Segmenting when it matters

Andreas Birnik and Richard Moat argue that business complexity is directly linked to the degree of segmentation implemented by a company.

Andreas Birnik and Richard Moat argue that business complexity is directly linked to the degree of segmentation implemented by a company.
SegmentingwhenitmattersThey propose an approach to map business activities at the segment level to make sure that complexity is only introduced when it really matters to customers.

When it comes to serving customers, businesses can move in one of two fundamental directions. They can standardize operations so that every customer receives the same options and treatment as every other customer. Think of Henry Ford in 1908 talking about the fabled Model T: “Any customer can have a car painted any colour that he wants so long as it is black.” On the other hand, a business can try to operate so that every customer is treated, to the greatest extent possible, as a unique individual – a market segment of one, if you will. Henry Ford, after all, could have tried to create a company that offered any colour car that a customer asked for – with operations split into colour-coded divisions ending with a corporation in chaos. While that second option makes for great marketing theory, it is, of course, impracticable for any company with a large number of customers. Nonetheless, we have witnessed on many occasions how segmentation champions inside companies have introduced unnecessary complexity and overcomplicated operations. The risk is perhaps greatest when a company makes the transition from a rudimentary segmentation model toward a more refined way of segmenting and servicing customers. In this situation, there is a clear risk that the pendulum swings too far and that business activities become overly segmented whether or not it actually matters to customers. This can result in fragmented operations driven more by the desire of segment champions to differentiate themselves internally within the organization than by actual customer needs.

Sensible segmentation

The degree of complexity required to deliver a company’s desired customer experience is directly linked to what we call the segment range and the degree of segment differentiation. Segment range is the number of different customer segments that the company actively targets while the degree of segment differentiation is the extent to which a company tailors its business activities to fit the exact requirements of a particular segment. The most segmented positioning option is what we call the portfolio strategy with full segment differentiation. To deliver this, the company fully differentiates all aspects of the customer experience by segment. This requires separate brand names, products and services and touch point experience. Hence, while Starwood Hotels & Resorts Worldwide operates St Regis, Sheraton, Westin and W Hotels, the customer experience is quite differentiated between the brands across a large number of factors. The complexity is the highest in this positioning option as it essentially requires separate operations to be fully implemented.

A company can also select to implement a portfolio strategy with varying segment differentiation. This means targeting different segments while limiting complexity by cutting back on some elements that could be tailored at the segment level. An example of this occurs when a company launches a low-cost brand in which price might be the only real differentiator.

A scaled-back version of the portfolio strategies mentioned above is the niche strategy with maximum differentiation for one segment. In this case, a company deliberately limits complexity by choosing to service only one customer segment and to gear all business activities towards delivering an experience tailored to the needs of the chosen segment. This is quite common for brands aimed at the luxury market, such as Aston Martin, Patek Philippe and Louis Vuitton.

At the other end of the spectrum is the nonsegmented mass market strategy. This is essentially Henry Ford’s one-size-fits-all approach. With this positioning option, customers are typically offered a good product at an attractive price, which makes them select the product over more segmented offerings that might genuinely suit them better but come at a higher price. Such practice occurs in diverse industries including low-cost airlines, fastfood restaurants, virtual mobile operators, VoIP phone operators and discount retailers.

There are two more options that should be mentioned. Consider the company that puts forth a core offering across segments with deep segment differentiation – or a core offering across segments with some segment specific differentiation. These two options are interesting to study because they deliberately seek to limit complexity by creating a strong core offering across segments together with segment specific differentiation. This means sharing some offer elements across segments (such as brand name and distribution channels) while other components (such as price, products and promotions) might be varied. This is quite common in the automotive industry; think of BMW and Toyota. It is worth noting that while this approach can work well across multiple segments, the core offer component makes it difficult to stretch this approach across a too-wide range of segments. Hence, Toyota created Lexus as a separate brand catering to the prestige market.

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