Those who know segment and the rest chase market share

How many gurus and bloggers write – the single most important task for a business is to gain market share? If only a business has all the share there is, even if they received a tiny profit from each customer  that will a;; add up to really handsome profit. In fact some go on to recommend businesses that are making handsome profit  now must give up that profit and gain market share so they can make future profit.

Take a look at second largest market out there – India. Let us say you are selling premium motorcycles. Should your goal be to price it such that 1.1 billion people will buy just your product?

Here is what the market looks like there

Segment 1: Millions of people in India still don’t have the means to buy an entry-level motorcycle that costs about 40,000 rupees ($640).

Segment 2: A recent survey by Credit Suisse estimated that India has 182,000 millionaires. That is 24,000 more than it had in 2012.

Making 10% gross margin on $640 motorcycle and making 40% gross margin on $20,000 premium motorcycle means businesses have to sell hundreds of millions of cheaper unit just to get the same profit selling premium units to 100,000 customers.Think about the cost of capital, distribution network, service network and all the other fixed costs needed to server hundred million customers.

That is  static segmentation just based on affordability and wherewithal to pay. If you look at the market based on “need based segmentation”, you will find

Segment-1: That hires the motorcycle to move from point A to point B

Segment-2: That hires the motorcycle for recreation

Won’t Segment-1 want to hire the  motorcycle for recreation? Sure they would but from what budget will they paying for? What are the alternatives available to them at that budget? A business’ strategy is to decide which segment they want to serve and what customer job they want to position their product for. Because segmentation and positioning determines price and hence profit.

The goal of business is not gain 100% market share but make profit in the most efficient and least capital intensive way. You do not have to serve every segment and every customer job.

If all businesses are going to be disrupted in the future shouldn’t a business maximize its profit till then and not spread out too thin that it gets disrupted from all directions?

 

We need regulations because our original business plan didn’t consider these disruptions …

A Cajun food cart in a food cart cluster in SE...

For anyone studying business model disruptions, a rich case study is unfolding across the nation, from coast to coast, one food cart at a time. Let us not make this a culinary argument and look at this purely from business perspective. If you have not been following the stories here is a summary,

Food carts are restaurant on wheels. They come in all flavors and with clever names (Curry up now). They are showing up in office parks and business districts, catering to the lunch crowd. And that is the problem for traditional  brick and mortar restaurant owners – the trucks are right at their doorsteps and eating their lunch (pun intended). The restaurant owners don’t like it!

Let us look at this in two parts to see the disruption. As I am wont to do, let us start with customers.

Customers/Customer Needs: Anyone with money to spend during lunch is a customer. Why are some willing to give up the sit down comfort and service of restaurants and try food carts? There is no one reason, there are always utilitarian and emotional reasons and it is the degree of intensity that varies for different customers.

Some were hiring the restaurant just to satisfy their hunger and they are happy to hire any other service that does the same job faster/better/cheaper. Some hire the restaurant for the experience but not likely all the time. In some cases they may be hiring the food cart just for the novelty and experience.

If you look at the comprehensive list of purchasing occasions you will find there were enough jobs for which the restaurants were hired only because there was no alternative. When food carts arrived the customers are happy to fire the inferior candidate and hire the new one.

The Incumbents: The restaurant owners had a nice run. Their product was hired by customers for lots of jobs even though it was not the right fit. Do not get me wrong, there are many other jobs for which restaurants are the right fit and rightly capture their share of the value add. But the rest of their customers incurred higher transaction cost for the value delivered. These segments were right for picking by anyone. Restaurants were however only too happy to serve the same product at the same price to all their customers and now see that advantage vanish.

Their reaction can be summed up nicely by the comments made by their rep in KQED’s Forum interview,

“Our original business plan did not take into account these food carts taking away our customers”.

Isn’t this a luxury every business would like to have?

That is the core problem. Disruptions don’t telegraph their arrival. Uncertainties are the unknowables. You can’t ask for protection because of your failure to model these uncertainties.

If disruptions these are the unknowables how can they model these?

There is really only one way – starting with customer segments and asking what jobs are the different segments hiring your product for.  If your product is not the best candidate for each one of those jobs it is currently hired for it will be disrupted. The flip side of my earlier statement, “anyone with money to spend is customer”, is , “anyone goes after that money is your competitor”. And they do that by doing the job faster, better, cheaper.

If the customers hired your product  only because of lack of alternatives are they really your customers to begin with?

Your failure to focus on customer needs cannot be fixed with newer regulations to stop the disruptors.

We all hear about customer loyalty and the need to focus on increasing loyalty. Loyalty cannot stop disruption. If you do not want to be disrupted it is you who should show loyalty – loyalty to the job your customer hired your product for, doing the job better than anyone else can.

Yellow Bananas and Black Model Ts

It is obvious to us now that Henry Ford should have allowed color choice and he would have sold lot more cars. He could have likely charged higher prices over black Model Ts as well. Was this not obvious to him?

Take a look at a present day product that we all consume almost everyday – Bananas. Unless you are a customer of Berkeley Bowl, it is likely you have bought just one variety of bananas. The brands could be Chiquita or Dole but there is only one kind of bananas.

Science Friday has an explanation for this dearth of choice,

… imagine a pipe from Ecuador to your supermarket that can only fit one variety of the world’s 1,000 banana varieties, and that’s basically the way it works.

In order to bring new bananas, you have to build entirely new infrastructure, ranging from plantation to shipping to packing methods and to ways to tell consumers about it.

So why not  do it? The old hands at Chiquita and Dole know only one way of doing things. They are not going to do it. Why not some entrepreneur disrupt the market and import new varieties?

The answer lies in the price we are willing to pay for bananas.

 The banana is the cheapest fruit in the supermarket

They are cheap because the suppliers made a choice to focus their limited resources. They decided to focus their investments and marketing muscles on just one variety.

It is an extremely high fixed cost business – building that virtual pipeline from Ecuador for handling another variety. The result? A split market unless the disruptors can grow the market enough (which is not really disruption).

But can’t they  recoup the fixed costs through higher prices for the new varieties

Unfortunately no. In any new product investment decision, pricing comes first. Given the low reference price set by current bananas how likely will the customer be willing to pay a higher price premium just for the variety? How big will the market be that is truly incremental?

Will the value from variety be clear to customer that they will pay premium for it? What is the additional marketing investment needed to convey the value message?

Even if the value is clear, is there value leakage that bring the value down?  For instance, are their customer behavior changes needed like

One of the reasons is that educational component in bringing the new variety. Baby bananas need to be served much more brown than a traditional Cavendish to taste right. But most people are used to that visual cue the Cavendish gives and so don’t allow them to go brown, and that’s been a real problem in getting people to actually like this variety.

All this capital and resources have opportunity costs – other fruits that can be profitably introduced or other business line altogether. There is no need to disrupt for the sake of disruption if there is no incremental profit.

When is not giving choice to customers is not all bad? When providing choice fail to deliver incremental profit.