What is a fragmented market? (Plus features and examples)

By Indeed Editorial Team

Published 22 November 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Fragmented markets provide a platform for small businesses to operate. The lack of a dominant company to influence customers and the low barriers to entry make it easier for small and medium-sized companies to start operating. Learning about fragmented markets can help you identify and leverage them for success. In this article, we answer the question ‘What is a fragmented market?' by describing its features, providing some examples, discussing its benefits and outlining tips you can use to overcome its challenges.

What is a fragmented market?

The answer to 'What is a fragmented market?' is that it's a marketplace in which no single company has enough influence to steer the industry in a specific direction. As a result, it comprises several small and medium-sized businesses that compete with themselves and larger companies. Since no single product dominates the market, companies often specialise in specific products to succeed. This specialisation can make it challenging to leave other businesses behind.

Related: Emerging market: definition, types, risks and benefits

Features of fragmented markets

Fragmented marketplaces have several distinct characteristics. Some of their features include the following:

There are low barriers to entry

Entry barriers are the various obstacles that make it challenging for new companies to start in a particular industry. These barriers protect the revenue of existing organisations in the market. There are three classes of barriers: natural, artificial and policy-based. Natural barriers commonly occur in monopoly markets where the startup cost is high. High costs can occur because a customer's preference for already existing companies often limits a new company's access to them.

Artificial barriers are the strategies created by existing companies to limit new competition. Policy-based barriers can include licencing requirements for new companies and tax benefits for existing companies. They can also include pricing strategies, marketing strategies, patents and other legal restrictions. Fragmented markets have low entry barriers meaning they typically have lower costs and fewer regulations protecting the industry from new businesses.

Related: What is market structure? (Definition and examples)

There are few economies of scale

Economies of scale are cost benefits that companies enjoy when production becomes efficient. For instance, many companies benefit from buying in bulk and negotiating wholesale prices, which lowers their production cost. Fragmented markets make this challenging, which can slow a small business's development, thus limiting the benefits it can enjoy.

Related: Economies of scale: definitions, types and examples

There's strong competition

Since fragmented markets consist of many smaller businesses, there's often intense competition to outperform each other. Many companies implement creative strategies to do better than their competitors but this often requires equal competition. Because of this pressure, many organisations begin to specialise in specific products or services, which allows them to separate from their parent market and form sub-markets where they can be at the top.

Related: What is perfect competition? With features and requirements

There are minimal standardisation requirements

Standardisation involves creating protocols and rules to ensure uniformity amongst goods and services. This uniformity forms in the industry through the consensus of the involved parties. Standardisation focuses on the production process, business operations and use of technology. The goal of standardisation is to ensure quality and create safe products and services.

Standardisation often works in an industry that makes the same goods and services. Fragmented markets often specialise in different products based on their customer's needs. This diversity makes it challenging to implement standardisation policies as many companies work with different commodities.

Related: What is quality assurance, and why is it so important?

They can offer customised products

Fragmented markets often lead companies to sell products based on the costs associated with customising their goods to meet customer demands rather than market trends. Many businesses prefer to determine the product's final price based on the production costs to ensure profits but this method disregards the fact some customers may think the cost is high while others could pay more. Since customisation often raises costs, businesses may attempt to differentiate themselves from their competitors by focusing on niche products that remove the need for customisation.

Related: What are cost drivers? (Types, analysis and significance)

They can answer market needs

A growing market can lead to an increase in diverse needs. Since fragmented markets lack a dominant business that influences the industry, customers may still have needs they want to be met. This phenomenon can lead the market to fragment further, such that smaller businesses create a sub-market to focus on fulfilling these specific customer demands.

Related: How to identify market gaps step-by-step (with examples)

Examples of fragmented markets

Fragmented markets occur across several industries, including the following:

  • Automotive manufacturing: Automotive manufacturing companies lack a specific dominant company. The various companies create different models with unique features to attract customers.

  • Software development: The software development industry is a good example of a fragmented industry as it has no dominant organisation. It has low entry barriers, which contributes to numerous software developments from emerging companies.

  • Hospitality: Hospitality comprises the restaurant and hotel industry. This industry has many sub-specialities that provide unique services and develop niches to identify customers.

  • Textile: This industry has many small companies focusing on various aspects of the manufacturing process, including design, production and distribution. There are few economies of scale due to the lack of a dominant company in the market.

  • Furniture: The furniture industry has a growing customer base with varying needs, which makes it challenging for one large company to satisfy all customer demands. As a result, small businesses can emerge to provide unique designs and meet various preferences.

Benefits of fragmented markets

Fragmented markets provide several advantages to the small businesses operating in them. These benefits can include:

Customer availability

Customers are available to new businesses because they often lack brand loyalty. Since no single company can satisfy all customers' diverse needs, new enterprises can attract clients more easily. You can study the market to learn your niche before opening a new business to determine and meet unsatisfied client demands.

Related: What are customer reviews, and why are they important?

Low marketing cost

Small businesses in a fragmented market often have a smaller target audience. Their marketing is mainly at the local level, which makes it easier to reach the customers. Local-level marketing can allow a business to spend significantly less on marketing and advertising.

Low entry barriers

Opening a new enterprise in a fragmented market is easier due to the low barriers to entry. Significant market entry barriers can include cost and legal policies, which dominant companies tend to control. Since fragmented markets are generally smaller businesses with smaller target audiences, the costs for starting and maintenance are typically less.

Strategies to overcome the challenges of a fragmented market

Here are a few strategies you can follow to succeed in a fragmented market:

Improve your risk management skills

Without the availability of a dominant business to steer the market, the customer's demands and interests significantly affect the market. Their interest can sway market trends which may impact the success of a business. Consider improving your risk management skills to allow you to anticipate changes in the market and help prevent losses.

Related: What is a risk management framework? A comprehensive guide

Specialise in a product

Specialising in a specific product can lead to business success. It can allow you to create a niche that customers recognise. By specialising, businesses can branch off from the parent market and form a sub-market with them at the top. For example, as a restaurant specialising in vegetarian food, you can create a niche and establish yourself as the best vegetarian establishment in the area.

Increase vertical integration

Vertical integration is a strategy that allows a company to control an aspect of production by purchasing it to eliminate the need for external suppliers. This approach can help the business succeed by reducing production costs and providing more significant profits. It can also enable the business to expand geographically by setting up new distribution centres. For example, a bakery can eliminate the need for wheat suppliers by purchasing a wheat farm, so some aspect of its production is under its control.

Related: Vertical integration: advantages for business (and examples)

Focus on quality

Focusing on quality can help businesses outperform their competitors in the industry and attract more customers. They can add value to their products by improving customer service and using advanced production technology, amongst other methods. For example, an internet service provider that offers free installation with every router purchase may attract more customers than one that foregoes it.

Create economies of scale

Creating economies of scale can also help reduce production costs by making wholesale purchases at a negotiated discount. You can achieve this by investing in managerial expertise for the business. Investing can also lead to growth by streamlining processes and increasing production, lowering the average unit cost.

Hire local employees

Hiring local employees helps keep money in the community and strengthens the local economy. Local employees also have a better understanding of the market, making it easier to bring in new business. They can also understand how the business benefits the community, making them more invested and committed to the job.

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