When entering a new market or segment there is always the calculations for expected return on investment. These risks are centred around that ROI being as high as anticipated and the causes for it.
Profit Pool Risk
This risk occurs when the potential profit pool in a market is reduced as a result of a reaction to the strategy you implement. If stronger competitors react and match your strategy with their own, they can severely limit your ability to profit in the segment. There may be multiple competitors all fighting for market share that can all react to the new market conditions and effectively shut you out.
Competitor Impact Risk
While similar to profit pool risk, this risk is focused towards a single competitor. If you enter a market with a strategy that targets a very similar market to one competitor and they react effectively, they alone can prevent your success. A good example of avoiding this would be Fitbit entering the wearable technology market but not directly competing with a powerhouse like Apple.
Internal Gross Margin Risk
This occurs when a company underestimates the costs of production and distribution which results in their end profit margin being very slim and having no room to drop to match a competitor’s price.
Profit Source Risk
Due to a competitors reaction, your profit margin may be reduced when you have to price match. Entering a market with the intention on taking market share purely from the market leader who will in turn be able to beat you on pricing the majority of the time.
Other Cost Risks
Costs that may not be immediately obvious might add up to more than expected and reduce you ability to make any significant returns on investment. This can be prevented by careful calculations of all extra costs and being realistic with these numbers to avoid optimistic disappointments.
References:
McDonald, Malcolm, Peter Mouncey & Stan Maklan (2014) Marketing Value Metrics: A new metrics model to measure marketing effectiveness. Kogan Page: London.
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