0264 · 3.1.2Understanding market changes

Consumer spending patterns and market changes

0:00A shop can sell more than before and still lose ground to its competitors. Customers might also change their purchases while the business continues offering the same products. Success depends on understanding both customer choices and developments across the wider market. By the end of this video, you will understand why markets change, how businesses respond, and what market share reveals. A market is where buyers and sellers of a particular product come together.

0:25Competition occurs when businesses selling similar products try to attract the same customers. Revenue is the income a business receives from selling goods or services. These ideas help us separate developments within an individual business from changes across all suppliers of a particular product. Consumer spending patterns describe how people distribute their expenditure between different goods and services. A household might spend more on transport and less on entertainment, even with an unchanged budget.

0:53Businesses selling transport services gain an opportunity, while entertainment providers face pressure. The important question for a business is where customers’ money is going and why their choices are changing. Spending patterns can change because of tastes and fashion, incomes, technology, the population’s age structure, prices, and health or environmental awareness. Changes in tastes and fashion affect what customers find attractive. For example, a particular colour of clothing can become popular after appearing frequently online.

1:22Retailers offering that colour have a better chance of attracting purchases while the preference continues. Income affects how much consumers can afford to spend. A household with higher earnings may buy more restaurant meals because its budget allows additional spending on leisure. When income falls, that household may prepare more meals at home to reduce expenditure. The effect differs between products because customers give essentials greater priority than purchases they can postpone.

1:48Technology creates new products and changes how customers meet existing needs. A customer who uses a phone to take photographs may spend less on a separate camera. The underlying desire to record special occasions continues, but the chosen product changes. Businesses must therefore watch for alternatives that perform the same function as their existing products. The age structure describes the proportions of a population in different age groups. An area with more young families may experience increased spending on childcare and children’s clothing.

2:17Where the proportion of older residents rises, demand for accessible transport or suitable leisure services may increase. Businesses gain opportunities when their products meet the needs of a growing customer group. Prices influence what a household can buy with its available income. If a bus journey becomes cheaper relative to travelling by car, some commuters switch to the bus. The bus company gains passengers, while fuel sellers lose some of their sales.

2:41A product whose price rises compared with its alternatives tends to lose customers to them. Finally, health and environmental awareness change what customers want to buy. Customers who learn more about healthy eating may join a gym or buy more fresh fruit. Concern about packaging waste can increase demand for reusable containers. Businesses offering these products gain sales, while sellers of sugary snacks or single-use packaging lose them.

Why markets become more competitive

3:06Markets can become more competitive through overseas businesses, easier online entry, price comparison, and entry into growing markets. Globalisation is the increasing interconnectedness of countries through trade and business activity. Customers gain access to suppliers from other countries, so domestic sellers face more alternatives. A clothing retailer may compete with overseas suppliers alongside shops in its surrounding area. Ecommerce is the buying and selling of goods and services using the internet.

3:35An online seller can begin trading without paying for a customer-facing shop. Lower start-up costs make entry possible for some businesses that could otherwise struggle to afford premises. Customers then have more suppliers competing for their purchases. Online price comparison makes differences between competing offers easier to see. A customer can check several sellers before buying the same model of kettle. Businesses charging higher prices need to demonstrate benefits that customers value, such as reliable delivery.

4:03This creates pressure to offer an attractive combination of price, product quality and service. Growing markets also attract new businesses because expanding customer expenditure creates opportunities for sales. If more households begin purchasing pet-care services, additional providers may enter that market. The original businesses then compete with a wider choice of suppliers. Greater demand creates opportunities, but the arrival of rivals can make winning each customer more difficult.

Business responses to market change

4:29Responses include market research, improving existing products, developing new products, cutting costs to lower prices, better customer service, branding and promotion, and selling online. Market research is the process of gathering, analysing and interpreting information about a market and its customers. It helps managers discover the reasons behind changing purchases. Asking customers about their preferences gives the business evidence for choosing an appropriate response. Cedar Kitchen sells prepared lunches to office customers.

