Market Definition

Define market boundaries using substitution principle. Use for market sizing, competitive analysis, and strategic positioning.

Metadata

• Name: market-definition
• Description: Market boundary definition framework
• Triggers: market definition, market boundaries, substitution, TAM SAM SOM

Instructions

Define what constitutes a market using the substitution principle for analysis purposes.

Framework

The Substitution Principle

A market is defined by customer choice between substitute options.

text

Customer's Choice:
Product A  VS  Product B  VS  Do nothing

IF: Customer can switch between Product A and Product B
AND: Switching is not costly or disruptive
THEN: They are in the SAME market

IF: Customer would NOT switch to Product B
OR: Switching would be costly or disruptive
THEN: They are in DIFFERENT markets

Market Definition Process

1. Identify purpose - Why define this market?
2. List products - What are we analyzing?
3. Identify substitutes - What alternatives exist?
4. Apply substitution test - Would customers switch?
5. Define boundaries - Geography, time, customer type
6. Validate with data - Check assumptions
7. Document clearly - Clear definition statement

Output Format

text

## Market Definition: [Industry/Product]

### Purpose

**Why Define This Market:** [Analysis reason]
**Application:** [What will this definition be used for]

---

### Product List

| Product | Current Players | Substitutes | Same Market? |
|---------|----------------|-------------|----------------|
| [Product A] | [List] | [List] | ✅ Yes |
| [Product B] | [List] | [List] | ✅ Yes |
| [Product C] | [List] | [List] | ❌ No |
| [Do Nothing] | [Option] | - | ❌ No |

---

### Substitution Analysis

| Substitution Criterion | Assessment | Finding |
|---------------------|----------------|-----------|
| **Price Sensitivity** | [High/Med/Low] | [Analysis] |
| **Switching Costs** | [High/Med/Low] | [Analysis] |
| **Functional Equivalence** | [Yes/No] | [Analysis] |
| **Customer Preference** | [Analysis] |

**Conclusion:** 
- [Analysis of which products are in same market]
- [Definition of market boundaries]

---

### Market Definition

**Scope Statement:**
"[Clear statement of what constitutes the market]"

**Includes:**
- [List of products included]
- [List of products excluded]
- [Geographic boundaries]
- [Customer segments]
- [Time period considered]

**Excludes:**
- [Products not in this market]
- [Adjacent markets]
- [Different time periods]

---

### Validation Tests

| Test | Result | Confidence |
|------|--------|--------|-----------|
| Substitution test | ✅ Confirmed | High |
| Pricing check | ✅ Verified | High |
| Share analysis | ⚠️ Needs validation | Medium |

---

### Strategic Implications

1. **[Implication 1]** - [Analysis]
2. **[Implication 2]** - [Analysis]

### Boundary Map

┌─────────────────────────────────────┐ │ │ │ MARKET X (Product A) │ │ │ │ Includes: │ │ Product A │ │ Product B │ │ Product C │ │ Do Nothing │ │ │ └─────────────────────────────────────┘ ┌───────────────────────────────┐ │ │ │ ADJACENT MARKET Y │ │ Product D │ │ Product E │ │ Product F │ └───────────────────────────────┘

text

## Tips

- Be conservative - when in doubt, assume different markets
- Consider customer switching costs - both monetary and non-monetary
- Test with real customers - don't assume theoretical behavior
- Document assumptions clearly - boundaries matter for market sizing
- Update regularly - products and markets evolve
- Use quantitative thresholds - what defines "significant" switch?
- Consider indirect substitutes - new alternatives can emerge

References

• Porter, Michael. Competitive Strategy. 1980. Chapter 2.
• Various industry analysis and market research sources