What a market and competition mean

1. A market can be a physical place such as a high street or a covered market, or entirely online like Amazon; what matters is that buyers and sellers meet there.
2. Businesses in the same market chase the same customers, so a customer won by one of them is usually a customer lost by another.
3. Competition is an external influence, because no business decides how many rivals it has, what they charge or when a new one opens nearby.
4. The more rivals there are, and the more alike their products, the stronger the competition, which is why UK groceries and clothing are fiercely competitive while a village post office is not.

The effects of competition on a business

1. Pressure on price: a business cannot charge much more than its rivals for a similar product, because customers compare prices in seconds online.
2. Thinner profit margins: prices are held down while the cost of competing goes up, so the profit made on each sale shrinks.
3. Pressure to improve quality and service: faster delivery, easier returns, longer opening hours and better trained staff all become necessary rather than optional once a rival offers them.
4. Spending on promotion: advertising, loyalty cards and sponsorship have to be paid for whether or not they lift sales, and a rival that spends more can take customers anyway.
5. The risk of losing sales, or the business itself: a firm that stops keeping up loses customers, as HMV did when buyers moved to cheaper online sellers and then to streaming.
6. Customers gain: competition hands them lower prices, better quality and more choice, which is why the same pressure that squeezes a business is good for the people buying from it.

Competing on price or standing out

1. A business meets a rival in one of two broad ways: it competes on price, or it differentiates itself so that price matters less to its customers.
2. Cut or match the rival's prices. This keeps price-sensitive customers from switching, but it takes profit off every unit sold, and a bigger rival can cut deeper for longer.
3. Improve quality. Better quality justifies a higher price and builds a reputation, though better materials and more checks push costs up.
4. Improve customer service. Loyalty built on service is hard for a rival to copy quickly, but it needs more staff, more training and more time spent on each customer.
5. Launch new or improved products. Something a rival does not offer gives customers a reason to choose this business first, although development ties up cash with no guarantee that the sales follow.
6. Build the brand through promotion. Customers who trust a brand buy for that reason rather than on price, but advertising is a large cost that may never pay back.
7. A small firm facing a much larger rival usually looks for a difference to compete on rather than a discount, which is how Gymshark grew against far bigger sportswear brands, on design and social media rather than on being cheapest.

When a business faces little or no competition

1. Some businesses have minimal or no competition, because customers who want what they sell have nowhere realistic to go instead.
2. Where this happens: the only shop in a village, the only petrol station for miles, a cafe inside a hospital or at a motorway service area, and a train operator on a route with no alternative.
   1. It also happens when a product is genuinely new or protected by a patent, so for a time nobody else is allowed to copy it.
3. Higher prices and wider margins: with no rival to undercut it, the business can charge more and keep a larger profit on each sale.
4. Less pressure to improve: quality, range, opening hours and service can all slip, because customers cannot easily take their money elsewhere, and there is little reason to spend on new products.
   1. Customers lose out through higher prices, less choice and slower improvement.
5. The comfort rarely lasts. High profits attract new entrants, and technology can open the market up, since online delivery now reaches customers a village shop once had to itself.