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Lars Perner, Ph.D.
Assistant Professor of Clinical Marketing
Department of Marketing
Marshall School of Business
University of Southern California
Los Angeles, CA 90089-0443, USA
(213) 740-7127

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Gap Analysis

Market Deficiencies. "Gap" analysis involves analyzing current market offering to assess the extent to which they meet customer demands. Demand side gaps involve a market situation where consumers are not satisfied buying what is available—usually either because the level of service provided is not adequate or because the offering is too expensive. Supply side gaps, in contrast, involve firms that provide services that are needed, but ones that can be met elsewhere at lower prices.

Demand Side Gaps. Customer satisfaction abounds, and many consumers would like to replace their current suppliers. This can happen either generally—there is a widespread dissatisfaction with banks among consumers, and many would switch if they found one that they thought to provide better service—or the gap can be with one segment that is not being well served. As an example of the latter, consider parents who, if they had not had children, would have been perfectly satisfied with an ordinary Internet service provider but are now worried that their children can be exposed to inappropriate material online. Therefore, the PAX Network, which features family-oriented television programming, stepped in to offer a service that claims to block out most objectionable sites. Further, one auto parts store owned by a woman ran an advertising campaign aimed at women, acknowledging that women were often being asked by their husbands and boyfriends to be "parts runners." The ad then went on to talk about the cleanliness of the store and non-condescending attitudes of the sales people.

Note that although a gap may exist in the sense that existing firms are not offering what consumers may ideally want, there is a limit to what buyers would be willing to pay for. For example, before starting their ice-cream business, Ben and Jerry considered going into business delivering the New York Times to people’s doors on Sunday mornings along with fresh baked bagels. A problem here, however, could have been the cost of this service. Sometimes, a firm may be able to come in and fill a gap, but may need to compromise on exactly how far to go. There are usually some struggles between what would be nice to have and what customers are wiling to pay for.  For example, many computer buyers would like to have someone come and set up the computer, the peripherals, and the Internet connection, but might balk at paying $150 for this service.  Many consumers would like to have their dry cleaning picked up and delivered, but when push comes to shove, they would not be willing to pay for the extra service.

In the early 1990s, a firm owning several supermarket chains decided start Tiangues, a chain aimed at Hispanic consumers in Southern California.  Employees were screened to be fluent in both Spanish and English, and foods that would appeal especially to different Hispanic groups were emphasized.  The chain was very popular when it first opened, but it soon lost market share as it was found that with time, what mattered most to customers was low prices.

Wheel of Retailing. An interesting phenomenon that has been consistently observed in the retail world is the tendency of stores to progressively add to their services. Many stores have started out as discount facilities but have gradually added services that customers have desired. For example, the main purpose of shopping at establishments like Costco and Sam’s Club is to get low prices. These stores have, however, added a tremendous number of services—e.g., eye examinations, eye glass prescription services, tire installation, insurance services, upscale coffee, and vaccinations. To the extent these services can be added in a cost effective manner, that is a good thing. Ironically, however, what frequently happens is that "room" now opens up for a "bare bones" chain to come in and fill the void that the original store was supposed to have filled! New stores can now come in and offer lower prices before additional, costly services "creep" in.  Note that upscaling over time may be an appropriate strategy and that the owner of the "rising" chain may itself want to start another, lower-service division (e.g., Ralph’s may want to own another chain such as Food 4 Less).

Supply Side Gaps. Supply side gaps come about when a business finds that the services that it has traditionally offered to customers in the past are now too expensive to justify the value they provide. For example, in the "old days" (i.e., until the early 1990s), travel agents provided a valuable service—they would "match" travelers and airlines, finding a reasonable fare and travel time and issuing the ticket to the customer who, then, did not have to call all the airlines for a fare and then visit the airport or an airline office. However, nowadays, it is much more convenient for consumers to carry e-tickets, and it is frequently easier to go online to compare fares and travel time at one’s convenience. Therefore, travel agents, to command their commissions, will often need to provide something extra that the online services cannot. The problem is that, for most consumers, there just isn’t much that the travel agent can offer other than fancy coffee or donuts, which you can get more conveniently elsewhere anywhere. Maybe they can take passport photos or arrange bus transportation to a cruise ship, but is that enough to justify people coming to them? Online services are starting to offer package deals—air fare, hotel, and car rental—anyway.

Finding opportunities. Again, it is important to emphasize the need for market balance. Frequently, there will be room for higher cost services for one segment, and perhaps a diametrically opposed service for the lower cost service.

Gaps, costs, and performance. Generally, we find that gaps do not exist when cost and service are "in line" with customer expectations. Thus, for example, Nordstrom serves a segment that desires high service. Nordstrom incurs a great deal of costs in this, which are ultimately passed on to the consumer, but Nordstrom’s customers are willing to pay for this. Similarly, Wal-Mart provides some, but less, service and does so at a very low cost. Thus, another segment’s preferences are served. Thus, service output demand is matched with supply. On the other hand, many auto repair facilities provide less service than is expected and do not adequately make up for this by low prices. Therefore, an opportunity might exist for someone to offer better service at a not much higher cost. On the other hand, nowadays people may not be willing to pay the extra cost for going to a butcher shop and pay significantly more if what they get is only a little better than what is available in the supermarket meat section.

Closing gaps. Firms may be able to close, or reduce, their gaps by reconsidering their offerings. A gasoline station that offers an "average" level of service at prices higher than those of self-service stations might either target the low cost segment, lowering prices and cutting costs, or targeting a premium service and "beefing up" service. Similarly, a firm that faces a segmented market might "branch off" into different units that offer different levels of service to different customers. For example, Toyota started the Lexus division for consumers who demanded more service than would have been cost effective to offer to its traditional customers. On the supply side, closing gaps mostly involves improving efficiency and/or reducing costs in other ways. Alternatively, existing channels may be reassessed—e.g., airlines have deemphasized travel agents.