What Is a Market Area? 8 Facts You Need To Know

A market area is a geographical area within which there is competition for customers. Your company or organization must be positioned in the right place, with the right product or service offering to effectively compete for business.

What Is a Market Area?

A market area is the geographic region in which a certain commodity or service is sold. The market region or trade zone varies from company to company based on demand, sales objectives, and marketing strategies.

What Is a Market Area?

By explicitly identifying the trade zone for its product or service, a firm is better equipped to sell and promote the product to existing consumers and find new potential clients.

Examples of Market Area

To comprehend how market area functions, it is useful to examine instances of various sorts of firms. A butcher in a small town may describe his market as those who live or work inside the city limits or in the adjacent suburbs. In contrast, a huge merchant may describe his market as everywhere his items are sold.

This may be limited to the local region, or it may cover countries worldwide. In this case, the corporation frequently splits the market area into several areas or zones to make marketing and sales operations simpler to manage.

How is the Market rea determined?

A product or service’s market is determined by a variety of characteristics and criteria. It is mostly driven by the local demand for that product or service, but may also be affected by how far people are willing and able to travel to receive it. Due to the availability of internet shops, the trading zone may be rather expansive in the contemporary global economy.

The availability of replacement items or rivals also influences the market area. Because meat products are generally identical, the more butcher shops there are in a small town, the smaller the market for each store.

If one of these stores can differentiate itself on the basis of price or quality, it could be able to expand its trading zone and attract additional consumers.

The advantage of clearly defining the Market Area

One of the key benefits of accurately identifying the market region for a product or service is that this information can be utilized for more efficient marketing.

This assists the corporation in setting prices, introducing new items, or modifying existing ones depending on consumer demand within the specified area. Understanding the size and demography of a certain trade zone assists businesses in planning expansions, maximizing size, and minimizing waste.

Geographic information systems (GIS) are frequently utilized by modern businesses to better comprehend the market for a product. GIS technology is a method for collecting and analyzing data, such as information on the population, average income, and purchasing habits of a certain area’s residents.

This assists businesses in identifying the optimal market for a product or service, as well as places that may be neglected by current enterprises and suppliers.

Market Size and Shape

Each economic activity has a location, but the numerous needs (raw materials, labor, components, etc.) and flows it creates also have a geographical dimension known as a market region.

A market area is the surface across which a single location’s demand or supply is expressed. For a factory, this is the area from which its products are sent; for a retail store, it is the region from which it attracts customers.

Transportation plays a crucial role in market area research because it influences the location and accessibility of economic activity. A market area’s size is dependent on its threshold and range:

What Is a Market Area?

  • Market threshold. Minimum demand required to sustain an economic activity, such as the provision of a service. Due to the fact that each demand has a unique location, a threshold has a direct spatial dimension. The size of a market correlates directly with its threshold.
  • Market range. The greatest distance each unit of demand is willing to travel to access a service or the greatest distance a product may be transported to a consumer. The range is determined by transit expenses, travel duration, or convenience in light of intervening possibilities. For a market to be lucrative, its range must exceed its threshold.

In the case of a single market area on an isotropic plain, its form is a simple concentric circle with the market range as the radius. Given that the objective of commercial operations is to satisfy all available demand whenever feasible and that the scope of many activities is restricted, more than one site is necessary to service a given region.

For such a goal, the ideal market shape under isotropy is a structure of market regions in the shape of a hexagon. This form is susceptible to non-isotropic environments, particularly differences in density and accessibility.

Economic Definition of a Market Area

The link between supply and demand is essential to the functioning of a market. It functions as a system for establishing prices for products and services. Demand is the quantity of a product or service that consumers are willing to purchase at a particular price.

When the price of a commodity is low relative to its utility, demand is high, and when the price is high, demand is low. In addition to market pricing, the following factors can often affect demand:

  • Utility. While the demand for basics (such as food) is mostly stable, the desire for products judged of lesser usefulness (or even frivolous) fluctuates according to income and economic cycles. There are significant distinctions between discretionary and mandatory spending.
  • Income level. The relationship between income, especially disposable income, and consumption is direct. A population with a high income has significantly greater purchasing power than one with a low income.
  • Inflation. Increases the money supply relative to the availability of assets, commodities, products, and services. Although it effects prices directly, inflation exists outside of the supply-demand connection and reduces buying power if wages do not grow proportionally.
  • Taxation. While the demand for basics (such as food) is mostly stable, the desire for products judged of lesser usefulness (or even frivolous) fluctuates according to income and economic cycles. There are significant distinctions between discretionary and mandatory spending.
  • Savings. The relationship between income, especially disposable income, and consumption is direct. A population with a high income has significantly greater purchasing power than one with a low income.

Increases the money supply relative to the availability of assets, commodities, products, and services. Although it effects prices directly, inflation exists outside of the supply-demand connection and reduces buying power if wages do not grow proportionally.

What Is a Market Area?

  • Profits. Even though a product’s sales are low, a provider of products or services may be content if earnings are substantial. This is particularly true with expensive products. If earnings are poor, an activity may discontinue, hence decreasing the supply.
  • Competition. One of the most significant strategies for determining pricing is competition. When there is little competition (an oligopoly) or too much (over-competition), prices artificially impact supply and demand.

