Market attractiveness is a concept that uses many factors to determine whether or not a market might be a profitable one for investment. As a term, it is most well-known for its inclusion in the McKinsey/General Electric Matrix, which was intended to help companies assess their product or business portfolios vis-à-vis their strengths. The more attractive a market is assessed to be, the higher the profit potential.
Factors in Market Attractiveness
The factors that contribute to market attractiveness can vary depending on what is important to the company in question, but some common factors are the market growth rate, the current market size, the current margins in the market, whether or not prices are increasing or decreasing, how many competitors are in the market and other factors that are specific to the company.
Market Size and Growth Rate
Market size and growth rate are two basic factors when evaluating a market. The larger the market is, the more opportunities exist to sell a product. This means higher potential for profitability, even at a lower profit margin. In a market of any size, however, it is important to also consider the growth rate. A market that is not growing means that the revenue potential is finite. A market with a low growth rate is probably a saturated one, with many competitors in the same space fighting for the same sales. This will lead to lower market share for all participants, as well as lower margins.
Margins and Pricing Trends
Revenue is determined by volume and margin, so margin is a key factor in determining the profitability and, therefore, attractiveness of a market. Two markets of the same size but with different margin points will have the potential to generate different revenue streams. Pricing trends, too, are important. If prices have been declining, they might continue to do so, eroding margins. And if they have been increasing, there may be increased revenue opportunity in that market than there would appear to be at a single moment.
Competition always exists in a market, and who the competition is can determine how successfully another company can enter the same space. Some things to consider about competitors are their size, how aggressive they are toward other competitors, any advantages they may have, how many of them there are and how much market share they already have. A market dominated by a strong single player might be unattractive because that competitor is likely to act aggressively toward a newcomer and it might dominate necessary contracts for suppliers or distributors. Alternatively, a marketplace with many small players may still be ripe for one to emerge as the dominant player.
Other factors might be important to a particular company when assessing a market. For instance, if a company is deciding to expand overseas, it might assess the transportation infrastructure in various geographies, as this would be important in delivering products to consumers. One of the most appealing aspects of the market attractiveness concept is that it is highly flexible and adaptive to any user or market. It is also subjective, however, in that no strict set of factors should be considered and there's no prescribed method of weighing these factors against one another when assessing the attractiveness of a market.