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Market Entry Theory and Practice
1. Market Entry Theory and Practice
Presentation to
NSW Natural Gas: Full Retail Contestability
Charlie Nelson
foreseechange pty ltd
www.foreseechange.com
2. 2
Topics
• Possible incumbent advantages
• Telecommunications case study
• Gas market growth
• How many competitors can the industry support?
• Predicting market shares
• More on price
• Benefit segmentation
• Brand differentiation
• Other marketing strategies
• Conclusions
3. 3
Possible Incumbent Advantages
• Technological leadership
– Experience curve effects or R&D success
– Less relevant when entrants come from overseas
• Pre-emption of scarce assets
– Raw materials, distribution
– Compass complained that they were not given adequate
airport terminal access
• Switching costs and buyer choice under
uncertainty
– Late entrants have to invest more to overcome costs
buyers see when switching or to overcome product
performance uncertainty amongst risk averse buyers
5. 5
Stages in Contestability
Telecommunications Case Study
Disguised Data
100
90
80
70
60
50
40
30
20
10
0
Monopoly Duopoly Open Competition
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Time
% Market Share
Incumbent First New Entrant Second Third
6. 6
Issues Suggested by Case Study
• Duopoly
– What market share will be gained by the new entrant?
– What factors influence this?
– What period of time will it take to gain that share?
• Full contestability
– What shares will new entrants achieve?
– Will the original incumbent or the second entrant be
hurt most?
– How many competitors can the market support?
7. 7
Telecommunications Duopoly
• Telstra had a large segment of dissatisfied
customers who welcomed the opportunity to
switch
• Optus had a cost advantage and could charge up to
10% less
– Telstra attempted to blunt this with pricing plans
– Which is cheaper? It depends!
• Inertia was high – companies and households
wanted time to evaluate the new entrant
• Optus brought on pre-selection too early (asked
customers to make a commitment) and inertia
counted against them
8. 8
Open Competition in
Telecommunications
• 15 competitors initially, now down to 5
– Suggestions that One.Tel were selling services at a loss
plus they strayed from their core area of expertise
– Further consolidation likely
• Optus up for sale
• Telstra’s share price plunged on news that revenue
and profit forecasts were too optimistic
– Hit by competitive pressures plus a market slowdown
influenced by the economy
10. 10
Gas Market Growth
• In telecommunications, Telstra’s share price has
plunged as a result of a downgrade in revenue and
profit forecast
– Attributed to the economic slowdown and competitive
pressure
– One.Tel has collapsed
• A quickly growing market will tend to offset loss
of share to competitors and may lessen the
prospects of a price war
• So, what are the growth prospects for the gas
market?
11. 11
ABARE’s 1999 Forecast
Average Annual Growth Rate 2000 to 2015
• Australia
– Natural gas 4.0%
– Electricity 1.5%
• NSW
– Natural gas 3.3%
– Electricity 1.3%
• These are averages and economic growth volatility
suggests that growth will be lower in some years,
possibly close to zero
12. 12
Growth Opportunities and Threats
• Opportunities
– ABARE’s residential forecast is based on consumption per person,
but households are growing much faster than people
– More switching from electricity to gas than ABARE allowed for,
due to lower carbon emissions (especially in Victoria)
– Switching from electricity to gas to secure better quality, more
reliable electricity (microturbines, fuel cells)
• Threats
– Switching from gas to solar hot water
– Global warming (less space heating)
14. 14
No Growth in Traditional Families
2000
1800
1600
1400
1200
1000
800
600
400
200
0
'000
1988 1991 1994 1997
couple only
couple + kids
single parent
15. 15
Highlights of ABS Household
Projections
• Between 1996 and 2021, the population will
grow by 24% but the number of households
will grow by between 38% and 46%
• Average household size to decline from 2.6
to between 2.2 and 2.3
• Couple families without children to exceed
couple families with children by 2020
17. 17
Some Generalizations
• Based on Kalyanaram, Robinson, and Urban (1995) “Order of market
entry: established empirical generalizations, emerging empirical
generalization, and future research” Marketing Science Vol 14, No. 3,
Part 2.
