Regardless of size, every company has limited resources and must make some tough decisions about what product and services they want to offer. In parallel, companies must also decide what market segments they are not going to pursue at any given point in time. When companies understand the nuances of markets, they are able to build winning products and solutions, increase sales revenue, and have the capital for sustained growth.
Let’s take a closer look at why it’s important to understand market segments.
Large markets represent billions (or trillions) of dollars of opportunity, but they cannot be approached at this level because large markets are really a composite of medium markets which are made up of smaller and smaller markets. Each market segment supports a specific group of market needs.
Figure: Sample Markets and Automotive Market Segments
Further Market Segmentation Techniques
As markets mature, companies need to put more energy into positioning and choose those market segments which best align with their products, services, and solutions offering as well as core competencies. In general, companies that position at the high end of a market are not able to also sell products at the low end. Likewise, high-fashion brands are not appealing to no-frills utilitarian buyers and high-fashion brand buyers prefer the brand because of its exclusivity and would not purchase a mainstream product.
New and adjacent markets can also represent growth opportunities for companies, but need to be looked at strategically because supporting a new business requires dedicated resources and capital.
So, Does (Company) Size Matter?
Early stage and small companies must identify a market problem and build their product/solution around this need. Picking an initial market segment is critical for success because a one-size-fits-all solution is not practical to build and probably not compelling to anyone.
For example, Tesla Motors entered the saturated car market with a $100,000 electric roadster, which is a niche market segment for sport car enthusiasts. This high-end entry point allowed Tesla to develop and prove out new technology while generating some revenue and working on their second-generation car, a four-door luxury sedan designed for the high-end market.
In contrast, larger companies support multiple market segments and must be clear about their core business solutions. As companies grow, the cost to support multiple product lines and market segments also increases. Broader products/solutions also add complexity to the buying process. Tesla, for example, has two car models while BMW has over fifty.
Deciding What Not to Do
Companies must also be clear about what businesses and market segments they are not going to support because every company has limited resources.
Companies should look at the size and growth of markets, their current offerings, technical expertise, and competition to strategically decide where to apply resources to get the largest return on their investment.
Deciding what not to do is a natural fallout of their current product and business plans and may be parsed into three groups. First, if a market segment is clearly outside a company’s domain expertise, it’s easy to discount. Second, if the company is resource constrained and wants to pursue an adjacent market segment, the opportunity may become a road map item. And to close, after reviewing and prioritizing all the market/product opportunities, a company may decide to put some projects on hold and revisit the opportunity in six to twelve-plus months.