Making Sense of a Fragmented Market
How does a fragmented market form?
Fragmented markets arise from a variety of factors. However, the main factor driving market fragmentation is frequently growth within a single market or industry. Different sub-markets start to separate from the parent market as a market or industry expands to support large numbers of customers. These niche markets split off from the larger market and typically develop into distinct markets with unique product and service offerings. Additional elements that affect the formation of a fragmented market include:
Differing market needs leading to market alternatives
A market expands to serve a wider range of customer needs as it gets bigger. But without a single market leader, the entire market might not be able to meet the new diversity of the market’s demand. When this happens, the market may eventually become divided into smaller segments due to the fluctuating and diverse nature of consumer demand. Small and medium-sized businesses and organizations can create solutions to satisfy demand in the newly created fragments when the market fragments.
Strong and equal market competition between organizations
When no one company dominates another in terms of market position, fragmented markets and industries can also develop. No company will outperform another if all businesses within a given sector are in equal competition with one another. This frequently leads to organizations breaking away and dominating a fresh, smaller submarket. As a result, businesses compete to dominate emerging submarkets across the entire industry, fragmenting the market.
Lower cost alternatives to market offerings
Customers may leave a market to find alternatives that are more affordable for the same quality of good or service if the industry’s offerings are out of date. Due to the need to find ways to satisfy the demand of customers who initially separated from the overall market, this could lead to businesses within an industry splitting up into smaller fragments. Organizations that engage in this activity may acquire sufficient sway to steer the fragment in the direction of growth.
What is a fragmented market?
A customer market that is fragmented (also known as a fragmented industry) refers to one in which no one company or organization has sufficient sway to steer the sector in a particular direction. Numerous businesses and organizations that compete within a single industry typically make up fragmented markets and industries; however, none of these small and medium-sized businesses dominate the entire market within the industry.
In a market that is fragmented, different submarkets exist that represent various buyer demands and necessitate various strategies for marketing and advertising to consumers who belong to these various fragments.
Types of fragmented industries
Fragmented markets occur across many types of industries, including:
How to identify a fragmented market
There are specific traits that can indicate whether a market is fragmented or will do so soon in large industries like technology and hospitality. To spot the signs of a fragmented market, follow these steps:
1. Determine if there are any barriers to entry
One of the most typical characteristics of a fragmented market is that it is simple for businesses to enter and take a position there. There shouldn’t be any entry barriers because businesses in fragmented markets compete on an equal footing. High startup costs, legal and regulatory requirements, or other impediments that prevent competitors from entering the market can all be considered barriers to entry. But there are very few, if any, entry barriers in a fragmented market.
2. Identify where theres product innovation
In highly competitive industries, there are frequently a number of companies and organizations that dominate the market in terms of revenue generation. This may be attributable to businesses’ capacity to consistently release cutting-edge and novel products to the market. However, a market that is fragmented typically lacks diversity, innovation, and even customization in the products that its vendors offer. A market is likely fragmented if the product offerings within it are similar across different companies and there are no truly innovative approaches to new offerings.
3. Lack of customization
Consider the market’s demands and how the companies operating there are addressing them. You’ll notice that there are no distinctive offerings among the companies in a market that is fragmented. This dearth of tailored or personalized offerings may point to an already fragmented market or one that will do so in the future.
4. Look at the economy of scale
The cost advantage that an organization has due to the size of its business operations is known as the “economy of scale.” For instance, due to the size of their business, large corporations with significant economies of scale can sell products at low prices. Because most of the market’s participants are small and medium-sized businesses, which cannot scale as effectively as large, competitive companies can, a fragmented market typically lacks significant economies of scale.
Advantages of a fragmented market
For small- and medium-sized businesses, fragmented markets have several benefits, including:
No single company to compete with
In a fragmented market, there is equal competition, which means that no one company has a larger customer base than the others. When no single organization has enough clout to change the market, it means that consumers don’t favor one company over another. For new businesses entering the market, the equal competition and lack of customer loyalty to any one company can be advantageous.
Little to no challenge to enter the market
Small businesses can benefit from fragmented markets because they have lower entry barriers. One critical barrier to entry for many organizations is cost. In competitive markets with multiple large companies holding dominant positions, marketing expenses will typically be higher. However, in a fragmented market, local marketing and advertising strategies encourage smaller businesses to cut costs for entering the market.
Opportunity to innovate and differentiate
Because of their capacity to offer novel and distinctive products, many small businesses thrive in fragmented markets. For instance, a small landscaping company can set itself apart from other businesses in its industry by tailoring the customer experience or offering extra services to satisfy a range of customer needs.
Easier to reach target customers
Since small businesses typically make up fragmented markets, marketing and advertising typically take place locally. This supports the revenue generation of small businesses by making it simpler and more consistent for them to reach their target customers.
Disadvantages of a fragmented market
Although smaller businesses can benefit greatly from fragmented markets, there are also some disadvantages to these kinds of industries, including:
Redundancy in offerings
Products, services, and marketing messages to customer markets may become redundant due to similarities in offerings among the companies in a fragmented market. Target markets eventually look for alternative offerings when there are too many repeated offerings.
Lack of economy of scale
Due to their small scale of operations, small businesses may find it difficult to compete in fragmented markets. For instance, a small company that makes home decor items might not be able to scale to handle high volumes of customer orders, shipping demands, and supplier coordination.
Frequent strategy updates
Within fragmented markets, consumer needs can change, necessitating regular evaluation in order to create effective marketing strategies. For instance, social media technology makes it simpler for small businesses to advertise to target markets, but it can be difficult to determine which platforms these target markets use given that these types of channels are constantly evolving.
Ways to overcome challenges in a fragmented market
Businesses can overcome the difficulties presented by a fragmented market in a number of ways, such as:
FAQ
What is a fragmented market?
a market where no single company has sufficient sway to steer the sector in a particular direction. Several small to medium-sized businesses that compete with one another and big businesses make up the market.
Is a fragmented market good?
For businesses looking to enter and potentially dominate a market, fragmented industries make excellent targets. Due to their nature, fragmented industries frequently have lower entry barriers than more consolidated industries.
How do you know if a market is fragmented?
- Determine if there are any barriers to entry. One of the most typical characteristics of a fragmented market is that it is simple for businesses to enter and take a position there.
- Identify where there’s product innovation. …
- Lack of customization. …
- Look at the economy of scale.
