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Early on, startups must identify the market type in which they plan to operate. In The Four Steps to the Epiphany, Steven G. Blank describes four different types of market:

  • Existing market
  • New market
  • Re-segmentation of an existing market as a low-cost player
  • Re-segmentation of existing market by employing a niche strategy

The first two market types suggested by Blank are mutually exclusive, but the latter two are specific sub-categories of the existing market. The category in which a new product falls depends on a startup’s competitive strategy as either a low-cost or niche strategy.

The appraisal of market type is important as it influences a series of key aspects of your early marketing, including:

According to Blank, each market type has its own characteristics and implications, listed below:

1. Existing market

In an existing market, the users, the market and the competitors are known. In this environment, one competes on product features and performance.

2. New market

A new market is created if your product enables a large number of customers to do something they were unable to do before you came along. In a new market, customers and their preferences are unknown and direct competitors are non-existent. In the absence of competition, product features take on less importance; identifying customers and making them believe in your vision are the name of the game. This is more time-consuming than if you were in an existing market, which puts extra emphasis on managing cash flow.

3. Re-segmentation of an existing market as a low-cost player

This approach is based on a belief that a “large enough” market segment will start using a product that may be inferior in terms of features but “good enough” to solve the problem as long as the price is low enough. If such conditions exist and you can be profitable under such circumstances, the strategy is viable. The emergence of low-cost airlines exemplifies such a strategy.

4. Re-segmentation of an existing market by employing a niche strategy

A niche strategy is viable if you can identify a part of the market which can be captured through a more focused solution than anything currently available. The idea is that a more focused solution will provide higher value to a particular market niche than any of the existing alternatives. The challenge is to demonstrate enough value to motivate a sufficient amount of customers to abandon existing market relationships.

Two-step decision making around your type of market

  1. Consider if you are entering an existing market where some kind of solution for the customer’s problem already exists.
    • If the answer is “no,” then you are creating a new market.
    • If the answer is “yes,” then you are entering an existing market.
  2. Regardless of what assessment you arrive at above, determine your strategic focus and positioning.
    • In The Entrepreneur’s Guide to Customer Development: A cheat sheet to The Four Steps to the Epiphany, authors Vlaskovits and Cooper suggest that startups must focus on a market niche independent of market type, simply because startups lack the resources to develop an entire market or challenge the leader in an existing market.

For information on identifying a niche, read Identifying target customer segments to focus your marketing resources.


Read next: Strategic planning: How product differentiation strategy depends on market type

References

Blank, S.G. (2005). The Four Steps to the Epiphany. Self-published: Cafepress.com.
Maurya, A. (2011). Running Lean. Self-published.
Ries, E. (2011). Lean Startup. New York: Crown Business.
Vlaskovits, P. and Cooper, B. (2010, July 29). The Entrepreneur’s Guide to Customer Development: A cheat sheet to The Four Steps to the Epiphany. Self-published.