Businesses tend to fall into one or more generic categories that have the same sorts of characteristics as each other and, therefore, react in a similar way to market fluctuations and other unexpected events.
One of the largest divides is between service and product based businesses. Quite simply, a service based business sells the time of staff, for example, a legal firm or a cleaning company, where the main asset is the employee’s time.
On the other hand, a product based business sells an actual item that has been manufactured, such as clothing or pictures. This latter type of business is much more likely to have higher start-up costs and larger ongoing working capital requirements.
Another distinction exists between the luxury market and the commodity market. Again, this distinction is reasonably self-explanatory and broadly considers whether or not the item or service being offered is considered as a luxury such as health spa treatments or an essential such as insurance provision.
Many businesses cross the two markets, offering both luxury and essential items. A classic example of this would be a clothes shop that sells basic clothing as well as more luxurious and frivolous items. As a basic rule, the essential market will be less susceptible to market fluctuations as customers will continue to require these essentials, even in the face of economic adversity.
In general, however, customers are more prepared to pay a higher premium for luxury products, meaning that there can be a much greater return during the good times! With the essentials market, the product or service is far more price sensitive. A small or new business may, therefore, struggle to compete with larger businesses that have the advantage of economies of scale.
A further distinction exists between consumable and durable products. A consumable product is something that is regularly used and replaced such as food; a durable item is one that is expected to last for a much longer period such as a computer or a car.
Consumable products are generally a lot cheaper than durable items, but they are replaced frequently. Consequently, there is a much greater opportunity to build customer loyalty and repeat orders. Durable products, on the other hand, tend to have a much higher ticket price but may simply be a one-off sale and, therefore, customer loyalty, although important, plays a much lesser role.
In order to asses, accurately, the potential within your chosen market, it is vital that you understand which market you are actually part of;
Several distinctions exist, including product versus service, luxury versus commodity and consumable versus durable; and
It is possible to stretch across several categories; recognising this is vital for identifying your target customers.