According to the principle of the market, the price determines the balance between supply and demand. It is also known as the market price or equilibrium price. This pricing is a compromise between the desires of enterprises to sell their goods and services at the greatest price feasible and the desires of consumers to purchase goods and services at the lowest price possible.

For many economists, the market is a place where commodities and services are exchanged, but it has no physical location since it is only an abstraction of the supply-and-demand interactions. The majority of the time, consumers must move to buy a product or obtain a service, thus it is essential to emphasize this.

A manufacturer must also send a product to a location where the buyer may purchase it, such as a store or a home (in the case of online shopping). Therefore, the idea of distance must be examined with the concept of the market. In such circumstances, the actual price comprises the market price plus the cost of conveyance from the market to the site of final consumption.

Competition over Market Areas

Competition entails equivalent endeavors to acquire clients from a comparable customer pool. Although the price of a similar commodity or service is the foundation of competition, there are a number of geographical tactics that effect the pricing aspect. The two most widespread are:

Market coverage.

Activities that provide the same service will occupy areas in order to provide goods and services to the entire region. This element is effectively addressed by the central place theory and applies to industries whose development strategy is spatial market saturation (convenience stores, fast food, coffee shops, etc.). The range of any site is determined by consumer density, income distribution, transportation costs, and the location of rivals.

Range expansion.

  • Existing establishments attempt to broaden their offerings to attract additional clients. A tendency in this direction, especially the rise of shopping malls, is economies of scale leading in increased retail activity.
  • Individually, each store would provide a restricted selection. However, as a group they tend to draw clients from broader demographics. First, complementary products or services are provided. Thus, it would be easy for a consumer to be able to purchase clothing, footwear, and personal care goods at the same site.
  • Second, a variety of similar goods or services are provided (more options), even if they compete. Thirdly, additional facilities such as safety, food, indoor walking space, entertainment, and parking are given.

Numerous techniques have focused on the creation of operational market area models. In the first half of the 20th century, initial research concentrated on basic market competition (Hotelling’s law), laying the groundwork for market area analysis by taking into account aspects like retail location and distance decay.

Eventually, variables such as market size were taken into account (Reilly’s law), allowing for the creation of complicated market area representations. Since market regions are frequently non-monopolistic and susceptible to client preferences, this component was incorporated with market areas becoming ranges of probability that customers will visit particular places (Huff’s law).

What Is a Market Area?

Although market areas are especially significant for retail analysis, the concept may also be used to time-dependent operations, such as freight transportation, because distribution facilities are located in service-specific national or regional markets.

By substituting a retail distance decay function with parcel delivery capabilities, the rise of e-commerce has significantly altered competitiveness over market regions. However, the manner in which this market is served is evolving. When customers travel to a store, proximity to concentrations of people is crucial.

The market areas are formed by the combination of mobility alternatives available, such as walking, public transportation, and the vehicle. When parcels are delivered, distribution capabilities’ closeness becomes the most critical consideration. Passenger mobility ceases to be a consideration, and freight mobility becomes the primary factor affecting delivery time.

Geographic Information Systems and Market Areas Analysis

Geographic Information Systems (GIS) have become indispensable tools for evaluating market sectors, notably in commerce. With basic data, such as a list of customers and their addresses (or ZIP codes), it is very easy to analyze market sectors with an acceptable degree of precision, a process that was formerly considerably more difficult.

With GIS, market area analysis transcended the realm of abstraction to become a tool merchants and service providers utilize in complicated real-world circumstances. In a GIS’s geographical representation, the market area is a polygon that may be measured and utilized for operations such as intersection (zones of spatial rivalry) or union (area serviced). Among the most important ways a GIS may be used to assess market sectors are:

What Is a Market Area?

  • Concentric circles. The simplest technique since it assumes that distance has an isotropic impact in all directions. The radius reflects the greatest distance a client is willing to go to complete a transaction. When insufficient information is available, it is important to have a general picture of the issue.
  • Share by polygon. When statistics are available at the zonal level, such as the ZIP code, the market area can be stated as each zone’s market share.
  • Star map. Straight lines connect each consumer to their respective place. Each customer’s details and location are required. It is a representation of the size and form of the market region, and is especially important for distribution systems in which the links between distribution centers and their consumers are illustrated.
  • Spatial smoothing. A trend surface based on actual consumer locations. Membership in a market region increases according to the density of consumers (each customer’s significance might be weighted).
  • Transport distance. Especially beneficial for retail or other operation dependent on customer accessibility or punctual deliveries. On-road segments radiating from a facility’s location are utilized to construct a measure of transport distance, which is often expressed in minutes of driving time. Under these conditions, the market area is directly proportional to the efficacy, connectedness, and accessibility of the local transit networks.
  • Manual polygon.Using local knowledge, common sense, and discretion. It may implicitly contemplate other approaches.

Conclusion

A market area is a geographical area with its own unique set of demographic and economic characteristics. It can be any size from a very large city to a single neighborhood or even a block of a city.

For example, in a city of 10 million people there may be one market area that has 300,000 people while another market area could have 10 million people.

A market area can also be divided into smaller areas known as market segments. There are many different ways to do this but an easy method.

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