• For mature consumer and industrial goods, there is a
negative relationship between market entry and market
share
• In mature consumer and industrial goods markets, early
entrant market share advantages slowly decline over time
18. 18
Other Industries in Australia
• Telecommunications
– Full deregulation in 1997 led to 15 competitors but consolidation and exits
will probably leave 3
– The 5th, One.Tel, just went under
– The 2nd, Optus, is up for sale
• Passenger Airlines
– Several collapses (Compass twice, Impulse)
– Two competitors on most routes, Virgin makes three on larger
routes
• Banking
– The “four pillars” policy is artificially keeping four big
competitors
– Without that policy, there would be two big competitors plus niche
competitors
19. 19
Likely Outcome in Energy
• 2 or perhaps 3 viable full service
competitors
• Plus possibly some niche competitors
• It is interesting to note the potential trend
back to government ownership in
Telecommunications and airlines – but it is
the Singapore government buying, not the
Australian government
20. Predicting Market Shares
The Influence of Brand and Other
Attributes
An example of conjoint analysis
21. 21
Breakfast Cereal Case Study
• This is a simplified example and real world studies
are not in the public domain
• 90 marketing students at Sydney University
participated in a conjoint analysis study as an
educational exercise that I conducted
• In discussions, we identified the important
attributes
• Then we developed an experimental plan to vary
the attributes by brand
• And developed a market simulation tool
22. 22
Breakfast Cereal Attributes
• Brand
– Kellogg, Uncle Tobys, Sanitarium, No Frills
• Price
– -30%, -10%, +10%, +30%
• Sugar content
– Low, high
• Fibre content
– Low, high
• Fat content
– Low, high
• Toys in pack (suggested by the boys)
– Yes, no
23. 23
Experimental Design
(cards were ranked by respondents)
Card Brand Sugar Fibre Fat Toys Price
1 Kellogg High High High No -10%
2 Uncle
Tobys
Low Low High No +10%
3 Sanitariu
m
low High High No -30%
4 No Frills high low high no +30%
5 Kellogg low high high yes +10%
15 Sanitariu
m
high low low yes +10%
16 No Frills low high low yes -10%
25. 25
Scenario 1 (all brands equal)
No Frills Uncle Tobys Kellogg Sanitarium
Sugar High High High High
Fibre Low Low Low Low
Fat High High High High
Toys No No No No
Price 0% 0% 0% 0%
Preference
4% 25% 62% 9%
Share
26. 26
Scenario 2 (realistic prices)
No Frills Uncle Tobys Kellogg Sanitarium
Sugar High High High High
Fibre Low Low Low Low
Fat High High High High
Toys No No No No
Price -15% -5% +5% -5%
Preference
8% 35% 49% 8%
Share
27. 27
Scenario 3 (Sanitarium Low Sugar)
No Frills Uncle Tobys Kellogg Sanitarium
Sugar High High High Low
Fibre Low Low Low Low
Fat High High High High
Toys No No No No
Price -15% -5% +5% -5%
Preference
3% 24% 44% 29%
Share
28. 28
Cereal Case Study Conclusions
• Despite the artificial simplicity and the non-random
sample, the market share predictions are
remarkably accurate
• The relative importance of brand, price, and other
attributes have been quantified
• Conjoint analysis and choice modelling (a similar
technique that focuses more on discrete choice
rather than preference) have been applied with
success in new product or new market entrant
studies in industries such as telecommunications,
airlines and finance
30. 30
Pricing Considerations
• Price is the only marketing variable that directly
determines revenue and, because it affects
quantity sold, affects cost as well
• In a competitive environment, it is important to
keep prices at levels that ensure industry
profitability
• Prices influence market growth as well as market
shares
• Price is seen by some consumers as a quality
signal
31. 31
Price Discrimination
• Price discrimination occurs whenever there are price differences
for the same product or service sold by a single seller that are not
justified by cost differences
• If different consumers have different price sensitivity then price
discrimination can boost profits
– Difficult to identify price sensitivity of individual customers
• Price discrimination exists despite identification and legal
problems
– Student and pensioner discounts
– Airfare discounts – differentiation on the “restrictions” attribute
• Opportunities in energy
– “green energy”
– Peak/off peak
– Quality differentiation
32. 32
Retail Price Sensitivity
• Several independent research studies confirm that
