Assessment
of Segment Attractiveness
Segments only make sense if they are actively utilized, i.e., if they lead to better, faster, or more plausible decisions.
If segments are intended to simplify decisions and manage resource flows, employees must be aware of the attractiveness of individual segments. Otherwise, segments may exist, but they will not provide clear direction on which customers should receive special attention and why. Here, we present three aspects that should be considered when assessing segment attractiveness: (1) the economic potential of the segment, (2) its consistency with brand identity, and (3) the availability of capabilities to serve the segment.
Assessing Economic Potential
This assessment dimension considers each defined segment independently of the company’s own capabilities and interests. This ‘objective’ evaluation at regular intervals is intended to ensure that market segments that are, or are becoming, economically attractive are not neglected (either due to comfortably clinging to the status quo or because the increased economic attractiveness goes unnoticed). Similarly, it aims to prevent excessive focus on customers that can be served well but are no longer economically interesting.
Specifically, a company should ask itself the following questions for each segment:
How large is the segment? What sales volumes, unit numbers, or customer numbers can be achieved in this segment (note: relative to total market volume, not own business)? How is the size of this segment developing?
The indicators naturally vary from industry to industry and depending on the chosen segmentation approach. A diaper manufacturer with geographical segmentation, for example, will closely monitor birth rates and the intensity of disposable diaper use in different regions.
How much can be earned in the segment (relative to revenue, per unit, per customer)?
The profitability of segments can differ because the number of competitors or competitive intensity varies, willingness to pay and price sensitivity vary between segments, or the risk of substitution is different. Based on these criteria, an absolutely small or shrinking segment (a small Western European country with low birth rates) can be as attractive as a significantly larger segment (a developing country with a rapidly growing population) because the willingness to pay for disposable diapers is higher and the risk of substitution by reusable diapers is lower.
How easily can a segment be reached? What entry barriers exist? Does a provider have to make high investments (in technology or infrastructure) to even operate in a segment?
These factors can reduce a segment’s profitability or tie up critical resources. Accordingly, it must be considered whether focusing on a difficult-to-reach segment might paralyze a company too much. In the context of the example above, laws in a country might require that a portion of the value creation be local – and this barrier would reduce the attractiveness of that segment for the manufacturer.
Many consider this assessment dimension to be self-evident – questioning the economic attractiveness of individual segments is not always a fixed component of strategic considerations. When one considers how much time companies spend, for example, observing competitors’ activities and trying to catch up as quickly as possible, it is worth considering whether a more intensive engagement with the economic attractiveness of each customer segment would not be more sensible.
Assessing the Fit with Your Own Brand
What a brand stands for is the result of a multitude of different factors. Among other things, services marked with the brand, employees, communication, and word-of-mouth contribute to how a brand is perceived. However, we also judge a brand by its users. While who uses a brand and how cannot be 100% influenced, most organizations consciously try to appeal to certain target groups and not others. Accordingly, we also judge brands with statements like ‘show-off brand,’ ‘brand for people with taste.’ An organization should therefore carefully consider how well segments fit its own identity and how other brand stakeholders would react to actively addressing these segments.
In politics, this consideration is obvious: How would current voters, as well as party members and officials, react if a previously neglected voter demographic were addressed? How consistent would this behavior be with the identity built up over a long period?
Application in a Corporate Context
The same applies to companies when they decide to address new customer groups:
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How do employees, customers, or suppliers react if a previously neglected ‘low-price segment’ is to be served?
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How consistent is it for a company known for being particularly service-oriented to offer its services in a cheaper, ‘service-free’ form? What would be the impact on the self-perception of employees, but also on the brand perception of existing customers?
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How well does it fit an organization known for sustainable business practices to invest in ecologically questionable technologies to open up a new market?
For this reason, it is not enough to regularly question the economic viability of actively addressing a segment; one must also consider how well the respective segment ‘fits’ one’s own organization:
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How compatible is the respective segment with your own brand personality, with the way relationships are shaped (internally and with partners), and with the self-perception of existing customers and employees?
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How high is the risk (or opportunity) of damaging or strengthening the brand’s reputation if a certain segment is served more intensively? For example, in many industries, acquiring ‘best-in-class’ customers in their market is attractive because a positive halo effect on one’s own brand is hoped for from the customer relationship.
Availability of Success Factors
The third factor determining a segment’s attractiveness is the company’s ability to successfully serve that segment. Segments differ in their expectations of a provider. The key to success is meeting expectations better than competitors.
How well expectations are met depends on the company’s capabilities. A segment primarily characterized by high expectations regarding delivery speed can best be served by companies that possess special capabilities in, for example, flexible production, warehousing, transport, and information technology. Customers in a segment who value personal attention will likely feel comfortable with a provider who has qualified and committed employees.
Success Factors
To assess your company’s ability to successfully serve a segment, the following questions must be answered:
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What must a provider master to meet the expectations of segment members? In other words: What are the success factors in this market?
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How well positioned is the company regarding these success factors? Where is there a need to catch up, and where are the strengths compared to competitors?
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How much would need to be invested to establish oneself as an attractive provider in a segment? If an economically attractive segment requires a local presence in Southeast Asia, but the organization lacks the corresponding resources, it must be considered whether the investment to build these capabilities is worthwhile.
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Does the company have clarity about the central success factors and strategic core capabilities needed to successfully address segments?
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What activities does the company undertake to cultivate and further develop these strategic capabilities?
From this perspective, it is about connecting one’s own capabilities with the expectations of the segments and the capabilities of the competition to determine whether a segment can be served at all, or if it should be consciously neglected due to missing (and not reasonably acquirable) capabilities.
This perspective – comparing one’s own capabilities with those of the competition – forms the basis for an organization’s positioning decision: Based on which capabilities can we better serve the expectations of which customer segments than our competitors?
IN BRIEF
The evaluation of market segments is the first step to creating internal clarity on how much organizational attention should be given to individual customer groups. This evaluation should consider the economic attractiveness of each segment, its consistency with the brand, and the necessary capabilities. Just as with segment formation, it makes sense to address these questions regularly, and not just within the framework of structured strategy development processes.
