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:
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.
Determine the degree of product innovation
Fragmented markets usually lack innovation or diversification and occur when multiple organizations sell undifferentiated products or services.
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.
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.
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.
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.
- 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.
Related Market Development Frameworks
Stages of Digital Transformation
Platform Business Model Strategy
FourWeekMBA Business Toolbox
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