how businesses can respond to changing spending patterns and increased competition

3.1.2 Understanding Market Changes

Learning objective

Explain how businesses can respond to changing consumer spending patterns and to increased competition, and why some markets have become more competitive.

Key concepts

• Market trends – shifts in consumer preferences, income levels, lifestyle, technology, fashion, health, environmental concerns, seasonal and cultural influences.
• Spending patterns – the way and amount consumers spend on different products.
• Competition – number and type of competitors, market share, intensity of rivalry and the reasons why competition rises.
• Business response – strategic (long‑term) and tactical (short‑term) actions taken to maintain or improve performance.
• Market research – systematic collection and analysis of information about customers, competitors and the wider environment (primary and secondary methods).
• Price elasticity of demand – the degree to which a change in price affects the quantity demanded; guides whether a firm should use price cuts, premium pricing or other tactics.

Why markets become more competitive

• Lower entry barriers – deregulation, cheaper start‑up costs and online platforms make it easier for new firms to enter.
• Globalisation – overseas companies can reach domestic markets through e‑commerce, increasing the number of competitors.
• Product‑range expansion by existing competitors – firms add new lines or improve quality to capture a larger share of the same market.
• Growth of online retailers – lower overheads allow them to offer lower prices and greater convenience.
• Availability of substitutes – alternative products that satisfy the same need at a different price or quality level.
• Legal and regulatory changes – new safety, health, environmental or tax regulations can level the playing field or create new compliance costs for all competitors.

Drivers of changing consumer spending patterns

• Economic conditions – recession, inflation or strong growth affect disposable income.
• Income changes – rises or falls in personal or household income.
• Technological advances – new gadgets, online services or production techniques create new wants.
• Social & cultural trends – fashion, health awareness, environmental concerns, seasonal festivals or cultural shifts.
• Legal & regulatory influences – taxes, subsidies, health‑safety or environmental legislation can alter buying behaviour.

Business responses to market changes

Responses are grouped under the classic 4 Ps (product, price, promotion, place) together with process/efficiency measures, strategic market moves and ongoing market research. Each response includes a brief justification that links it to the specific market change.

1. Product‑related responses
   • Product development – introduce new features, variants or entirely new products.
     Why? Meets emerging consumer wants (e.g., healthier, tech‑enabled) and differentiates from competitors.
   • Quality improvement – enhance durability, safety, performance or ethical standards.
     Why? Attracts customers willing to pay a premium when competition is based on quality.
   • Re‑branding – change the image, name or packaging to align with current lifestyle trends.
     Why? Refreshes perception when consumer attitudes shift (e.g., towards sustainability).
   • Compliance‑driven product changes – reformulate or redesign products to meet new legal or regulatory requirements.
     Why? Avoids penalties, retains market access and can be marketed as “safe” or “eco‑friendly”.
2. Pricing responses (linked to price elasticity)
   • Price reductions / promotional discounts – temporary cuts, bundle offers, loyalty vouchers.
     Why? Effective when demand is price‑elastic (e.g., during a recession) and consumers become highly price‑sensitive.
   • Premium pricing for eco‑friendly, high‑tech or luxury versions.
     Why? Used when demand is relatively price‑inelastic (e.g., niche markets that value added benefits).
   • Flexible payment options (instalments, buy‑now‑pay‑later).
     Why? Helps maintain sales when cash flow is tight for consumers, reducing the perceived price barrier.
3. Promotion & place (distribution) responses
   • Targeted digital advertising – social‑media campaigns, data‑driven ads, influencer partnerships.
     Why? Reaches specific demographic groups whose spending patterns are changing.
   • Loyalty programmes & enhanced customer service – points schemes, after‑sales support, personalised communication.
     Why? Builds repeat business when competition is intense and switching costs are low.
   • Channel expansion – online store, mobile app, click‑and‑collect, pop‑up shops.
     Why? Counters the rise of online competitors and meets consumer demand for convenience.
4. Process & cost‑efficiency measures
   • Process optimisation & automation – lean production, robotics, AI‑driven forecasting.
     Why? Reduces unit costs, enabling lower selling prices without sacrificing profit.
   • Outsourcing non‑core activities (e.g., logistics, IT).
     Why? Allows the business to focus on core competencies and benefit from specialist economies of scale.
   • Negotiating better supplier terms – bulk buying, long‑term contracts.
     Why? Lowers input costs, supporting price‑competition strategies.
5. Strategic market moves
   • Market penetration – increase share in existing markets through intensive promotion, price cuts or improved distribution.
     Why? Useful when the market is growing but competition is high.
   • Market development – enter new geographic or demographic markets (e.g., overseas e‑commerce, new age groups).
     Why? Offsets reduced demand in the original market.
   • Diversification – launch unrelated products or services.
     Why? Spreads risk when the core market becomes saturated or highly competitive.
6. Market research (continuous response)
   • Primary research methods – surveys, focus groups, interviews, observation, test‑markets.
     Why? Provides up‑to‑date, specific information on consumer attitudes and buying behaviour.
   • Secondary research methods – published statistics, industry reports, competitor websites, trade journals, government data.
     Why? Offers broader market context and helps benchmark performance.
   • Data‑driven decision making – use sales‑trend graphs, market‑share charts or price‑elasticity calculations to decide which response to adopt.
     Why? Gives a quantitative basis for choosing product, price or promotional actions.

Summary table

Suggested diagram

Key points to remember

• Regular, systematic market research (both primary and secondary) is essential for spotting spending shifts and competitive moves early.
• Understanding price elasticity helps decide whether to cut prices, charge a premium or use flexible payment options.
• Flexibility in the 4 Ps, together with process efficiency, strategic market moves and compliance actions, enables a business to adapt quickly.
• Each response must be directly linked to a specific market change – e.g., price cuts for falling disposable income, product development for new lifestyle trends, reformulation for new regulations.
• Strategic choices (penetration, development, diversification) should align with the firm’s strengths, resources and the opportunities identified through quantitative research.