Entering and exiting markets

Entering a new market means starting to sell in a market you did not previously serve. A business may do this because it expects the market to grow. Higher sales can raise profits, and spreading risk by selling in more than one market is called diversification.

Entering a market is not risk-free. You may be unfamiliar with customers, suppliers and rules, and you may face competition from established businesses. You may need new resources, such as machinery or skilled staff, and new marketing to attract customers, which adds to costs. For example, a bowling alley chain might enter the children's party market because demand is rising, but it must learn about party planning, train staff and advertise to parents.

A business may exit a market, meaning it stops selling there, when sales are falling, the market is shrinking, competition is too strong, the market is saturated (most customers already have the product, so sales stop growing), or the market is unprofitable. Leaving lets it focus resources elsewhere. For example, the bowling chain might leave the arcade games market because mobile games have cut demand; it can then spend money on its party rooms.

Increased competition can push prices down. Lower prices reduce the amount earned on each sale, so with costs unchanged it is harder to make a profit, and a business may exit. Technological change can also reduce sales, for example when streaming replaces DVD rentals, making another market look more profitable and encouraging an exit.

Exiting can reduce losses and free up money, staff and space. But it may involve costs, such as closing a shop or making staff redundant, and you lose sales and customers. Exiting one market does not mean the whole business closes; it may simply stop operating in that one market.