No one wants to run as fast as they can just to stay in one place. When new entrants decide to fight their way into saturated markets, they may face this sort of treadmill situation. Gaining customers ends up as a bitter price fight, ending in lower profits for everyone.
So the first piece of advice is to choose a market that isn’t saturated so that that your profits don’t have to come from your direct competitors. However, whether you choose a less saturated market or not, don’t go in without a business strategy! This is a corporate level strategy: which businesses should you be in? This decision process is often hampered by myopia for what is near and familiar. I wrote a bit about that recently, whereas in this piece I want to focus on business strategy.
Once a market and business type has been selected, there are four generic business strategies that an entrepreneur can adopt when entering a market. The first is a mass market product line differentiated based on quality as excellence or reliability. This is more suitable in markets with fragmented high end offerings and low saturation over all. The second strategy is to adopt a low cost business model offering mass market products at lower prices. This type of strategy is often successful, though usually unpopular among incumbents and may be met with sharp reactions. The third option is to specialize in a niche—a segment of customers that have some differentiable needs. Since it is more profitable for incumbents to have more generic products that cater to a mass market, this customization strategy can be effective at splintering incumbent monopolies. The fourth option is low cost niche focus, targeting customers that would not normally buy by giving them simplified versions of products.
Usually, new entrants come in with one of the two niche strategies, but the two mass market strategies are also effective in fragmented industries. Which strategy you choose will make a big difference to how you do business and how customers think of you.
Strategic management dogma (e.g., M. Porter and associates) states that any company stuck in the middle between a low cost and differentiated offering will confuse their stakeholders and therefore fail. Recently, Clayton Christensen has shown how nice market entries tend to be more effective, especially if they cater to customization, convenience, affordability, and simplicity needs. Incumbents often offer bloated products and services that do more than what is needed by any given segment of users. Finding that sweet spot is what he called “disruptive innovation”.