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The downside of market fragmentation

January 9, 2013

market fragmentation

The advantages of accessibility and agility in the modern technology world comes with many benefits for the small players – the word ‘disruption’ is used frequently. It’s helped reshape entire industries, bring down powerful but inefficient established brands, empowered social enterprise, given consumers more choice and therefore empowerment and reinforced the hope of achieving that faint but realistic dream – of starting your own company and doing well at it. The opportunities for smaller, more agile players will continue throughout 2013, as a whole new generation of entrepreneurs competes for venture capital and to spruik their business ideas, addressing increasingly fragmented markets.

While traditional venture capitalists sought mostly the opportunities that would net the largest potential audience, the current climate is such that audience size no longer matters as mush. A different product exists to address every segment of the market in just about every industry there is. Business ideas can now be profitable and return revenue even when targeting only a fraction of their addressable market, due largely in part to the growth of transactional business models. Similar to a ‘freemium’ mobile application concept, transactional business models enable businesses and consumers to use platforms normally without any upfront cost, with payment only occurring when someone actually sells something. It’s the next step along the path from ‘cost per click’ of course.

So in such a model , assuming the challenger keep their costs to,freemium,mobile, a bare minimum – they can generate customers and revenue before they ever have to approach fund managers to secure investment – by which time they have already proven profitability for a certain segment of a certain market and therefore minimised the risk to the investor. I’m not sure what the next mass audience product will be, but if investors have learnt anything from the MySpace, Facebook, Groupon and Instagram debacles, it’s that paying big money  for a large audience is no  longer a way to guarantee revenue. By the way – why those investors didn’t learn this from the share prices of media organisations over the last 10 years, I’ll never know.

Paying top dollar to invest in a product that users love, means only one thing: the product must change to extract revenue from those users and return value to shareeholders, which in turn almost always implies that consumer sentiment toward the product will change. For the first time we’re seeing users beginning to leave Facebook and seek alternatives – this blogger uses Path as an intimate, private social network for example, but even that will undoubtedly have to commercialise at some point and introduce various forms of transactional and/or advertising capability. Until then – it’s a beautiful user experience. The recent Instagram stoush which saw thousands of users try to delete their accounts was in response to an attempt by that company to modify terms & conditions to give them the ability to sell any image on the site without compensating the owner of the image. Naturally, once the outcry happened, Instagram backflipped, blamed their lawyers for creating ‘unclear terms and conditions’, a position I am sure their legal team felt happy about…but it gave Instagram the chance to back out of their proposal.

By the time they had done this though, millions of global users of the platform were already seeking alternatives – seeking a challenger brand with an equal user experience that they could shift their imagery to, because as everyone knows – in this day and age, there is always a challenger brand waiting to snap up your business, or to take your customers away.

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