market-types

What Are Market Types? Four Types Of Markets To Build A Business

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?

market-types-why-it-matters

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.

product-business-model-culture-framework

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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

market-types

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.
  • Positioning.

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.

bootstrapping-business
The general concept of Bootstrapping connects to “a self-starting process that is supposed to proceed without external input.” In business, Bootstrapping means financing the growth of the company from the available cash flows produced by a viable business model. Bootstrapping requires the mastery of the key customers driving growth.

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.

how-does-google-make-money
Google (now Alphabet) primarily makes money through advertising. The Google search engine, while free, is monetized with paid advertising. In 2021 Google’s advertising generated over $209 billion (beyond Google Search, this comprises YouTube Ads and the Network Members Sites) compared to $257 billion in net sales. Advertising represented over 81% of net sales, followed by Google Cloud ($19 billion) and Google’s other revenue streams (Google Play, Pixel phones, and YouTube Premium).

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.

Key takeaways

  • 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.

Read Next: Business Model Innovation, Business Models.

Related Market Development Frameworks

TAM, SAM, and SOM

total-addressable-market
A total addressable market or TAM is the available market for a product or service. That is a metric usually leveraged by startups to understand the business potential of an industry. Typically, a large addressable market is appealing to venture capitalists willing to back startups with extensive growth potential.

Niche Targeting

microniche
A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.

Market Validation

market-validation
In simple terms, market validation is the process of showing a concept to a prospective buyer and collecting feedback to determine whether it is worth persisting with. To that end, market validation requires the business to conduct multiple customer interviews before it has made a significant investment of time or money. A transitional business model is an example of market validation that helps the company secure the needed capital while having a market reality check. It helps shape the long-term vision and a scalable business model.

Market Orientation

market-orientation
Market orientation is an approach to business where the company focuses more on the behaviors, wants, and needs of customers in its market. A company will first target a niche market to prove a commercial use case. And from there, it will create options to scale.

Market-Expansion Strategy

market-expansion-strategy
In a tech-driven business world, companies can move toward market expansion by creating options to scale via niches. Thus leveraging transitional business models to scale further and take advantage of non-linear competition, where today’s niches become tomorrow’s legacy players.

Stages of Digital Transformation

stages-of-digital-transformation
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.

Platform Business Model Strategy

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Business Platform Theory

business-platform-theory

Business Scaling

business-scaling
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.

Strategy Lever Framework

developing-a-business-strategy
Developing a successful business strategy is about finding the proper niche, where to launch an initial version of your product to create a feedback loop and improve fast while making sure not to run out of money. And from there create options to scale to adjacent niches.

Related Innovation Frameworks

Business Engineering

business-engineering-manifesto

Business Model Innovation

business-model-innovation
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Innovation Theory

innovation-theory
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.

Types of Innovation

types-of-innovation
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).

Continuous Innovation

continuous-innovation
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.

Disruptive Innovation

disruptive-innovation
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Business Competition

business-competition
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.

Technological Modeling

technological-modeling
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Diffusion of Innovation

diffusion-of-innovation
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.

Frugal Innovation

frugal-innovation
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.

Constructive Disruption

constructive-disruption
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.

Growth Matrix

growth-strategies
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).

Innovation Funnel

innovation-funnel
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.

Idea Generation

idea-generation

Design Thinking

design-thinking
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.

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