5 Things to Consider Before Entering a New Market

5 Things to Consider Before Entering a New Market

For companies seeking growth, entering a new market is a tempting strategy. Sometimes the new ventures are far afield from the segments currently served. Other times, adjacent markets are attractive because of the seemingly lower-risk opportunities they afford. But whether distant or close in any sense, forays into new markets often present unforeseen challenges.

What’s the best way to assess whether entering a new market is an opportunity or a trap?

Stephen Wunker, whose Boston-based international consulting firm New Markets Advisors has helped many businesses innovate, notes that offering a new product or service that meets a real consumer need is of course a good start. But need is not enough; many great ideas struggle to get traction. He suggests addressing five success factors in considering a new-market move.

Quick or Slow

First, according to Wunker, determine whether the new market under consideration is likely to grow quickly or slowly. The pace of growth depends on a variety of factors, including whether a supporting infrastructure exists for the new market.

For example, until widespread urbanization compelled the creation of sanitary water distribution and sewage systems in the 19th century, there could be no market for indoor plumbing fixtures, no matter how great an idea they were in the abstract. As a result, the potential demand for those products remained latent until supporting infrastructure arrived, which required massive capital investments and large-scale political action.

By contrast, Wunker points to the U.S. market potential for sushi. While some infrastructure development was needed in the form of greater supply of high-quality fish, there were few capital or political barriers to overcome. Instead, consumer taste preferences made for the market’s initial slow growth, since there was little inherent demand. At best, most Americans had no familiarity with raw fish or seaweed as food; a probable majority no doubt felt outright aversion.

While the first sushi bar in the United States appeared in the 1960s, it took two decades for sushi to become part of the popular consciousness. Demand finally exploded in the 1980s.

First or Later

The second consideration in entering a new market is determining whether it’s better to be a “first mover” or a later entrant.

For first movers, Wunker believes the product or service should be such that high barriers to entry will exist, or can be erected, for entrants that follow. One barrier could be the establishment of a dominant mindshare such that later arrivals can’t gain traction. Another could be quickly building economies of scale that later arrivals can’t match.

First arrivals also have the ability to experiment and try new technologies, which means they can quickly match customer preferences. First movers should strive for low upfront costs so that they need not invest too heavily in a market whose size is indeterminate. If customers are quick to adopt, the business can be scaled up.

Gain a Foothold

Third, Wunker believes entrants should determine which customers to target first. Dominating a foothold market is a key element in capturing a broader new market, he explains, but one often overlooked by large incumbent companies, which often opt for seeking the motherlode first.

“Going after the big market first may excite top management, but it may not yield success, because big markets are often difficult to access, take a long time to crack, and are risk-averse, highly competitive, and quite demanding of any new offering,” he says.

Instead, concentrate on a foothold market where there is a very clear target customer base that creates a reference for other target customers. It should be a market that is uncompetitive and easily satisfied with a basic offering, where there are few dependencies or risks and where entry and experience-gathering can be rapid.

The prime example of a foothold market is the one used by Facebook: college students. Facebook wasn’t the first social networking site, but it was the first that clearly defined its target. In fact, for the first two years of its existence, Facebook required users to have an email address with an .edu suffix in order to register.

While the user restriction may have seemed limiting, it allowed Facebook to quickly gain scale in its niche, refine its offering, and signal that in its chosen lane it would be the dominant player.

Superhighway vs. Country Road

The fourth consideration involves the channels for entering a new market.

Traditional channels are like existing superhighways, Wunker believes, in that everyone knows how they work, where they go, and how to use them. If a new market can be served traditionally, so much the better.

But channels to new markets are typically more like country roads than interstates, requiring entrants to figure out the directions themselves — a process that, ironically, often is the most direct route to reaching the out-of-the-way destinations that foothold markets frequently are.

Since traditional sales forces don’t typically do well in environments that require them to educate potential customers about something new, Wunker suggests that using a direct approach with a dedicated team to reach a new market may be best. Transitioning to the superhighway can come later.

Markets Next Door

Finally, would entering an adjacent market be a better choice than breaking all-new ground? If a company currently sees a lot of value going into adjacent markets, or feels that entering such a market would bring it closer to its customers, a peripheral move could make sense, Wunker contends. Such a move also creates option value by opening the door to potential new growth opportunities later if the current base business becomes challenged.

But adjacent markets can be a false lure if the aim is to leverage existing assets, such as a brand or distribution strength.

“Approaching a marketplace that way is very company-centric, not customer-centric,” warns Wunker. “Also, if you have no advantage in an adjacent market except for what you consider to be in-house expertise, that’s a sign you may be in for some surprises. You don’t know what you don’t know, and your expertise might not be as extensive as you think.”

Find out how GLG’s network of more than 700,000 specialists can help your organization gain new insights from consultations, surveys, subject-matter experts, and more by visiting glginsights.com.