Recognizing if a business value proposition, being a product or a service, addresses a new market, rather than an existing one, is paramount to the viability of a value proposition. So, the answer to the “which type of market” question needs to be clear early on. This post proposes 4 indicators to answer the “what market type” question.
Early in my career, while working as an engineer in applied industrial research, little I knew about the importance of recognizing the market type of the applications I was working on. It took me a few years of consulting and an MBA to finally understand it. It was not straightforward for a simple reason. In applied research and tech-driven companies most business ideas come from technology-push rather than market-pull. So, when new technology is among hits the market, it is easy to have the illusion of being among the first to address a problem. Finding no competitors gives the illusion of a new market. Sometimes, what new technology addresses is truly a new market. Mostly, it does not.
A new market is no better than an existing one, or vice-versa. It is just a matter of different rules of the game. This post is about how to recognize a new market. It is my recipe based on experience and from reading academics and experienced professionals like Clayton Christensen and Steve Blank. Now, if you wonder why should you care about distinguishing a new market from an existing market, keep reading.
Why the market type matters
The difference between a new and an existing market is no rocket science. An existing market is made of customers who are already served. These are customers that already have ways to solve their problems or satisfy their needs. On the other hand, in a new market customers do not have any solution to their problem or need. They are either struggling with a solution not fit for their purpose or not managing at all to get the job done.
So, time spent figuring out the market type is well spent. And spending it early can save hassles further down the line.
Market differences
There is often an investor or an executive asking if the market your product targets is new or existing. Sometimes the question investors are really asking is whether your product has competitors. However, most of the times, what investors refer to is not just about competition, it is really about customer needs. In other words, is the need the product addresses already satisfied or not?
So what is it all about knowing if the market is new or existing? Steve Blank, entrepreneur and an early advocate of the lean startup methodology, points out that new and existing markets have different revenue patterns. In a new market the path to growth usually looks more of a hockey stick, first flat then steep. On the other hand, in an existing market, sales usually grow more steadily from the beginning.
In a new market there are, by definition, no customers. So, dedicating too much effort and budget on acquiring customers who don’t exist is not recommended. It is more important to first create demand and awareness. Conversely, if you don’t realize you are in an existing market, you might interpret flat sales as expectable and tolerable, while you should be worried.
Product differences
The two market types should also have different product strategies. In an existing market differentiation against competitors or alternatives is crucial. So, products should provide better performance or new features against what is already available for the market. On the other hand, in a new market there are no competitors or alternatives, just non-consumers. In this case, a product should provide convenience and simplicity good enough to transform non-consumers into consumers.
Often people think that being in a new market is a plus with respect to an existing market. This is a myth. Many successful high-growth companies started with addressing specific segments in existing markets and ended up disrupting their markets. Some notable examples are Amazon and Dell. Amazon was initially in the market of book sales, competing with Barnes & Noble and local shops. Amazon re-segmented an existing market by providing customers with a new way to purchase books. So, Amazon addressed “people who read books”, definitely an existing market, even in 1994.
Hopefully by now it is more clear why any innovator should define the market type before doing any planning. The risk of spending lots of money and time in executing the wrong strategy is not really appealing. Now, let’s look more in depth at how to recognize a new market by using 4 indicators.
4 indicators of a new market
Now that we know why it matters if a market is new or existing, let us look at how to find if a market is new, by using 4 indicators.
1. There is a customer need
Surprisingly, too often products are launched without targeting any customer needs. As a matter of fact, empirical research conducted by CB Insights shows that the top reason why startups fail is “no market need”. In both new or existing markets, there are people trying to get a job done. This is a necessary condition for the existence of any business. If you have the coolest technology but have not yet figured out which problem or need you are solving, you should produce and validate some hypotheses. You can use the market opportunity navigator as a tool to systematically select what markets to start with.
