Segments Summary Points Outline
This section is intended solely to help you to diagnose the market segments of your business and to save you time and cost in gaining a good understanding of your business situation. Once you have completed this section and have identified the customer segments in the market that you are likely to serve well, your next step would be to move to the Improve Segments section.
Throughout the text, you will find links to information that offer further insight on the topic. The green links are glossary pop-up boxes. In addition, at the end of each section, you will find questions and links to analyses that will guide you through your diagnosis.
SUMMARY POINTS
Segments in the Market: Introduction
Part 1: Value of a Customer Relationship
Capsule: The first consideration in customer segmentation is the size of customer. Because the largest customers get the most attention from industry competitors, customers of a similar size receive similar treatment from industry suppliers and tend to buy in similar ways because of this.
Capsule: There usually are several suppliers of similar products in the customer’s relationship. Each of these suppliers fills a different role for the customer. Each role receives an allocation of the customer’s volume.
Growth and Profitability of Size/Role Segments
Capsule: The price the customer pays largely determines how profitable the customer is. You don’t want a fast growing customer unless the customer is profitable. If it is profitable, the faster its growth the more you appreciate the customer.
Part 2: Sources of New Market Share
Capsule: Industry volatility is market share that moves from one set of suppliers to another. The Company who loses the market share suffers negative volatility while the Company that gains the share has positive volatility. The more competitive the market the more likely that volatility will be low rather than high and that the volatility will take place in less attractive market segments.
Comparison of Volatility and Sales Growth
Capsule: Volatility and Sales Growth are important strategic concepts. They differ from one another and co-exist in most markets and companies. Neither depends on the other, though both change market share for a company. This comparison seeks to make each concept clear.
Capsule: Volatility happens either because someone wins the customer’s business outright or because a supplier to the customer fails that customer and allows a competing supplier to take some or all its sales to the customer. When the incumbent supplier fails the customer, the customer looks to other suppliers to replace some or all of that failing competitor’s sales volume. The type of market has an important effect on marketing, sales and product development. The more competitive the market the more likely it is that failure causes volatility.
Capsule: In a fast growing market you are best off going after the largest customers in the market place. But if the market is difficult you should spend more marketing and sales dollars trying to sell customers of weak competitors, those companies losing market share in your industry. The cost of gaining share from weak competitors will be considerably lower than the cost of beating a strong competitor.
Capsule: You should compare the percentage of your Company’s sales made to the industry’s larger customers to that of the industry as a whole. If you are one of the top competitors in the market you should have a better than average mix of your sales with these customers. If you have a medium to low market share position in your industry your customer mix will be more strongly shaded toward the medium and small customer, usually a weak position.
Company Share Change and Volatility
Capsule: The company’s market share change is the net result of five factors expressed as a percentage of annual sales: its relative customer growth, the Get In and Increase Use forms of positive volatility and the Get Out and Decrease Use forms of negative volatility. For most companies, market share shifts because of the Company’s good performance on volatility compared to everyone else in the industry. In a fast growing market, this good performance means beating the industry on positive volatility. In slower growing and highly competitive markets, though, this good performance means having lower negative volatility than the average competitor in the market.
Capsule: Set your customer targets by determining the profitability of each customer and assigning each to category based on the objectives you have for the customer: Stay In, Increase Use, Get In or Opportunistic. Then compare your projected results to your goals.
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Once you have completed these analyses, you have done a thorough job of identifying the customer segments in the market that you are likely to serve well. Your next step would be to move to the Improve Segments page of the site. Here, you begin developing new segmentations of your target customers based on their needs as buyers and users of your products and services.