4:58If buyers increasingly seek meat-free meals, the business could improve its existing sandwiches by offering a bean filling in each one. Developing a new range of vegetable soups would offer another response to the same change. Improvement adapts an existing offer, while development gives customers an additional product to choose. Cutting costs can make lower prices affordable for the business. For example, reducing wasted ingredients lowers the cost of making each meal.

5:24A lower selling price can then attract customers whose budgets have tightened. Managers must preserve the features customers value, because savings that damage the offer can drive buyers towards competitors. Better customer service gives customers reasons to return, especially when competing products are similar. Kestrel Bikes sells bicycles and provides repairs. Clear repair times and helpful advice make purchasing more convenient for its customers. A buyer who values dependable support has a reason to choose this business even when another seller offers a lower price.

5:55Branding creates a distinctive identity for a business or product. The aim of promotion is to inform customers about an offer and persuade them to buy it. Clear branding helps buyers recognise the supplier, while promotion explains benefits such as dependable repairs. Customers who trust a brand are less likely to switch to a new competitor. These responses work best when the business consistently provides the experience its messages promise.

6:19Selling online can reach customers who prefer ordering from home. Willow Crafts sells handmade gifts and could offer internet ordering as shopping habits change. However, it would also face competitors that customers can find through the same channel. An effective response must fit customer preferences and the business’s ability to provide its promised service.

Calculating and interpreting market share

6:38Market share is a business’s sales revenue as a percentage of the total sales revenue of the whole market. It shows the proportion of customer expenditure captured by that supplier. Imagine the whole market’s revenue as a complete circle, with each business receiving a slice. A larger slice represents a stronger sales position relative to competitors. Harbour Audio sells headphones, and its annual sales revenue is three million dollars. Total revenue for the headphone market is twenty million dollars over the same year.

7:08Market share equals business sales revenue divided by total market sales revenue, multiplied by one hundred. We divide to find the business’s fraction of the whole, then convert that fraction into a percentage. Three million dollars divided by twenty million dollars gives zero point one five. Multiplying zero point one five by one hundred gives fifteen per cent. Harbour Audio therefore receives fifteen per cent of total headphone expenditure in this market.

7:34Both figures cover the same product market, geographical area and period, which makes the comparison meaningful. Maple Play sells board games and earns six million dollars in its first year. The whole board game market earns thirty million dollars during that period. Its sales revenue as a fraction of the market is six million dollars divided by thirty million dollars, which is zero point two. Converted into a percentage, that is a first-year market share of twenty per cent.

7:59In the second year, its revenue rises to seven point two million dollars, while the market reaches forty million dollars. Dividing seven point two million dollars by forty million dollars gives zero point one eight. Multiplication by one hundred produces eighteen per cent. Of the extra ten million dollars spent in the market, Maple Play gained only one point two million dollars. Its revenue rises, but its market share falls from twenty per cent to eighteen per cent because the whole market grows faster.

8:27For calculations, use total revenue for the whole market, including the business being measured. Match the period and geographical area before dividing, and express the answer as a percentage. Revenue growth describes the business’s own sales development, while market share measures its position relative to the whole. Each measure answers a different question about performance.

Exam application and recap

8:47In Paper One Short Answer and Data Response or Paper Two Case Study, you could calculate market share or explain a business response. Explain means set out purposes or reasons, say why and how, supported with relevant evidence. Consider Orchard Corner, which sells fruit drinks to customers increasingly seeking lower-sugar options. An exam-style task asks you to explain one way it could respond to this change. Orchard Corner could reduce the sugar content of its existing drinks.

9:16This would match the changing preferences of its health-conscious customers. Those buyers would have a stronger reason to continue purchasing from the business. Retaining their custom would support sales revenue as preferences change. Consumer spending patterns describe how people distribute their expenditure between different goods and services. Changes in customer needs and available choices create opportunities for businesses that respond appropriately. Remember that market share is a business’s sales revenue as a percentage of the total sales revenue of the whole market.

9:48Understanding the cause of a change helps managers choose a response and interpret the resulting sales figures.