2. There are no direct competitors
In new markets people have unsatisfied needs. These needs are somehow too complex or not worth to have some company to invest resources into figuring out and addressing them. The consequence is that in new markets there are no products or services that address customer needs. Consequently by entering a new market you will find no direct competitors. So, if you identified a customer need but can not find any company addressing them, you might have found a new market. Before moving on, to ensure you are targeting a new market, there is still more to check.
3. There are no alternatives to get the job done
If your offering has no direct competitors but your potential customers can still find and use “good enough” solutions to satisfy their need, then you are still in an existing market. Conversely, in new markets people do not find any convenient and simple enough alternative solution to their problem. The AirBnB platform, for example, is a disruptive innovation addressing the need of travelers who seek cheap and authentic local short-stay accommodation. Despite of its disruptive business model, AirBnB entered an existing market. In fact, although AirBnB had no direct competitors, travelers looking for cheap and authentic local short-stay accommodations could already find “bed and breakfasts” online. However, by addressing home owners who seek a simple way to temporarily use their unutilized assets AirBnB did create a new market. Indeed, without AirBnB owners did not have any simple way to temporarily let their houses, so they usually let go potential income.
4. Non-consumers are struggling to get their job done
Be careful about understanding the characteristics of your market. Despite being non-consumers, people in your market should not just have a need, but they should recognize it and, even better, actively seek for a solution. As consumers, we often fail to recognize our own needs. Henry Ford once said “If I had asked people what they wanted, they would have said faster horses.” When customer needs are implicit, reaching for these customers and generating demand requires more effort. Not everyone takes the effort to find the solution. So, as Clayton Christensen puts it in its masterpiece “The Innovator’s Solution“, in a new market is important to verify if non-consumers are already struggling to get the job done and, even better, are actively looking for a decent solution.
The last checks before targeting a new market
If you verified the 4 indicators above, you might have found a new market ready to be served by your product. Before moving on, it is a good idea to check a few more aspects to see if the market is really worth.
1. The market size is large enough
With a new market there are no ready-made reports talking about market size and compound annual growth rate. But sizing the market is still relevant. There is no need to be very accurate. What matters at the beginning is a ballpark estimate to have an idea about whether the market is desirable, especially for your long-term strategy. The actual question to address is “once you find product-market fit, does the product have margin of growth?” For startups targeting new markets, market size is in not much of a deal breaking, as long as they can target their market cheaply (see the next check) and have a vision on how to expand to new markets. Existing companies, on the other hand, generally tend to require a higher return on investment to justify the risk of investing in a new market. Therefore they need to measure the potential size of a market early on.
2. There is a clear and fast path to profitability
As Clayton Christensen points out in his masterpiece “The Innovator’s Solution“, for new market opportunities what matters is profitability more than growth. Therefore, knowing how all the costs add up in order to acquire and serve the market is crucial. As Steve Blank says, new market opportunities differ from opportunities in existing markets because of the cost of acquiring customers. Customers don’t know you because you are the only one who can solve their problem. So, getting noticed, acquiring prospects and converting them into customers will be more costly and harder than in existing markets.
3. There is a way to defend intellectual property
Let’s finally address the technology aspect. There is no need to have a new technology or method in order to be in a new market. Innovators can create new markets by proposing existing technologies in simpler and more convenient forms. Indeed, research on disruptive innovation shows that it is the application that makes a technology innovation disruptive not the technology by itself. Nevertheless, reusing or reshaping an existing technology creates a risk of infringing intellectual property or missing the opportunity of protecting own intellectual property. Therefore, even in new markets where there are no direct competitors, performing a patent landscape analysis early on is crucial to reduce the risk of intellectual property infringement and to create the opportunity to create a competitive advantage through intellectual property protection.
Finally
If you have checked the 4 indicators and verified if the market is worth entering, you are almost ready. Depending on the specifics of your market and your organization’s product portfolio, you will likely have to check other things before moving on with go-to-market. All the best.