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?