Understanding Market Growth: Factors & Trends

Market growth is the measure of how desirable a product or service is on the general market. It is essentially a measure of the change in demand over time. Of course, demand does not exist in a bubble. It is highly correlated to price, supply and other factors, and market growth examines how these factors interact to expand or contract the desirability of a product. 

Market Growth Example

When the DVD was first introduced to the market, there was speculation as to whether or not it would replace the video tape (VHS). Many people argued the DVD was too expensive, and still others did not have a DVD player and could not afford one. In the first years, video rental stores carried both VHS and DVD versions of the vast majority of movies. Slowly, overtime, the market began to accept the DVD as the standard. The VHS saw depreciating market growth at the same time the DVD saw rapid market growth. Then, years later, the Blu-Ray disc system was developed. This again saw speculation from the market at its introduction. Overtime, market growth for the Blu-Ray disc lead to an expansion in the number of Blu-Ray films made and its presence in video stores and elsewhere.

Market Growth vs. Price

One key change that lead to market growth for the DVD was price. When DVDs and DVD players were first introduced, the cost of the technology was exclusive to a large portion of the market. However, as with most technology, the longer the DVD player and DVD lived, the more efficient the production process. The cost of both began to fall until it was essentially the same as any video tape player or VHS. In fact, it is cheaper to produce a DVD today than to produce a VHS. This drop in price exposed a greater market for DVDs and DVD players, increasing market growth. 

Market Growth vs. Industry

Some industries see relatively stable market growth. The demand for the product may rise and small slightly over time, but on the whole the market growth is constant with population growth. Grain is an example of a commodity with consistent market growth over time. In fact, farmers aim to control market growth through use of subsidy programs to curtail price decreases. However, even in stable industries, anomalies can occur. When grain was promoted as an alternative to gasoline in the late 1990s, the production of grain and corn rose dramatically. The market growth was not sustained, and a small bubble burst in the grain industry.

Tracking Market Growth

To track market growth of a product, analysts need to track a whole industry rather than just a company. Comparing the industry to a market indicator, such as the S&P 500, can show if the industry is showing market growth that outpaces the market as a whole. Only then is the industry truly expanding in comparison to other segments of the market. At that point, investing in the industry can be profitable or it can create a bubble. Analysts watch for potential signs of bubbles once a segment begins to show market growth.