about
– 20% of consumers are very price sensitive
– 30% trade off price and other attributes such as
convenience and quality
– 50% are more concerned about convenience, quality,
service, or other factors and price is of relatively low
importance
• This may vary by industry
– eg higher in air travel because there is a high market
size elasticity as well as market share elasticity
• It certainly varies over time and by demographics
33. 33
Retail Price Sensitivity Variation
Low
Medium
High
Price Sensitivity Segments
Source: foreseechange
100
80
60
%
40
20
0
Sep 97
Mar 98
Sep 98
Dec 97
Jun 98
Dec 98
Quarter Mar 99
Jun 99
Sep 99
Dec 99
Mar 00
Jun 00
Sep 00
Dec 00
Price
Sensitivity
34. 34
Determining Market Share Price
Elasticity
• Analysis of time series data if available
• Analogy from other countries or industries
• Simulated choice modelling
– Where it has been possible to compare with
time series analysis, elasticity estimates are
quite similar
35. 35
Benefit Segmentation
• Consumers differ on the relative importance
attached to attributes such as price, quality, and
customer service
• With knowledge of benefit segmentation, it is
possible to differentiate the product so as to
maximise profit (not necessarily market share)
• Benefit segments can be identified in market
research through conjoint analysis or cluster
analysis of an attitudinal battery
36. 36
Brand Differentiation
• Brands are still very important to
consumers, although less important than 25
years ago
• Brand differentiation is important,
especially in defending market share
• Australian ownership and environmental
credentials are two potentially powerful
differentiators
37. 37
Brand Choice in Supermarket
Most Important Reason for Brand Choice
Source: ACNielsen
0 5 10 15 20 25 30 35
Quality
Brand usually buy
Price
Where made
Environmentally Friendly
Other
%
97
99
38. 38
Brand Choice in Supermarket
Factors Important - Multiples Allowed
Source: ACNielsen 1999
0% 10% 20% 30% 40% 50% 60%
Brand usually buy
Recently advertised
Packaging
Where brand made
Quality
Price
Environmentally friendly
Other reason
%
Dick Smiths
segment
Green
segment
40. 40
Bundling
• Bundling involves selling products in packages – eg a travel
package includes transport, accommodation, meals,
entertainment, etc
• If properly developed and implemented, a price bundling strategy
can enhance customer’s perceptions of value, provide competitive
advantage, lead to cost economies, and effect a profitable pricing
strategy
– In insurance, some people want to buy a portfolio of insurance
products from one company, others want the best deal on each
type of insurance
• If improperly done, it can lead to lost sales, reduced profits, and
lower customer satisfaction
– Bundling home loans at a discount with energy offends the
majority of households who do not have a home loan and don’t
qualify for the discount
• The key is to understand customer segmentation
41. 41
Loyalty Schemes
• Sometimes called “disloyalty” schemes because most
consumers belong to more than one and choose between
them for each transaction
• A good example of the power of loyalty schemes is Coles
and Woolworths
– Coles has fly buys and share holder discounts, Woolworths have
neither
– Yet Woolworths market share and share price is higher than Coles
• Moral: get customer service right
– If you don’t, a loyalty scheme won’t help
– If you do, you don’t need a loyalty scheme
• Few, if any, loyalty schemes are being effectively used for
1 to 1 marketing
42. 42
Conclusions
• The market can probably only support 2 or 3 full service
competitors
• Incumbents can have several advantages over later entrants
• Pay attention to growing the market as well as market
share
• Price sensitive customers are easily won and easily lost
• Need to be able to withstand a price war at some stage –
possibly during a market slowdown
• Understanding market dynamics and segmentation is vital
to development of a profitable portfolio and, ultimately,
survival
43. 43
For more information ...
• Market Defence and Entry
– Defending market share against a new entrant by Roberts, Nelson, and
Morrison, in New Directions in Corporate Strategy by Twite and
O’Keefe, AGSM
• Market Modelling
– Marketing Models by Lilien, Kotler, amd Moorthy, Prentice-Hall
• Pricing
– Pricing: Making Profitable Decisions by Kent B. Monroe, McGraw-Hill
• Conjoint Analysis and Choice Modelling
– www.futuretoolkit.com/conjoint.htm
