Who are the company’s customers? Why do they use the company’s product(s)/service(s)? What are their priorities? What do they expect? Does the company understand and meet these expectations? If businesses produce new products, uncertainties arise as to whether there will be sufficient demand for those products to generate profit. Conducting extensive market research before fully investing in the design, production, distribution and marketing of products can mitigate this risk, enabling businesses to modify and adapt offerings to suit consumer preferences.
Which distribution channels do its customers like to buy through? Do they generally want to buy the product online, in-store or through both channels? Do customers from different segments have different preferences regarding distribution channels? Are sales generally made from business to business (B2B) or from business to customer (B2C)?
What is our customers’ willingness to spend, both in general and in relation to our particular products? How are their purchasing decisions affected by changes in price (i.e. what is the price elasticity of their demand)?
- Price Elasticity Of Demand: measures the extent to which price changes affect demand. Price-elastic products are products for which demand changes significantly in response to price changes. Examples include necessities (every-day household items) or generic items that can easily be purchased from other suppliers. Price-inelastic products are products for which demand changes less dramatically in response to price changes. Examples include luxury goods such as designer items, which are less easily substituted by other products.
How can customers be segmented? How big are the customer segments? Companies should know the size of their customer-base, which segments generate the most revenue/profit, which segments are growing/diminishing in size and what it is that customers within these segments care about/are looking for. Segmenting customers can help companies to ensure their products are effectively targeted to the consumers that are most likely to purchase them. Does their age, gender, location, marital status, occupation (etc.) affect their purchasing choices and/or the price they are willing to pay? If customers of a certain age/occupation will be unable to afford the products on offer, then companies should ensure their products, branding, marketing and distribution are tailored towards/targeted at the groups most likely to make purchases (or prices should be adjusted to encourage other groups to make purchases).
How big is the company’s market share? Is its market share growing? Is the market saturated/becoming saturated? Is the industry as a whole growing/becoming more profitable?
What is the company’s customer concentration? Does the company have a small number of large customers (in which case it may have little supplier power, as it is reliant on retaining its existing customers, thus leaving little scope to negotiate)? Does it have a large number of customers that all contribute to the firm’s revenues (in which case it may have more freedom to adjust prices)?
- Buyer Power: strong buyer power means the buyers in a particular market have strong bargaining power. This is usually as a result of either (1) there being a surplus of suppliers offering similar (or identical) products to buyers or (2) a buyer being so large that suppliers are dependent on its business to the extent that those suppliers have to meet that buyer’s terms of purchase. Where strong buyer power exists, suppliers (in order to compete effectively) will have to offer buyers more favourable terms, enabling buyers to command, for instance, cheaper prices, greater quality, a higher level of service etc.
- Supplier Power: strong supplier power means the suppliers in a particular market have greater freedom to set prices and dictate the terms of sale. This is usually as a result of either (1) there being a surplus of buyers in comparison to the number of suppliers/available products or (2) a supplier being so large or offering such a unique product that buyers have few (or no) alternative purchasing options and are therefore dependent on that supplier’s business. Where strong supplier power exists, suppliers may be able to command a price premium (a higher price) for their products in the knowledge that their customers will not simply be able to switch to an alternate supplier and secure the desired product(s) at a cheaper price.
Premium: paying a premium means paying an amount that exceeds the market value of a product or company. Premiums can be offered by potential purchasers (or borrowers) to persuade sellers (or lenders) to engage in transactions. Buyers will offer premiums in the belief that they will be able to extract additional value from the target company post-acquisition, either because it is under-valued, underperforming or unable to operate as efficiently as it could if controlled by the buyer.
By Jake Schogger - City Career Series