One of the key elements that an entrepreneur must know is “the market”. In other words, the place in which you are going to offer and sell your products and services. In this lesson we will explain what the market is, what its elements are and how to work within it.
The market, what is it?
Do you remember the last time you visited a market? Maybe yesterday you went to buy some fruit or some bread. A market is a place where you can buy products or pay for certain professional services.
In the market you have also found different people selling products, offering different and/or similar products or others offering exclusive products. The prices are diverse and the people who have gone to buy a product can decide to buy from the varied offer of the market. Markets can be small local daily or weekly markets, or large markets celebrated at designated times.
All these characteristics and some others are the same that will help us to define what the market is for an entrepreneur.
In a formal definition: Market is an actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods, services, or contracts or instruments, for money or barter.(Source: http://www.businessdictionary.com/definition/market.html)
When you are an entrepreneur and launch your project, it is important to know what your market is: where you are going to sell your products, how you are going to sell your products, at what price you are going to sell and to whom you are going to sell. In addition, it is important that you know who is selling the same product as you and how to differentiate yourself from them so that your products or services are exclusive and can compete better.
In order to know more in detail your market, the first step is to know what the features of the market are. We can define the market as a big scenario in which each actor represents a character. Sellers and buyers, products, price, offer and demand play a drama.
The following infographic summarises the market actors (elements).
Elements of the market. Source: own elaboration
Thus, we have a PRODUCT that one SELLER sells for a PRICE to one BUYER in order to meet the needs of this buyer (SUPPLY) who is willing to buy it (DEMAND).
Even if all these elements are relevant in the market, there are two that have more influence in the market: SUPPLY and DEMAND.
SUPPLY is the amount of goods that producers are willing to sell under certain market conditions. Unlike supply, DEMAND works from the perspective of a consumer, not a producer. Demand is the number of products that consumers are willing to buy based on their price.
One of the most important challenges for you as an entrepreneur will be to determine the price of your products. Whenever you have thought about starting your business project you see that it is difficult to determine how I am going to sell a certain product or service.
There are many ways to calculate the selling price of a product or service, and many factors that influence the final price of it. To calculate the final sales price of a product or service you must be very clear about two concepts:
- Cost of production of the product or service: Here you have to calculate everything that costs you to make a product: raw materials you use, labour (i.e. your time or the time of your employees), electricity or other supplies and the rent of the premises where you produce your products, the costs of packaging (labels, wrappers, etc.) and finally all those taxes that are not recoverable.
- The benefit you wish to obtain from it. Once the above has been calculated, you have to apply the percentage of profit you want to obtain from your product to the amount.
Don’t forget that in the case of producing several products at the same time, you must divide the number of products by sales units, and in this way, you will obtain the unit price.
Besides the above, there are there are other variables that can influence the final selling price of the product.
- Selling price of your competitors. If you set a higher price without adding value to your product, sales will most likely go down.
- The psychological selling price: If the price is 50 euros, it is better to set it at 49.95 euros. Even if it’s only 5 cents, it looks like it’s well below 50, so it seems cheaper.
- The image of the product. setting a high price will raise the status of the product, since people will perceive it as something exclusive and of quality.
- Any kind of discount to the real price. In special seasons and because of the type of product you have, you need to do it to keep a minimum of purchases by customers.
Every time we visit a market, we meet different sellers. Some of them offer us similar, if not the same, products. And we decide to buy from one or other of them, taking into account different aspects such as the price, the quality of the products or simply that we like the packaging better. This is the COMPETITION
Identifying your competition is very important for your business. And it is very important that you know them. To do this we must ask ourselves a series of questions that will help us to know more about our competitors:
- Who they are.
- What they offer.
- Where they offer it.
- How they offer it.
- When they offer it.
- How it is perceived by third parties (customers, suppliers, other competitors, etc.).
References / Further resources
More about market concept
More about Supply and demand law
More about pricing
More about competition
More about marketing plan
References: Pictures and figures source: own elaboration (except those in which source is indicated)