Market definition is a tool to identify and define the boundaries of competition of a market.

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Does the Wall Street Journal compete with other financial newspapers or financial information services, for example, Bloomberg and Dow Jones. If so does it compete with some of these or all of these?

Approaches for defining markets such as these include:

  • Substitution
  • Common needs
  • Product-based market definition (features)

Defining markets based on substitution

The classical approach to market definition is to focus on substitution.  If people replace one product with another, why do they do it? Is it because they prefer another product? Is it because they cannot buy the one they usually get? Or, is it because they are induced by price or some other marketing activity? If so, then the products are substitutes.  The market for a product is then defined by degrees of substitution.  If people substitute colas for energy drinks, then they are in the same market.

Common needs/Jobs-to-be-done

A related approach to a market definition is to define markets in terms of common needs.  Let's take a look at the snacking market. This includes products like confectionery and chips. It is a market defined by the need to consume a small item of food (i.e., a “snack”). The fast-food market is defined based on the need for quickly prepared food and a convenient location.  This approach follows the same basic principle as substitution, with the difference being the type of data.  That is, substitution focuses on the substitution behavior, and needs focus on the cause of the behavior.

Sometimes a needs-based market definition is referred to as defining the market based on jobs-to-be-done.

Product-based market definition (features)

Product-based marketing strategies focus on a company's product offering rather than any particular customer. Defining markets is to describe the market in terms of the features of the products in the market.  This is sometimes referred to as taking a product view of the market.  Evian completes in the market for bottled water.

That is, there are two features of the product that define its market: it is water, and it is bottled.  This definition could be further narrowed to only premium bottled water. Products would then be classified as being competitors or not, based on their price. The definition could be further narrowed to include how the water is obtained. For instance, is it a premium natural bottled water? Is it carbonated i.e. a premium natural carbonated bottled water?

Other approaches

Product-based market definitions can also include non-product features, such as how they are to be used and how they are sold.   Sometimes it is useful to include in the market definition aspects of the extent to which the product needs to be assembled, such as meal kits versus frozen meals, pre-assembled versus DIY furniture kits.

Market definitions can be based on the assumed expertise and usage levels of users, such as basic versus “professional” software and domestic versus commercial cleaning products.  The market definition may also include the distribution channel; most commonly, packaged goods manufacturers distinguish between grocery, which means supermarkets, and route, which usually means all the smaller shops, such as convenience stores and service stations.

Choosing an approach for market definition markets

Textbooks generally advocate the use of needs and substitution for market definition. However, neither approach is common outside of brainstorming sessions and court cases.   Both approaches have substantial measurement problems.  Obtaining data on substitution can be extremely difficult.   Consider the competition between, say, tap water and Evian bottled water.  There is lots of sales data on bottled water, but the consumption of water from taps and drinking fountains is not captured at any point of sale, so good data is hard to obtain.

The needs-based approach is problematic for different reasons.  Sure, it’s easy to ask consumers questions about their motivations for buying different products, but the resulting data is often too superficial to be helpful.  Learning that somebody drinks water because they are thirsty is not sufficient for market definition purposes.  It is also not helpful to learn that people prefer to drink from drinking fountains since it is cheaper than purchasing bottled water.

Numerous qualitative techniques have been developed for probing beyond such superficiality, and although these techniques can provide insight for lots of problems, they are too unreliable to be used in market definition.   One researcher might package the obvious as profundity (“Sometimes water is just water”); another may note the link between water bottles and the comfort of being bottle- and breast-fed as an infant, or that bottled water is about asserting a deep-seated need for control or a demonstration of social superiority.

The distinction between substitution, needs, and products as ways of defining the markets is not as great as it may seem.  The reason that product definitions are straightforward is that they are precise and easy to communicate and implement.  However, a decision still needs to be made about which aspects of the product to focus on; and this decision is made by reflecting on needs and substitution behavior.  Thinking about wireless internet devices, it is only by thinking about needs and substitution that we know which features of the product are key for defining the market (i.e., that we focus on the product being wireless, rather than, say, its size, color, or country of manufacture).

Regardless of whether we define a market based on needs, substitution, or product features, we need to make a decision about how broad the definition needs to be.  Should we be focusing on communication, the internet, wireless internet, wireless internet that uses the phone network, or wireless internet that uses the phone network and is plugged into a USB port?  The strategic objectives of the segmentation generally answer this question.  Is your goal to increase sales of Pepsi Max? If so, you may define the market as consisting of cola and energy drink consumers.  To identify opportunities for increasing the Coca Cola Company’s share of “throat”,  you will likely focus on all beverage consumption occasions.  If you are trying to identify the next flavor rotation for Coke, such as Coke Chili, you will perhaps want to focus on lapsed cola drinkers.

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