Why Companies Need to Enter New Markets
Companies enter new markets in hopes of increasing revenues. Most often, this happens when they find it difficult to meet revenue targets in their current market(s).
However, experience tells us that successfully entering new markets is a far more difficult task to achieve than it may seem.
Companies tend to severely underestimate the time and cost required to generate adequate sales in new markets. In fact, many have bailed out of new markets after sinking significant money without seeing the returns they expected.
Does this mean that entering new markets is a bad idea? No.
It simply means that companies should know what they are getting into before spending money. They should have a much firmer grasp on the level of investment in money, time, and effort required. In addition, they should have more realistic expectations of how much revenue they can expect and by when.
Below is an outline of what we believe is the minimal preparatory work necessary for successfully entering new markets.
Definition: Let’s start by defining a new market as one in which you have little or no presence today.
The Basic Elements on How to Enter New Markets
We can think of 9 basic elements to consider before entering a new market.
1. Compelling Need
Identify a compelling need that your product can solve in that market. This is the most crucial and most difficult step for many companies, which could explain why their new market entry efforts don’t produce the desired results.
Definition: A compelling need is a problem that customers cannot live with any longer than they absolutely have to.
If you have identified a compelling need, customers with such a need will jump at the chance to try out and purchase your solution. If the need is not compelling enough, they may still try it but will think too long and hard about spending the money, if at all.
Lack of compelling need makes market entries a very prolonged and expensive exercise in futility. If you cannot identify a compelling need, it is better to wait until you find one before entering a new market.
2. Target Segment
Very few products solve compelling needs across a wide range of customers. Such “Killer Apps” are few and far between.
In the vast majority of cases, we can at best define a compelling need for a specific group of customers who have the same or highly similar operational context and pain.
According to Geoffrey Moore, the noted high tech marketing guru, a market segment consists of a specific business role (someone charged with achieving specific business results) in a specific industry and probably in a specific geographical setting.
For example, “Chief Medical Officers in hospitals with 200-500 beds in California” is a well-defined market segment. “Healthcare CXO’s” is not.
The more precise the segmentation, the easier the rest of the market entry work will be.
The best market segment to select is one that is adjacent to the segment you are currently serving, and for which you have identified a compelling need that you can address.
3. Access to Decision Makers
The next challenge is determining how to access the above target group. Are they members of any organization? Do they regularly attend certain conferences? Do they subscribe to certain trade journals? Do they open emails or take calls from unknown sources? Are they active on any social media network?
In short, what are the best ways to reach them, and how cost effective are those?
While the cost of your marketing and sales is expected to be quite high initially , you want to ensure its reduction to acceptable levels (no more than 30% of sales) once you achieve a certain degree of name recognition and presence in that market—which should happen after 12-18 months of consistent marketing and sales efforts.
All sales are replacement sales, since you are trying to replace an established product with something new— your product.
No matter how compelling a need you may have identified, you must assume that your target customers are currently solving their problem in some way, to some extent.
Competition always exists. That is a given.
What we must clearly know before moving forward are:
- How currently underserved/poorly served this new market is.
- If there are any entrenched competitors that are complacent today but will wake up and fight back if challenged
- How capable and willing they are to fight back to keep their customers
The more you know about whose business you are trying to replace with yours, the more successful your strategy shall be.
5. Complete Product
One common fallacy is to assume that the same product will work across different segments.
For example, an accounting package that was originally created for manufacturing companies will not, out of the box, work adequately for hotels. Yet, product makers routinely think that they can simply make some cosmetic changes (such as a new name) and expect the same sales results in a different market. A mechanic may think a car is a car, but a Mercedes owner never thinks her car is the same thing as a Kia.
If you don’t know the customer’s context—what drives their business, what their top challenges are, where and how they make money, how they are regulated, who they compete against, and so on— then you don’t know enough to make a product that addresses their needs.
A product must completely address the compelling need for which it is made. It must work turnkey.
If you expect your customers to buy your product as is and then figure out how to make your product fit their existing systems/processes and business model, you may do a lot of demos but will close very little business.
The only reasonable way to build a turnkey product is to limit the scope of what that product is expected to do— go narrow but deep. This can only be accomplished through the pursuit of a very specific market segment rather than a broad one.
Products must be priced to sell, which means that neither the amount nor the pricing model should create a sales hurdle.
The amount itself must work—it must be easy to show financial metrics such as a reasonable Return on Investment (ROI) and Payback Period. If the price is too high, these numbers will be too weak and you will find it hard to close deals.
