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Market Growth

Updated on March 27, 2024
Article byKosha Mehta
Edited byKosha Mehta
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Market Growth?

Market growth refers to the expansion of a market’s size, value, or volume through time. It indicates the growth and health of an industry or economy. An expanding market is a good indication of the economy and enterprises operating inside that market.

Market Growth

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Numerous variables can contribute to market expansion, including population growth, technical developments, increasing consumer spending, and innovation. It can result in greater income, business development, and job creation. The purpose of looking at market growth is to understand whether the economy or company is progressing.

Key Takeaways

  • Market growth refers to the rise in the size of a market over time, which is often measured by the variation in sales or revenue.
  • Population growth, increasing consumer demand, and economic growth can contribute to it.
  • Companies can focus on expanding their customer base, developing new products or services, and entering new markets to increase the market growth.
  • It can be a key indicator of a company’s success and is frequently used to evaluate investment potential.

Market Growth Explained

Market growth may be quantified in various ways, including by examining the overall market size, the number of consumers, or the produced income. Competition increases alongside market expansion, requiring businesses to innovate and adapt to remain competitive. Numerous internal and external factors can impact market expansion, including demography, economic circumstances, and government regulations. As a result, the market expansion is critical to an industry’s and the economy’s health.

Market growth refers to expanding a market’s size and worth over time. For example, increasing client count, revenue, or market share often boosts it. Multiple variables, including population growth, higher consumer spending, and the introduction of new products and services, can contribute to market expansion. It can also be affected by macroeconomic variables like economic growth and inflation.

Market expansion may be a positive indication for firms since it can result in higher sales and income, but it can also raise competition. To be competitive, businesses must be able to adapt to market expansion and continually innovate. Therefore, the expansion of a market may be assessed by both the market’s size and growth rate.

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Market Growth Formula

Market growth can be calculated primarily in two ways. One, by using the compound annual growth rate formula, or second, through the absolute growth rate formula.

Utilizing the compound annual growth rate (CAGR) formula is a typical calculation method. However, there are other alternatives. CAGR is the rate of return on an investment stated as a percentage over a certain period. To calculate CAGR, you need the investment’s beginning and ending values and the number of years elapsed.

The absolute growth rate formula is another method for calculating market expansion. To produce this formula, divide the difference between the market’s final and beginning values by the initial value and multiply by 100.

Absolute growth rate = (Final value – Initial value) / Initial value * 100

These formulae only estimate market growth and are based on a certain period and collection of facts. Competition, customer preferences, and economic conditions can influence market expansion. Additionally, evaluating the sector or market in issue is essential, as various industries may see varying expansion rates.

Examples

Let us look at its calculation example and one theoretical example to understand the concept better.

Example#1

If a company’s sales were $100,000 in the first year and $150,000 in the fifth year, the compound annual growth rate (CAGR) would be calculated as follows:

Considering EV=Ending value, BV=Beginning value & n is the number of years.

CAGR= ((EV/BV​)n1​−1)×100

CAGR = (150000/100000)1/5 – 1) * 100

= 8.45%

This indicates that the company’s annual revenue has increased by 8.45% during the past five years.

Example#2

A new technology company has recently released a new product that has received positive reviews from early adopters and industry experts. In addition, the company’s strong marketing and distribution network has generated significant interest in the product. In the initial market growth stage, the company experiences rapid growth as more and more customers become aware of the product and its benefits. This leads to increased sales, and the company can penetrate new markets and expand its customer base.

The growth rate begins to slow as the product becomes more established in the market. However, the company still experiences growth but becomes more moderate as the industry becomes more competitive and saturated. Nevertheless, the company continues to innovate and improve its product to stay ahead of its competitors and expand into new territories to maintain its growth.

Over time, the industry stabilizes and reaches a mature stage, where the growth rate slows significantly. The company continues to operate and generate revenue, but its focus shifts toward maintaining its market share and protecting its existing customer base.

How To Increase?

There are various strategies to boost a firm or industry’s market presence:

#1 – Expand Into New Markets

Entering new geographic markets or growing into new product or service markets are viable options for expanding into new markets.

#2 – Increase Market Share

Expand the portion of the current market that a corporation or sector acquires by carrying out marketing and sales activities and improving the quality of products or services.

#3 – Introduce New Products Or Services:

Achieving progress through research and development and rolling out new products or services based on innovation is also possible.

#4 – Increase Customer Loyalty

Strengthening ties with existing consumers and establishing a stronger brand identity through improved customer service.

#5 – Invest In Technology

Reaching new consumers and enhancing brand awareness through digital marketing tactics such as social media, search engine optimization, and email marketing.

Market Share Vs Market Growth

  • Market share refers to the proportion of a market that a firm owns or controls, whereas market growth refers to the rise in market size.
  • Determining market share involves comparing a company’s sales or market share to the industry’s total sales or market share. Conversely, evaluating market growth involves comparing the current market size to the previous or predicting future market size.
  • Strategies such as expanding product lines, targeting new customer segments, and acquiring competitors can increase market share, whereas expanding into new geographic markets, developing new products or services, and increasing marketing efforts to attract new customers can increase market growth.

Frequently Asked Questions (FAQs)

Explain how productivity relates to market growth?

Productivity is positively correlated with market growth since it results in cost savings, better efficiency, and higher output, which contribute to increased sales, market share, and revenue.

How to compute the market growth rate in a BCG matrix?

Determine the yearly growth rate of the company’s market or industry to compute the market growth rate in the BCG matrix. Then, divide this figure by the current market or industry size. This yields the market growth rate expressed as a percentage. This proportion may then be used to calculate the company’s place on the BCG matrix, where high-growth markets are referred to as “stars,” and low-growth sectors are referred to as “dogs.”

Why strategies for market growth is important in the business?

In business, market expansion strategies are essential because they enable organizations to raise revenue and broaden their client base, resulting in greater profitability and long-term success. Without a focus on growth, a firm may stagnate and struggle to compete in a constantly changing market.

This has been a guide to what is Market Growth. Here we explain its examples, how to calculate it, and compare it with market share. You can learn more about financing from the following articles –

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