesses are operating in national markets – e.g. the markets for telephones, television, groceries and fast food. However, you will notice from the examples given that businesses which are national in terms of the scope of their operations are definitely not small businesses!

Another way to think of a national market is in terms of the total sales of a product or service across the country. For example, the total demand for greetings cards, jams or loft conversions. A start-up or small business can be focused on a national market, although it is likely that it will have a very small share of the market.

Physical and electronic markets

We have touched on these two categories already.

A physical market brings buyers and sellers together in the same location. We've already mentioned car boot sales and markets in town centres. Farmers' markets are another good example.

A much larger number of markets are now electronic. Businesses find their customers using a variety of electronic media, including the Internet, mobile telephony, digital television and via email. Transactions are completed electronically with the delivery method depending on the nature of the product sold.

Both physical and electronic markets are important to start-ups and small businesses. For example, Fraser Doherty started his Superjam business by selling his homemade jams at farmers markets and then promoting them in the aisles of supermarkets. By contrast, specialist greetings card business Moonpig has always relied on using electronic markets, building sales by running a specialist website.

The key points to remember about electronic markets are that:

  • They provide an easier way for start-ups to enter a national market, particularly if the business has identified a small niche segment of that market
  • Electronic markets tend to be highly price-competitive since it is quite easy for customers to search for products from a variety of suppliers and to compare the best prices available (just about every consumer goods market has one or more price comparison website).
  • Setting up a new business in an electronic market tends to have lower start-up costs than entering a physical market.
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