Tuesday, April 10, 2012

Small Business and Entrepreneurship - To Startup or Not to Startup Part IX - Markets

"In marketing I've seen only one strategy that can't miss - and that is to market to your best customers first, your best prospects second and the rest of the world last." -- John Romero

"Marketing is too important to be left to the marketing department." -- David Packard 

We continue our discussion on the decision of whether or not to start a business with a look into product markets and market segmentation. In this article we will examine the difference between industries and markets and the benefits of focusing on market segments. The next article in this series will look at how to segment markets and identify which to target.

Last post we started at the broadest industry our product could fit in and then narrowed industries down until we thought we might begin cutting out potential customers. This led us to the beginning of market segmentation, so we'll start here with a discussion of the differences between industries and markets, as the definitions can get a little hazy and distinctions can blur.

According the Robert M. Grant in Contemporary Strategy Analysis industries are groups of firms that provide products for markets - and industries compete in both product markets and input (supply) markets. Industries are therefore broad while markets refer to more specific products and a company in a specific industry can compete in multiple product markets.[1]

As an example, we could say a company in the automobile industry can compete in multiple markets like the individual consumer market, the rental car fleet market, and maybe golf carts.

 Why are we discussing this? Decades ago there was one primary marketing technique -- mass marketing. Basically, a company would attempt to tout their product at some general level or appealing to a very basic need in order to appeal to as many people as possible. As an example maybe advertising a cereal as satisfying hunger, a very basic need and therefore “food for everyone”, as opposed to a cereal positioned as quickly dissolvable, healthy, and full of all the vitamins needed for an infant just starting on solid foods (therefore satisfying the same need but for a very specific group). The mass marketing approach is still possible today in some industries like commodities where there is little product differentiation.
However, with competition and product differentiation companies can and do focus products on specific groups within the broader market. Today when you look at major companies, they will often have separate products targeted at specific groups or combinations of groups.

Since we've just passed Easter let's take a look at a company like Cadbury. If you look at their product line at their website (here)  you will see dozens of different types of products. They have the cream-filled chocolate eggs always available this time of year, chocolate bars with very colorful, fun wrappers (perhaps to draw the eye of children), chocolate bars with more simple wrapper designs emphasizing the chocolate (perhaps to draw the eye of adults), and even cakes, hot chocolate and coffee creams. This complicated line of products is almost all chocolate based meaning they could theoretically all be targeting the same broad market, but there likely exist many charts in the Cadbury company's marketing department detailing their definition of the different Cadbury customer groups and how each product is positioned relative to the different segments.

Large companies can afford to develop large product lines and target specific groups of customers, they can position products to overlap each other, target multiple segments, they can have broad-targeted products and very specifically targeted products. They can saturate segments for the sole purpose of preventing competitors from targeting that group. However, for someone trying to decide whether or not to launch a product and start a business, it is probably best to focus on what appears to be the best bet at the time.

There is definitely an appeal to targeting the larger number of customers that may be available in the broader market. However, it is often the case that some form of differentiation of a product could yield more success focusing on a smaller segment, then an undifferentiated product unfocused on the broader market.

Let's consider a product that has two potential market segments (A & B) which prefer different features. We can choose one or the other, or both. We can focus our product on segment A by providing A's features, or we can focus our product on B by providing segment B's preferred features. To target the general (A+B) market though, we would need to either provide both A&B's features (which would likely be more costly) or we would need a basic product which provides neither groups features (which would be less appealing).

Failure to focus on one, could lose both as a competitor will come in with an A-targeted product and another with a B-targeted product and they will either have the features your product does not (if you created the featureless version) or their products will be cheaper (if you have created the A+B version).

However, the more immediate concern is that this is a start-up company. A start-up will want successes and self-sustainability as quickly as it can get them. It may also have limited resources preventing it from targeting both markets. Studying the segments, identifying which is the most attractive and then launching one differentiated product focused on either A or B, (whichever is more attractive) will likely yield the greatest chance of success. Ideally, after achieving a bit of success with A, the company can look at offering a product for B as well, but getting to the first customer, and the first dollar, quicker, is often a key to success for a start-up.

Next in this series we will look at how to differentiate between market segments and how to identify which is the most attractive.

[1] Grant, Robert M. Competitive Strategy Analyis Blackwell Publishing 2008 pg 85

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