It is also critical that the pricing model (how customers pay) works as well. Many companies continue to use the same pricing model when they enter new markets without first researching how the target customer expects to pay for a similar product or service.
For instance, if customers are used to paying at the end of the month, they will be outraged if you expect them to pay up front for 12 months. If the payer in the new market is typically someone other than the end user in a similar context, end users will be upset if you expect them to pay for the product.
Remember the early days of cable? Cable network providers were tasked with convincing TV viewers to pay for what they were already getting for free, since advertisers were paying the TV stations.
Cable companies had to provide considerably more channels with fewer/no commercial interruptions, as well as a much better quality of reception, to convince viewers to pay $10 a month. Today, many TV viewers routinely fork out $200 or more per month for cable subscriptions.
Communication consists of more than just the message. It is also the mode of delivery (online, mobile, print, broadcast, face-to-face, etc.), the timing (when, how frequently), the freshness, relevance, and usefulness of the message that makes it work.
Companies often replicate their communication from their current market to be used for the new market with little or no change. This will not work. Even worse, it actually turns off the new market since the vendor clearly doesn’t know anything about them.
However, the message is only one component of communication that needs to be customized. The whole communication strategy must be redefined around the new target market.
In some cases, customs dictate what is acceptable and what is not. It is not a good idea to send a message that sends the wrong message (no pun intended). Crossed fingers may mean, “hoping for good luck” in the US, but it could mean something totally different in another culture. Do your market research.
It is not just customs that we need to worry about—we could inadvertently violate laws. For example, some countries allow calls only between certain hours of the day, while others have no restrictions. Still others have very specific laws as to how emails are sent, and so on.
Whether violating customs or laws, both can get companies into real trouble.
Selling can also be different among different markets. Some markets conduct business only after they have met face-to-face, wined and dined, and shaken hands. Others are comfortable closing large amounts of business over emails and phone calls. Customs and traditions are a big deal when it comes to sales.
Salespeople need to have “situational fluency” in the new market. They need to speak the language, know the right words and terms to use, and adequately understand their customers’ business and how they make money (which means understanding their customers’ customers) in order to truly engage their prospects.
Furthermore, size matters. Even in the same vertical space, the size of the customer can make a huge difference. For example, very large banks may behave differently from small community banks. If you are currently selling to very large banks, you may find it difficult to conduct sales with community banks, and vice versa.
This may require that you hire different sales reps who have the right background in the new market you wish to enter. It could also mean that you need to manage and compensate them differently.
We think of positioning as a shortcut to sales, as it refers to how you make it easy for customers to buy your products by creating a brand they recognize and trust. That is a deceptively loaded statement.
By definition, you have no position in the new market since few customers, if any, know you exist. Only visionaries buy from someone they don’t know who promises to give them something they want badly. The problem in selling to visionaries is that they have their own ideas of what they want from you and are constantly requesting custom jobs. If that is what you want, fine. Otherwise, if you want to sell products, you must focus on the mainstream market.
That is where positioning is really critical.
Remember, all sales are replacements of something already in place.
- Pragmatic buyers need to see documented evidence that your product will do what you claim it will do for their business before they rip out what they have and replace with yours. They want to see case studies, benchmark studies and the like. Even more so, they want to see what other companies that they regard highly are using your product. That’s the catch-22.
- Conservative buyers are even worse. They want to know that you have been in business for a long time (think a decade or more), have a large installed base, and that you have some highly recognizable names as customers— before they even think of buying from you. Then they want deep discounts.
Winning Strategic Accounts early in the new market is the key to winning in the new market segment.
Critical Success Factors for Entering New Markets
As we see it, there are three critical success factors (CSFs) to success in a new market segment:
- Select a segment that is as adjacent to your current market as possible so you can leverage name recognition and validation.
- Win at least 3-5 Strategic Accounts as early as possible. These are the linchpins in that new market. As they go, so will the rest of the market.
- Invest adequately in product development, support, marketing and sales for two years minimum. New market entries typically fail because they are starved of the resources they need— or worse, senior management pulls the plug on the whole project too early because of unrealistic expectations that will likely not be met.
In conclusion, while new market entries are a viable way to grow a company, they should only be undertaken after significant internal discussion has resulted in a strong consensus and commitment on the nine elements discussed above, and after adequate preparations on each element have been made.
Companies are especially advised to seriously consider the three CSFs and to refrain from entering new markets until they are fully committed to ensuring that the CSFs will be met.
SOMAmetrics provides the consulting and implementation services necessary to assist clients in successfully entering and developing new markets.
Please contact us for an initial discussion.