Market fragmentation

Market fragmentation refers to the division of the market into small fragments, each with specific characteristics, preferences and needs. The division may be a result of various factors. This includes consumer preferences, new competitors and technological advancements.  Gaining perspective on fragmentation helps businesses in dominating markets to target specific sets of populations and cater to their needs better.  

However, businesses need to understand the reason for such fragmentation to achieve domination. They should additionally tailor solutions that remain unmet in the market to tap its full potential. These help a business stay afloat and stay ahead of the competition. Conducting market research, harnessing technological updates, and developing tailored market strategies are three things that help them dominate the fragmented markets.  

Implementing these is not a cakewalk for most companies. Conquering the market is difficult when there are limited economies of scale, increased competition, difficulty in reaching customers and resource constraints for the company. Additionally, market volatility and uncertainty of fragmented markets add to the challenge. These factors can be challenging for large companies, as mass marketing efforts may not yield the intended results. Companies have to implement varied strategies and monitor the pricing policies of competitors. Hence, these companies need to think, innovate and adapt continuously strategically.

Given below are some of the reasons that cause fragmented markets. 

• The population naturally has a mix of individuals with varied interests. 
• Customers prefer high degrees of personalization of products or services. 
• They may choose certain products and services due to their value and belief systems. 
• Technological advancements drive certain changes, and this may result in changes in the existing preferences of customers.  
• Globalization and liberalization have led to the opening of markets and the influx of new products and services. People can shift their preferences in accordance with their lifestyle changes.  
• Regulatory changes can induce consumer preferences, such as a higher tax duty on fast foods may give rise to healthy snack options or organic food options, etc.  
• Economic shifts can also contribute to market fragmentation by altering people's purchasing power.

Given below are some of the types of fragmented markets

#1 - Technological development: Transformation always happens in the field of technology. As innovations come up, people tend to upgrade their choices, too. This phenomenon can fragment the market.

#2 - Financial market fragmentation: The world of finance has expanded from mere accounting to tax and service provision, among other things. Hence, it is a fragment where the finances of individuals are maintained. Insurance can also be included under this category.

#3 - Construction: Construction fields have evolved from individual houses to flats and apartments. Even in apartments, there are one-bedroom, two-bedroom apartments, etc., with a market for each preference.  

#4 - Healthcare: Drugs and pharma companies can produce different drugs for different ailments. Similarly, services are to be offered differently for people according to their age and medical history. Similarly, some people prefer traditional medicine and modern medicine, and some prefer both.

#5 - Clothing industry: This is one of the most fragmented industries where people of the same age prefer different choices. Some may prefer clothing of a certain fabric, length, price, or quality. The trends often change fast here

Let us look at some examples to understand the concept better.

Example #1 - A hypothetical example 

Imagine, Greatbooks is a financial service providing company that navigated the financial market fragmentation. They noticed that several companies offer residential and non-residential accounting services. In the times of globalization, many are educated and work abroad. The company found a group of people who are non-residents and require retirement planning. They are from different countries, so knowledge of tax formalities across nations is required. Great books could offer this service.

This consumer market fragmentation allows the company to capitalize on an existing demarcation of population. Providing them services helps them tap in and get the first mover advantage. 

Example #2

Another example is associated with the credit guarantee market. The market faces risks of fragmentation as new multilateral lenders emerge. The inflow of institutions offering credit guarantees could lead to strong competition over pricing, undermining the effectiveness of these guarantees. It was highlighted that the MIGA’s (Multilateral Investment Guarantee Agency) 35 years of expertise in providing credit enhancements and political risk insurance could be compromised if the market becomes too fragmented. To address this, the World Bank Group plans to consolidate its guarantee structure to triple its annual guarantees to $20 billion by 2030, focusing on renewable energy and other global challenges. 

Given below are some of the advantages and disadvantages of a fragmented market:

Advantages

• No single competitor: There is increased market competition in a fragmented market; hence, there is no monopoly. This information also indicates that no particular company has a mass following compared to the rest. This means there is equal competition and no visible customer loyalty. This can be taken advantage of by new companies entering into the market.
• Easy entry: A fragmented market allows easy entry and exit for companies. This is especially beneficial for small companies and doesn't require much capital. Local promotions by these companies can be cheaper and help them achieve a position in the company.
• Competition and innovation: There are a number of competitors in the market, and hence, the business is always in competition with each other. This pushes the companies to innovate constantly and would help the company's growth and development.
• Small enterprise benefits: Small enterprises generally do not have that many resources to cater to the masses. They also cannot market to a large population, and hence, small businesses can limit their marketing strategies to one fragment of the population and still make a profit.
• Consumer benefits: There is heavy competition, and hence, there will be a variety of products or services to choose from. The consumers get good quality products and services at competitive prices.

Disadvantages

• Innovation depends on the fragmented population: If a market fragment has limited preferences, innovation opportunities may be restricted. This is because innovation involves feasibility testing; if that fails, there will be no point in innovating. This makes the fragment less exciting, and products may seem similar.
• Economies of scale: Fragmented population has limitations of numbers and small businesses especially cannot achieve economies of scale. Economies of scale reduce manufacturing costs, giving them a large profit share. In excessive market fragmentation, the profits are further reduced.
• Requirement of constant strategic thinking: Constant monitoring of trends is a necessity in such markets. This can be exhaustive both in efforts and the resources required to draft and implement them. Additionally, there may be constant changes in the preferences of people, which may be difficult to keep up with.

The main differences are the following:

Concept: Market fragmentation is a situation where the marketplace breaks into small markets. These markets contain small sets of people who have distinct preferences and choices. Whereas, market segmentation is a strategy adopted by companies to divide a market based on consumer preferences and choices for marketing convenience.

Characteristics: Fragmented markets have a degree of inconsistency. Many companies exist, and hence, they are highly competitive. In contrast, market segmentation results in homogeneous groups, as business categories are organized in a particular order.

Purpose: Fragmentation is a natural process that results from an evolving market. Hence, companies react to the existing diversity of a fragment. Segmentation is done to derive maximum benefit from a marketing strategy.