market-fragmentation

What Is Market Fragmentation? Market Fragmentation In A Nutshell

Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.

Understanding market fragmentation

The fragmentation process is initiated by a small customer group whose needs are not currently being met. As the market expands, it becomes economically feasible at some point to develop and sell products to each group. That is, to meet previously unmet needs

Fragmentation is both the result of market growth and an avenue for growth for any business looking for a new opportunity. If the business can identify that a fragment is breaking away from the parent market, it can become that market’s leader by creating a suitable product. In some cases, market leadership in the fragmented market may increase the company’s brand reputation in the parent market, or vice versa. 

Identifying market fragmentation

Identifying market fragmentation is perhaps easier said than done, but the ability to do so can pay off handsomely for a business.

Below are a few characteristics that may help businesses identify fragmented markets or indeed if a market is likely to fragment in the future:

  1. Determine if there are barriers to entry – by their very nature, fragmented markets are characterized by the ease with which a company can gain a competitive position. Therefore, it stands to reason that markets with existing barriers to entry are not likely to be fragmented. These barriers can include prohibitive start-up costs, legal or regulatory obligations, or patented technology.
  2. Determine the degree of product innovation – fragmented markets usually lack innovation or diversification and occur when multiple organizations sell undifferentiated products or services. 
  3. Lack of customization – are the needs of the market being met? Is demand being fulfilled? We touched on customer needs in the previous section, but it is worth repeating once more. Indeed, a lack of custom or personalized products can accurately predict the formation of a new market before it occurs.
  4. Assess economy of scale – or the cost advantage a business enjoys because of the size of its operations. Fragmented markets have an absence of large and established players that use economies of scale to sell high-volume, low-cost products.

Market fragmentation industry types

Market fragmentation can occur in any industry, including:

  • Finance and accounting – no single company can dominate the finance and accounting industry because of the sheer number of fragmented markets. Within the accounting market alone are specialized financial services including retirement planning, tax preparation, forensic accounting, auditing, and fiduciary (property) accounting.
  • Retail – fragmented retail markets typically consist of small to medium players that do not have the ability to become market leaders. This causes further fragmentation as these organizations seek to dominate progressively smaller or niche markets.
  • Hospitality – one of the best examples of market fragmentation can be seen in the hospitality industry. Fast food is dominated by a handful of restaurant chains, forcing many smaller establishments to differentiate themselves in sub-markets. The so-called “Uberification” of this industry has resulted in market fragmentation as restaurants seek to appeal to millennial consumers who value quality, low-cost, and convenience over a diverse menu selection. Fast-food restaurants are also differentiating themselves from some of the bigger brands by offering fast-casual dining. This is a high-quality, self-service dining experience where dishes are prepared to order in an informal setting.

Key takeaways:

  • Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.
  • Market fragmentation is typically initiated by a small customer group whose needs are not being met in the parent market. As the parent market grows and becomes fragmented, it becomes economically viable for a business to meet these needs.
  • Market fragmentation can occur in any industry, though it is perhaps best exemplified in the finance, accounting, retail, and hospitality industries.

Connected Business Concepts

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business-model-template
A tech business model is made of four main components: value model (value propositions, missionvision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
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Digital transformation enables existing businesses to leverage digital technologies for business model innovation. The process of digital transformation is not just about new distribution channels. It starts by better serving key customers, and it completes by developing a new business mindset required to succeed in the digital era.
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Business storytelling is a critical part of developing a business model. Indeed, the way you frame the story of your organization will influence its brand in the long-term. That’s because your brand story is tied to your brand identity, and it enables people to identify with a company.
3c-model
The 3C Analysis Business Model was developed by Japanese business strategist Kenichi Ohmae. The 3C Model is a marketing tool that focuses on customers, competitors, and the company. At the intersection of these three variables lies an effective marketing strategy to gain a potential competitive advantage and build a lasting company.
ge-mckinsey-matrix
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mckinsey-7-s-model
The McKinsey 7-S Model was developed in the late 1970s by Robert Waterman and Thomas Peters, who were consultants at McKinsey & Company. Waterman and Peters created seven key internal elements that inform a business of how well positioned it is to achieve its goals, based on three hard elements and four soft elements.
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AIDA stands for attention, interest, desire, and action. That is a model that is used in marketing to describe the potential journey a customer might go through before purchasing a product or service. The AIDA model helps organizations focus their efforts when optimizing their marketing activities based on the customers’ journeys.
pirate-metrics
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The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
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A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
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A go-to-market strategy represents how companies market their new products to reach target customers in a scalable and repeatable way. It starts with how new products/services get developed to how these organizations target potential customers (via sales and marketing models) to enable their value proposition to be delivered to create a competitive advantage.
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Customer segmentation is a marketing method that divides the customers in sub-groups, that share similar characteristics. Thus, productmarketing and engineering teams can center the strategy from go-to-market to product development and communication around each sub-group. Customer segments can be broken down is several ways, such as demographics, geography, psychographics and more.
customer-segmentation
Customer segmentation is a marketing method that divides the customers in sub-groups, that share similar characteristics. Thus, productmarketing and engineering teams can center the strategy from go-to-market to product development and communication around each sub-group. Customer segments can be broken down is several ways, such as demographics, geography, psychographics and more.
psychographic-segmentation
Psychographic segmentation is a form of market segmentation, that looks at consumers into sub-groups that share specific psychological characterizes, that comprise activities, interests, and opinions of customers. The rise of data-driven marketing enabled psychographic segmentation to become a key element of digital marketing activities to personalize those campaigns and reach a micro-audience.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"