Breaking into Tier-2 and Tier-3 Markets: A Growth Strategy for Startups

✍️ Opinions

Varun Bhardwaj

Oct 18, 2024 — 5 min read

Startups Can Grow by Expanding into Tier-2 and Tier-3 Cities

This article has been contributed by Mr. Amit Bansal, CEO, Solv.

For the last decade, India has shown proven to have great potential as the global startup hub with emerging entrepreneurs across the country. Though the metropolitan cities of Delhi, Mumbai, and Bangalore remain to be the startup hubs, the Tier 2 and Tier 3 cities have huge scope as untapped markets. One of the most frequent but very important questions entrepreneurs in today's highly competitive startup scene ask themselves is: how does their business scale beyond Tier-1 cities which are just so saturated? While the Tier 2 and Tier 3 cities are rapidly growing momentum for new business opportunities, India's Tier-1 metropolises have traditionally been the center of consumer demand and technological innovation. In India over 60% of the population is from Tier-2 & Tier-3 cities, which shows the immense untapped potential they have. Reaching out to such markets can redefine businesses looking to scale. MSMEs have emerged as the backbone of the economy by generating jobs, innovative ideas, and inclusive growth-all of which form the crucial aspects driving overall productivity.

The Changing Landscape of Tier-2 and Tier-3 Markets

Better internet access, increased disposable incomes, government initiatives, and the ambitions of a growing middle class are driving migration to Tier-2 and Tier-3 cities. According to estimates by RedSeer Consulting, India's Tier-2 and Tier-3 towns would constitute as much as 60% of all new online customer acquisition by 2025. Consumers in small towns, rather than being mere passive media consumers, have taken an active role in the digital economy of India. Furthermore, a report issued by NASSCOM in 2023 has disclosed that the consumption behavior of these smaller cities is changing at rapidly. The year-on-year growth of digital services and products, starting from online commerce to fintech, was witnessed at 45% in Tier-2 cities and 30% growth in Tier-3 towns. Such places are undergoing fast-paced changes for new-age banking, shopping, or how one relates with brands; hence, this is an area where startups can thrive immensely.

Why Startups Should Target Tier-2 and Tier-3 Markets

Lower Competition, More Opportunities

The Tier-2 and Tier-3 cities provide less competition compared to the metropolitan markets. For the metro cities there’s a constant challenge to grow the customer market share, with established peers dominating much of the sector in terms of customer footfall. In contrast, smaller cities present relatively untapped potential.

Lower Costs of Customer Acquisition

Lower customer acquisition costs (CAC) can be one of the answers for startups in Tier-2 and Tier-3 cities. A study by BCG shows that acquiring customers in smaller cities is 40-50% cheaper in Tier-1 cities. This is mainly because of lower media and advertising expenditure along with more flexible pricing and less competition.

Increasing Disposable Income and Aspirations

A report by McKinsey states that disposable incomes of people staying in Tier-2 and Tier-3 cities have been rising at a faster rate than in metros, as more jobs and industries are shifting to smaller towns. These towns, in which middle class is on an upsurge, also witness a spending spurt in aspirational products and services of any form-be it e-commerce, fintech, or edtech.

Government Push Towards Inclusive Development

Initiatives such as "Digital India" and "Smart Cities Mission" have spurred growth in these regions. According to the report by the Ministry of Electronics and Information Technology, the push in digital infrastructure has increased internet access and enabled easy entry for more digital startups. Additionally, the Pradhan Mantri Awas Yojana (PMAY) has experienced higher home ownership in the regions and is enhancing the consumption patterns of goods and services.

Strategies for Entering Tier-2 and Tier-3 Markets

Startups should strategically position their business in Tier 2 and Tier 3 cities because the needs, behavior, and expectations of consumers have a stark difference than the metro populations. Therefore, the only way to deal with this variance is a tailored approach.

1. Localization of products and Services

Hyper localization should be the focus for the startups to reach the unique preferences and needs of Tier-2 and Tier-3 consumers. For instance, affordable e-commerce platforms have totally changed the way people shop in small towns by catering to customers looking at price-consciousness by offering low-cost products with affordable payment options. Supporting regional languages, adjusting the pricing strategy, and offering localized products or services makes market penetration and customer engagement much better.

2. Building Trust through Offline Channels

In smaller cities, consumers usually depend on word-of-mouth suggestions and personal rapport. Having omnichannel strategy-a strategy that includes both online and offline touchpoints-helps startups gain credibility. Building strong relationships with local vendors is highly effective for gaining widespread adoption in the regions. Operating small customer support centers, collaborating with influencers, and organizing community events further help build relationships and earn the trust of consumers.

3. Partner with Local Entrepreneurs

Most firms that succeed, tap into these markets via joint ventures with local entrepreneurs who are keenly aware of the going-on dynamics in their respective regions. Local partners can play vital roles in distribution, marketing, and after-sales services, all of which are important for establishing presence in these regions.

4. Regional Orientation of Marketing Campaigns

Policies that work in metro cities may not work as effectively in Tier-2 and Tier-3 cities. Localised marketing efforts with regional language, local content has to be the focus for start-ups. Regional language-specific platforms are avenues where start-ups can uniquely engage and connect with consumers in Tier-2 and Tier-3 cities.

5. Affordability and Accessibility

Affordability has to be a criterion for start-ups entering these markets. Consumers in Tier 2 and Tier 3 cities are extremely price-sensitive, and premium pricing strategies that generate great value in metro are unlikely to excel in these regions. Mass adoption will be driven by EMIs, BNPL (Buy Now, Pay Later), and lower-ticket offerings. The leading e-commerce companies, with their affordable prices, localized products, and flexible modes of payment, including cash on delivery and installment plans, has allowed them to capture significant market share in these regions.

As India continues to evolve in various sectors and as an economy, the real growth potential lies beyond the metros. Tier 2 and Tier 3 geographies have great opportunities that can be tapped by startups through embracing hyper-localization, fostering trust through offline connections, leveraging local partnerships, and focusing on affordability. The key is to develop strategies that are tailored to meet the needs of these consumers. Tier-2 and Tier-3 cities have evolved as the new frontier of growth, waiting to be adapted and invested in for startups who are willing to evolve and be at par with the metro cities.