A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.
Why does it matter to understand the market type?
Understanding the market type will change the way you’ll need to structure the organization, whether or not you’ll need outside funding and how to position your business in the marketplace.
Market types in classic economics
In classic economics there are four main types of markets:
- Monopoly: in a monopoly, there is a single supplier for a product/service thus able to influence market demand.
- Oligopoly: a few suppliers control the market demand.
- Perfect competition: where buyers and sellers are present in equal measure.
- Monopsony: a single buyer influenced the market demand. Think of how in the rocket industry the US government is the primary buyer (even though private contractors recently entered the industry).
Market types in the startup world
Entrepreneur, and professor Steve Blank usually defines market types according to four main contexts:
- Existing market with well-defined companies and customers.
- Resegmented market dominated by one or a few players.
- Newmarket where competitors do not exist and it’s very hard to define the customer.
- Clone market, a market where, due to geographical or cultural barriers, a business model can be cloned and transposed.
Defining your market type
There are many other ways we can categorize the kind of market we are in. But it’s important to start with a simple exercise in mind, to understand the territory in which you’re operating.
For that matter the market type will determine:
- The time to market for our product/service and whether you can test quickly and cheaply.
- The market readiness to accept our product/service and thus the way you’ll need to structure our organization to market that product.
Let’s look at each of those based on the market type.
Time to market: how long will it take to launch?
Market types influence also the time to market because if you’re operating on an existing, defined market, with defined demand and existing players, in most cases the product you’re trying to build might comprise technology, know-how and its components that might be easily available.
In that case, the time to market might be relatively short, thus it’s possible to build a product/service with little financial resources.
And based on it, we can answer the following:
Do we need venture capital or external funding?
In a new market or resegmented market (and in some cases in a clone market) the company you’re trying to build might actually need external funding, be it government funding, venture capital, a product development roadmap within a larger organization or as a joint venture.
The primary reason is it’s very hard to get any feedback from the market, as there are no well-defined customers in the first place.
Think of companies, that as of now are trying to build a viable business in the blockchain forming industry. Those companies, in most cases, will need funding, as the technology and application might be sounding but not ready yet to be marketed.
Can we talk to potential customers?
In the opposite scenario, where there is an existing market with well-defined rules, customers and competitors, and where the product you’re trying to build is not complex, or technologically advanced, you can demo it quickly to potential customers, thus you better bootstrap it.
Experimental process: can we get ahead of feasibility?
Imagine the case the product will be ready in a few years, are we still sure it makes sense to test it in the first place?
The market might change quickly, and what works today might not work in the future. Indeed, timing is extremely important and running tests on products that might be ready in a few years might be a waste.
Does it mean you won’t need testing before launch? You do need to test whether there is at least interest from the market or to figure whether the product you developed is the right commercial use case (among the potential applications it can have).
Indeed, among the greatest failures for new products are lack of interest from potential customers, poor distribution and inability to generate excitement around a potential new product (demand generation).
Therefore, while testing a product before starting the development is great for those products who are not creating new industries in the first place (think of a product that improves 2x compared to existing alternatives).
For those products who are creating whole new industries, it becomes harder to use an experimental process where it’s possible to gather feedback from existing customers (there are no existing customers).
In some of these scenarios, venture capitalists, governments or organizations with massive budgets are betting on the future. For instance, if you take a company like Alphabet, within it has an investment arm, placing bets on how the future might look like.
Whether the market will like it, it’s not an issue. The primary issue is whether it will work; if it will create a new market and how big that might be.
Market readiness: are we still talking enterprise?
When building up a valuable business there are several steps to take, depending on the stage your company is at and the complexity of the product and how ready is the market to accept that product.
Some of the questions you want to answer when dealing with market readiness are about the kind of organization structure you need to build a successful company based on the customer type.
In that case, you need to understand whether you’ll need to deal with a large enterprise customer, or you can push the product already as a consumer product.
In short, in a new market, there might be a few key customers, before the market expands and reaches its peak. And as it does you might be able to move from enterprise product to consumer product.
But in between, you will need to understand the market type to structure your organization.
Are we investing in marketing and automation?
In general, if a product can be launched on a large existing market, it can work well as a consumer product. Thus, at the organizational level, it makes more sense to structure the organization around marketing and product development to build a large customer base (consumer product/platform/service).
Do we need salespeople instead?
If in a market there are a few clients, mostly made of complex organizations or large businesses, in that case, you better structure your organization with competent salespeople, able to close deals and product development instead will be about a tailored product, customized to clients’ need (enterprise product/platform/service).
Positioning: broad, niche or microniche?
In most cases, when a new brand is getting built the more it starts from a niche (unless you have massive budgets to burn) the better it will be able to grow organically.
That’s because none knows your company, and before it can scale, it needs an experimental stage, where it can gather feedback from a larger and larger audience.
However, positioning can be also defined by market types. A complex product in a new market will need to be defined by providing as much value as possible to a microniche, or a small set of customers.
A product launching on an existing market, which has well-defined demand, consumers and understanding of the product offered can be also tackled broadly.
The exception to all rules
In late 2019, Elon Musk launched the Cubertruck, which redefines the whole concept of the truck, not only from a functional standpoint but from a cultural standpoint.
If you are Elon Musk you can do that. And in any case, also Tesla is leveraging on existing know-how and distribution.
Thus, also in this exception, there are three key points to account for:
- Demand generation: Elon Musk is a celebrity, able to tap on a massive audience, and he’s built a name for launching breakthrough products.
- Tapping on existing know-how: While Tesla is redefining the concept of what a truck means (this is more cultural than functional), it is also tapping on existing facilities and know-how. In short, it has lower feasibility issues than, say, a company launching such a product from scratch.
- Tapping on existing distribution: Elon Musk also leverages an existing customer base eager to get hold of the next Tesla cool car.
- Market types tell us the structure of the interactions between a group of consumers and producers, what’s the balance between those and if they are well defined in the first place.
- Market types can be classified in various ways. In classic economics, we have four types of markets (monopoly, oligopoly, perfect competition, monopsony). In the startup world, we can also redefine them according to the definition of potential customers (new markets, resegmented markets, existing markets, and clone markets).
- Market types will help us understand what kind of organization we are going to build based on time to market, the type of customer we’ll deal with and whether we’ll need external funding or we can bootstrap the business. Market types will also help in defining the positioning of our brand.
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