Success Depends On Knowing Which Market Type You Enter
Market Type makes a critical difference when you enter a market, Yet, many entrepreneurs do not consider market type when planning how to enter their market. There are four types of markets and each one needs to be approached differently. Steve Blank in his book, “The Four Steps To The Epiphany” describes the four types as:
- Startups that want to enter an existing market
- Startups that are creating a new market
- Startups that want to resegment an existing market as a low-cost entrant
- Startups that want to resegment the market as a niche player
Which market type you plan to enter changes everything. How you evaluate customer needs, customer adoption rates, how customers understand their own needs, and how you position the product to the customer. The market type also changes the market size and how you launch the product into the market.
For example, If you enter an existing market, the market knows you and will accept your new product based on its segmentation and merits. If you enter a new market, no one knows what the product is or who you are so you have to educate the market about what your product can do for them.
Here is some additional information on the four market types.
New Product in an Existing Market
An existing market is easy to understand if you have a better value proposition both buyers are known and competitors are known. So its all about the product and the product’s features and benefits.
New Product in a New Market
This is a situation where you have to create a new, large customer base (large enough to be profitable) that couldn’t be done or wasn’t done before you came along. What’s your story: a new better product, lower cost, a new class of users, a new product that solves availability problems, or a new skill or technology.
Normally, at first, your product will be ignored. Who needs it? Most people will be skeptical, But at this time you also have no competitors. That’s good because you need time to determine who the users will be and what the specific targeted market will be.
In a new market, your problem isn’t how to compete, its how to convince a customer segment that your product is needed and up to the task.
Creating a new market means you have to determine:
- If there is a large enough customer base for your product
- If the customer can be convinced they need and want this new product
- What the adoption curve (especially for revenues and margins) looks like
- What the financial requirement will be (burn rate during the adoption phase) and if you can raise the funds needed.
New Product in a Resegmented Market. A majority of new startups are aimed at this hybrid market. There are two types of resegmented markets: Low-cost strategy or a Niche strategy. Segmentation here means you selected a position in the customer’s mind that is unique, understandable and concerns something the customer values.
New Product in a Low-Cost Segmented Market
In this segment, customers will be at the low end of price and value. This is the “disruption” that Clayton Christenson made famous in his book on disruptive technology, These customers will buy a new product if the product is “good enough” and priced at a substantially lower price then what is available now.
The good news is that established companies will not compete with these new, low-cost providers because their cost structure makes them unprofitable at these prices. So, they ignore the new entrant. But, over time, the new entrant moves upscale and sooner or later become a significant competitor to the established companies. Then, major competition erupts.
New Niche Product in an Existing Market
To introduce a new product in this market, you need to ask the question: “would people buy a new product designed specifically to meet a specific niche or mindset (want); even if it costs more or has less performance?
If you enter this market, you have to convince the market that this new product is so different or even radical that it changes the characteristics of the market. Unlike a low-cost entry, here you are only going after segments with higher prices and affluent buyers.
Resegment Markets Summary
In both resegmented markets, you have to re-frame the product and how people think about the product within their existing market.
Trying to resegment an existing market, especially with a low-cost product can be difficult because you need a long-term plan. Longer-term, moving upmarket will bring intense competition from companies protecting their profits.
Before you jump in, ask yourself, “What kind of a startup are we?”