What is a Market?
The term “market” is a very common term in the business industry. We talk about the automotive market, the produce market, the disk drive market, etc. And yet, what do we really mean when we use that term? It is an instructive question because very often CRM (Customer Relationship Management) systems or other sales analytic systems group customers and sales based on their “market”. However, if we don’t have a clear understanding of what a market is, we misrepresent and misgroup and therefore mislead ourselves as we study the implication of our advertising and promotional efforts.
The Historical Market.
Historically, markets were physical places: marketplaces. People went to the market in order to conduct trade. In many communities there was a single market where all goods were bought and sold. However, as communities became larger and developed into cities, marketplaces began to specialize and there was a particular place to go to buy and sell fresh produce. There was another place to go to buy and sell spices; and yet another to buy and sell furniture.
As time progressed and the economy became more and more differentiated and cities grew larger and larger, marketplaces became even more specialized and more geographically localized. So, for instance, we have the diamond marketplace in Antwerp, Belgium, and the screenplay marketplace in Hollywood.
Why Did Physical Marketplaces Emerge and Dominate?
The trend toward physical marketplaces was not necessarily inevitable. Buyers could seek out sellers at their own place of business and conduct business that way. Conversely, sellers could seek out buyers in their own place of business. What led to the popularity of the marketplace were two factors. One was that the physical movement to the marketplace was collectively more efficient for most of the participants. The second reason was that the marketplace allowed easy selection and comparison between similar offerings. Additionally, the cost of information about potential sources or demands for a given product or service was not nearly as economical as it is today with computers and the Internet.
Why Did Marketplaces Specialize?
Marketplaces specialized because the sheer volume of selection and choice eventually became overwhelming. Imagine in the current day if we went to a marketplace where every possible product and service was available for sell from every possible supplier. The marketplace would be so vast that none could traverse it. It certainly makes one wonder how COMDEX was as successful as it was. A general-purpose electronics show offers far more variety than most participants would deal with. So, as the marketplaces became larger, they began to self-organize into specialization of offerings.
But Why Did They Choose the Specializations That They Did?
Why, for instance, did a marketplace in antique furniture develop and not a marketplace of chairs? Each is a specialization. The chair marketplace could conceivably offer a wide variety of chairs, an infinite variety of chairs, including antique chairs. It would allow buyers to select the widest possible range of chairs. But that is not what occurred. What occurred was an antique furniture marketplace where buyers could buy antique chairs, antique tables, antique hutches, etc. And in parallel, a marketplace for contemporary furniture has emerged. We see this in virtually every market that we look at. There is not really a car market or marketplace. There is a luxury car market, an SUV market, a luxury SUV market, etc.
What Makes a Market?
In modern times, we only occasionally rely on a physical marketplace to define a market. Buyers and sellers get together and conduct business outside of a physical or even virtual marketplace.
However, we still have the useful concept of a “market”. As with many other categories, we group together or lump historical activity into categories with the intent that if the categories are well-chosen and most members of the category are representative members, then predictions made about the category will be valid for many of the members.
So what forms the basis of the categories? Categories can be based on attributes of the offering. So, for instance, we could make up a category of blue cars. Using blue as a possible attribute of cars and we could group buyers and sellers into the blue or not blue market place. But unless “blueness” was a selection metric, this is not how the market will form.
No, markets form when a group of customers begin selecting products or services based on one or two characteristics of an offering. For hundreds of years there have been potato markets. Generally they competed on the basis of price and perhaps freshness. But when McDonalds began buying potatoes based on length and straightness (they wanted long french fries to stand up in those little cardboard envelops) a market emerged to satisfy this demand.
In “The Innovators Dilemma” and “The Innovators Solution” Clayton Christensen outlines case after case of how markets formed around one set of metrics, but the incumbent vendors oversupplied the metric they were competing on, and left room for a new entrant to compete on a different metric. Eventually a new market emerged to serve a segment of the prior market who were more interested in the new metric of competition.
So for instance, the computer disk drive market at one time primarily competed on capacity and price per MB of capacity. For years each season brought bigger and bigger drives at lower and lower cost per MB. At one of the firms the engineers “invented” a smaller (8”) disk drive, but none of the existing customers were interested in a drive with less capacity and greater cost per MB for what it had.
The engineers defected and started a new company which had rough going for a while until the mini computer market emerged, which had slightly different selection criteria. The capacity of the mainframe drives already exceeded what they needed. They were
more interested in total cost of the unit, and the footprint. A second market emerged to supply these metrics to these new customers. Christiansen goes on to describe how in some cases (the disk drive being one of them) that the continued improved in the new market eventually crowded into and displaced the established players from the existing market.
For the purpose of this paper, though, we are more interested in how new markets come to be. And this is it. The way we currently define markets based on the SIC codes and the like is deeply flawed and does not produce categories with comparable attributes. Until we begin to discover what really creates and defines the boundaries around markets our categorizations are not going to be very useful.
Christiansen goes on to say in the Innovator’s Solution that failing to distinguish which markets you make offers to are in the, what he calls, “sustaining” category and which are in the disruptive category, will lead to marketing and financial ruin for the unwary.
Conclusion
To wrap it up, we believe that a market is a categorization based on a tacit agreement between a group of buyers and sellers as to what are the important selection criteria or selection metrics for the offering. Markets so defined do not have static long-term boundaries; they are constantly in flux. Marketing executives and professionals involved with analytics and business information would do well to align their market segments with this definition, as we believe that the group of customers or suppliers who share common selection criteria will also share much more common behavior and reception to specific promotional activities.
