We’ve all heard the old adage “jack-of-all-trades, master of none.” No other statement can better describe a company’s attempt to serve too many markets.
Straightforward logic would assume that more fish in the pond would translate to an increase in sales and profits. However, the benefits typically do not extend below the company’s sales line. A careful study of corresponding costs and risks to the organization should take place before entering a new market.
To meet the needs of a new market, additional resources are required. One of the highest organizational costs is sales channel development and management. If the products/services are sold to a new market, an organization’s current sales channels do not typically connect with them. The path to a new market requires the building of a new “road.” An organization’s current “roads” lead to different markets. Therefore, an organization needs to build the “road” with additional sales staff and/or develop another distribution or rep network. The cost is not only the increased headcount, but also the time and expense to research, interview, travel, and negotiate.
Another significant cost to new market entry is marketing communications. Just like the building of new sales channel “roads,” new marketing communication tools must also be “built.” Similar to learning a new language, a company must demonstrate that it understands the market or people quickly figure out “you’re not from around here.” Marketing material such as sales literature, technical specs, and websites must use the market’s terminology and highlight features that it values. Therefore, an additional set of marketing material needs to be produced and maintained.
Just like new sales channels, new communication channels will also need to be “built.” A true market player needs to be seen and heard. Therefore, new trade associations, publications, forums, and shows need to be researched and added to the budget.
Will the target market require new variations to your products or services? An organization’s technical resources will be required to design, develop, and test the new variants. Even a “simple” color or code change may involve hundreds of hours of technical development. There are additional operational costs to consider. Will additional inventory, programs, and suppliers need to be added and maintained?
An increase in a company’s costs to serve a new market is not the only evaluation factor. Risk is also a large part of the market analysis.
The biggest risk in adding a target market is loss of organizational focus. It is common (I know because I lived it many times!) to bypass all the above costs and absorb them into current staff and budgets. Vince Lombardi attributed his success to keeping his team focused – like learning only a handful of plays and executing them to perfection. More “plays” (markets) to be executed by the team takes away from the focus that leads to excellence. “Jack” wouldn’t have lasted long on Lombardi’s team.
An additional market will also add more customers, competitors, regulations, and industry news to track, further stretching resources. Interestingly, a typical reason organizations provide to justify entry into new markets is risk diversification. However, without a clear understanding of the market’s dynamics and drivers, organizational risk is increased, not decreased!
Another risk to consider before entering a new market is competitor reaction. Are you poking a sleeping giant?! Will an entry into a competitor’s core market initiate an in-kind response? If their retaliatory response is a price war, does the organization have the means to withstand an assault?
Before jumping into a new market, a company should consider if it has done everything to gain additional market share in its current markets. If the organization is not a major market player (35%+ share), resources are better used to grow share as its “roads” are already developed. It may require widening the road by adding distribution or product variations. Moreover, a market penetration strategy allows an organization to avoid the costs, risks, and time with a new market entry strategy, providing a much better return on investment.
Don’t be like “Jack” of jack-of-all-trades fame. When it comes to target markets, less is more.
The temptation to enter new markets is great. But so are the costs and risks associated with it.
Chad Kaderabek is the business development director for K4 Innovations, LLC.
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