Market Type Analysis
Determine whether you are entering an existing market, creating a new market, or resegmenting an existing market to choose the right strategy
Market Type Analysis is a framework for identifying which of four market types a startup is entering, because Market Type changes everything a company does. The four types are: entering an existing market with a better product, creating an entirely new market, resegmenting an existing market as a low-cost entrant, and resegmenting an existing market as a niche player.
The critical insight is that thinking and acting as if all startups are the same is a strategic error. The strategy and tactics that worked for one startup in an existing market will fail catastrophically for a startup creating a new market, and vice versa. Market Type determines customer needs, customer adoption rate, how customers understand their needs, how you position the product, the market size, and how you launch the product.
In an existing market, users and competitors are known. The basis of competition is product features and performance. Spending on branding and demand creation makes sense because customers already understand the category. In a new market, there are no competitors to define the space, but you must convince customers your vision is not a hallucination. Spending heavily on branding and advertising is wasteful because customers do not yet know what the product is.
Resegmented markets take two forms. Low-cost resegmentation targets customers at the low end who will accept good enough performance at a substantially lower price. Niche resegmentation asks whether some part of the market would buy a product designed for their specific needs even at a higher price. Both forms require adroit positioning of how the new product redefines the market.
The importance of Market Type grows at each step of the Customer Development process. During Customer Discovery, all startups talk to customers regardless of type. By Customer Creation, the differences are acute and startups that do not understand Market Type spend themselves out of business.
- Market Type changes everything a company does: sales, marketing, positioning, launch, and financial strategy
- Thinking and acting as if all startups are the same is a strategic error
- In an existing market, competitors define the market and competition is about product features
- In a new market, your problem is not competing on features but convincing customers your vision is real
- In a new market, spending money early to grab market share is wasteful because there is no market share to grab
- Resegmentation means picking a clear and distinct spot in customers' minds that is unique and concerns something they value
- The speed through Customer Development depends on Market Type: weeks in an existing market, years in a new one
- Keep testing and asking what kind of startup you are at every step of Customer Development
- 1. Identify Your Market TypeAnswer a series of diagnostic questions to determine which of the four market types applies to your startup. Does your product have better performance than existing competitors? Then you are in an existing market. Is there an established market where your product costs substantially less? You are in a resegmented market via low cost. Can your product be uniquely differentiated for a specific segment? You are in a resegmented market via niche. Is there no established market and customers could not do what you enable before? You are creating a new market.Pro tipMost companies have the luxury to choose which Market Type to pursue. Do not default to the most obvious answer. Consider whether a resegmentation strategy might be more viable than a direct assault on an existing market.WarningThe consequences of the wrong Market Type choice are severe. Develop initial hypotheses and test them as you move through Customer Development. Do not lock in a Market Type choice without customer evidence.
- 2. Align Strategy to Market TypeOnce you have identified your Market Type, align all sales, marketing, and financial strategies accordingly. In an existing market, differentiate on product features and performance, and use competitive positioning. In a new market, focus on market adoption rather than market share, use low-cost education-oriented demand creation, and plan for a longer timeline. In a resegmented market, position the product to redefine how customers think about the market.Pro tipFor resegmented markets, the positioning work is critical. You must convince customers that some characteristic of your product is radical enough to change the rules and shape of the existing market.WarningDo not apply existing-market strategies to a new market. Launching an expensive branding and advertising campaign in a new market, as PhotosToYou did, burns cash without generating proportional customer acquisition.
- 3. Set Appropriate Timelines and Financial ExpectationsAdjust your financial model and timeline expectations based on Market Type. In an existing market, Customer Development can be accomplished in weeks or months. In a new market, the process may take a year or two or even longer. Budget your cash-burn rate accordingly and set investor expectations for the appropriate timeline.Pro tipIn a new market, your revenue is bounded by the size and growth of a market that does not yet exist. Model your financials based on realistic adoption curves, not optimistic market share projections.WarningMaking unrealistic financial assumptions by ignoring the consequences of your Market Type choice leads to unachievable goals and forces execution toward plans that cannot succeed.
- 4. Choose the Right Launch TypeSelect the appropriate launch strategy for your Market Type. In an existing market, an onslaught launch with heavy spending makes sense because customers understand the category. In a new market, use an early adopter launch focused on earlyvangelists and word-of-mouth. In a resegmented market, use niche-focused demand creation that builds from a small cadre of early evangelists to a mass market.Pro tipIn a new market, only the earlyvangelists will find the product and spread the word. Focus your limited resources on reaching and serving them rather than trying to create mass awareness.WarningCustomer acquisition costs in a new market will be sky-high if you use mass-market tactics. Customers also prove to be fickle, testing multiple competitors. Customer churn and retention matter as much as acquisition.
Palm Computing in 1996 was creating a new market for PDAs. No one knew what a PDA was, there was no latent demand, and emphasizing technical features would have been irrelevant. Palm needed to educate customers. Three years later, Handspring entered the existing PDA market with essentially the same team and similar products. Now customers understood the category, and Handspring could differentiate on features like expandability and performance while driving demand from competitors into its sales channel.
PhotosToYou was creating a new market for online digital photo printing. But the executive team believed the key to winning was branding and launched an expensive advertising campaign. The company's revenue was bounded by the small number of digital camera owners with broadband internet, making mass-market spending wasteful. Customer choice was not permanent as users experimented with multiple services, and customer-acquisition costs were sky-high.
In-N-Out Burger resegmented the existing fast-food market by observing that incumbents like McDonald's had strayed from their original concept. By 2001, McDonald's had over fifty-five menu items and none tasted particularly great. In-N-Out offered three items: all fresh, high-quality, and great tasting. They focused on the core segment that wanted high-quality hamburgers and nothing else.
Steve Blank developed the Market Type framework after observing that the postmortem of failed companies frequently included the statement 'I don't understand what happened, we did everything that worked in our last startup.' He illustrated the concept through the contrast between Palm Computing in 1996, which was creating a new market for PDAs, and Handspring in 1999, which was entering the existing PDA market. Even with essentially identical products and teams, the two companies needed fundamentally different strategies. Palm would have failed using Handspring's tactics, and Handspring would have failed using Palm's. This insight that Market Type changes everything became a central pillar of the Customer Development methodology.