Although we talk collectively of start-up businesses as if they are a homogenous group, the truth is that not all start-up businesses are alike. One of the most important ways in which one startup may differ from another is in the relationship between their new product or service and it's market. These product/market relationships can be generally typified by one of the following descriptions:
Why are these distinctions important? They are important because the whole approach a business must take in order to maximise their chances of success will be strongly influenced by the market type. Strategy and tactics that work for one market type seldom work for another. So, it is very important at the outset of any business enterprise to understand the market type into which you are launching your new product or service. Let's look at each market type in turn and see how you would plan and act differently depending upon the type you enter.
In existing markets where customers already exist, marketing is relatively easy. A company would start by having users describe the product or service attributes that matter the most to them. They typically want a product or service that runs faster, does something important better or cheaper or otherwise improves on an attribute of the product or service that is important to the customer. Customers, competitors and the market are all either known or are knowable with some research. Competition involves the comparison of the features of the various products on the market with customers deciding which products and services best fit their wants and needs.
If you are entering an existing market, it s important that you position your company as different and credible, focused on solving a problem that customers believe is important. Once you have positioned your company, it is important that you differentiate your products or services. Differentiation normally takes one of three forms:
In existing markets, it's important to differentiate. It's also important to realise, however, that to be different usually costs more as it's cheaper for everyone to use the same suppliers at the expense of being unique. That is the tension in most markets that leads start-up businesses to fail to effectively differentiate and to become simply a "me-too" business. If you want to enter crowded, "red ocean" market places, make sure that you are different. Give customers something to love.
In new markets, a company will be approaching potential customers with a product or service that has never existed before, which will allow them to do things that they couldn't do before. Alternatively, it will be approaching an entirely new class of users with either a dramatically lower or higher cost version of an existing product or service. Almost by definition, a new market will not have any customers in it yet, so there is nobody to know what the product or service can do or why they should use it. This makes getting any type of meaningful feedback on the product or service more challenging since the product is unknown to users. It also makes generating any significant demand more costly.
The key in new markets is understanding whether a large enough customer base exists and whether customers can be persuaded to buy at a price that makes the venture economically viable. Serious problems can arise when, based upon untested assumptions about a market that has never previously existed, companies rush into the customer creation and company building phase of their business development without having first validated their assumptions and ensuring that there was a market large enough for them to profitably develop.
Naturally, you cannot position your company at all in a new market as there are no existing companies with which to compare it. So, in new markets, it is important to communicate a vision of and passion for what you are trying to achieve. For example, when Airbnb opened up the "peer to peer" accommodation market, they had the challenge of communicating the novel idea that people would want to rent out their homes to people who wanted to stay in other strangers' homes. As they had no service to compare it against and they could not really focus on the features of their service (how do you think "sleep in a strangers bed" would have gone down as a strapline?), they positioned the service in terms of its economic benefits and it being a friendlier, more personal experience.
In existing markets where the status quo is so large and powerful that they would simply be unassailable through head-on competition, the only option is to redefine the market in which you operate, creating in effect a new market for an existing product. A new business, based upon its knowledge of the market, may be able to identify a sizeable segment at the lower end who will buy "good enough" performance at a significantly reduced price. They may be able to dominate that segment or micro-segment of the market without ever directly competing with more established and better-capitalised companies.
This decision to effectively sidestep the existing competition by focusing on a sub-set of demand in the market has worked well for a broad range of businesses. For example, here in the UK, we have seen the emergence of the "no-frills" airlines such as Ryanair and EasyJet which have thrived despite the dominance of the big traditional airlines such as British Airways and Virgin. They found that a low margin, high volume business model that still made attractive profits due to the pared-down nature of their offering. If you are looking to enter a resegmented market as a low-cost entrant, then you will face many of the challenges that companies that have created new products or services for a new, untested market face and will need to proceed with some caution, although customers will migrate to the new market you are creating from adjacent markets. The challenge facing the low-cost entrant into their own new segment of an existing market is to communicate how and why the new market segment is different and important to your customers.
Another way startups can redefine the market in which you operate, creating in effect a new market for an existing product, is to look at the market and identify a segment that would buy a new product that has been specifically designed to address a specific need which isn't being adequately met in the existing products on the market. An example of this is Pipedrive, the online sales pipeline management company. Rather than compete directly with Salesforce.com, and Dynamics CRM, they resegmented the online CRM software market, creating a new segment of online pipeline management.
Rather than face the competitive challenges of an existing market, if you can persuade a significant sub-set of that market that a particular characteristic of your new product is radical enough to change the rules and shape of the existing market, then you can open up a new market. The theory and practice of entering an existing market as a niche entrant is comprehensively covered in "Blue Ocean Strategy", a fascinating book published a few years ago by W Chan Kim and Renee Mauborgne, the lessons from which I strongly recommend that anyone looking to carve their own distinct niche into an existing market absorb and apply in their start-up.
When a business model has proven successful in one country but has not yet been introduced in another, this presents a great opportunity for a start-up business to "export" that successful business model to another country. An example of what we are talking about would be Yandex in Russia or Baidu in China which are their respective countries equivalents of Google, albeit customised and adapted to conform to the needs of the local market.
The Samwer brother from Germany have adopted the cloning philosophy as a business model at their startup incubator, Rocket Internet, having built numerous businesses that were essentially clones of US high tech start-up businesses that they exported to other markets. As Oliver Samwer said in a recent Wired interview, "We are builders of companies, we are not innovators. Someone else is the architect and we are the builders". They have built up a billion-pound fortune by building clone companies and, often, selling them back to the companies that had pioneered the business model in the first place. Whilst this is controversial, it is a formula that has significant benefits in terms of being able to appropriate somebody else's expensive learning curve and just make minor adjustments to take into account local preferences in the new market. The morality of this approach is a matter of heated debate.
As you can see, the strategy and tactics required to successfully establish a business differ significantly depending on the market type that your startup is poised to enter. For some startups, the market type they will enter is fairly clear. If you have lots of existing competitors, you are entering an existing market. If, on the other hand, you invent a brand new product that nobody has ever seen before, you are entering a new market. However, many startups have the luxury of sitting back at the planning stage and choosing which market type they wish to operate within. If you need help in determining which market type would be best suited to your business idea, contact Continuous Business Planning today. We specialise in industry and market analysis and can advise which market strategy you would best serve your start-up business.