Ways to Segment Your Business

When I researched the U.S. Restaurant Business, I found that the restaurant business has been segmented by service (full, limited) or by style (full, casual, fast casual and quick service).

It is useful to think about several different ways to segment so as to discover new opportunities where unmet needs still exist.

The most basic of these “value adds” are the price and service levels. A simple example is Walmart. People drive long distances to shop there because of the low prices while accepting an adequate level of service. For more service and a willingness to pay somewhat higher prices, you are likely to turn to a national or local chain nearer your home, perhaps a King Sooper or a Safeway in the Denver area. Close to home, you might stop at an independently owned grocery store where the prices are high but the owner greets you by name.

There is almost a limitless way to segment: priceservicevaluedemographicsspeedethnicitystyle, etc. A graphic from the April 2015 issue of Fast Company details the segmentation of the apparel industry very well.

The chart captures the challenge that the retailer Gap finds itself. It is in the middle and needs to make “… clothes that people actually want to wear.” Being in the plum center of such a chart is not a good place to be. When you try to please everybody, you end up pleasing very few people.

Occasionally, a company can develop advantages on several dimensions. For example, Amazon initially competed with bookstores on price and breadth of selection. They won that war. Then they expanded their offerings and started to offer electronics, for example, at a price better than Best Buy’s prices. Even though Best Buy’s local presence offered the advantage of convenience, its anemic service made their bundle of value unattractive. They continue to chisel away at the distance disadvantage with their Amazon Prime 2-day service model. Currently it is offering same day service in some markets. Amazon efficiently segments every business it enters. It is the big gorilla in the low price segment with Amazon, but it also offers a full-priced, high service, selection of shoes and clothing through Zappos, a company that it owns.

A Common Mistake

Many people make the mistake of looking at a large category and assuming that they can develop a nice sized business by getting a small share of the market. Their reasoning might go as follows: China has more than a billion people. It seems feasible to reach 2% of the market and sell them four cereal boxes a year at $2 / box. This would allow our business to scale to $160 million rapidly.

Even though the numbers seem small and therefore “conservative”, such as only a 2% market share and only four cereal boxes a year, they are based on more hope than reality. The better questions to ask might be:

  1. How many people eat cereal in China?
  2. How many boxes per year do the cereal eaters buy?
  3. Which companies are selling cereals there today? How big are they? What is their experience to date?
  4. What will be our point of difference?

Beware of the beguiling fallacy of large numbers.

Take the time to understand your industry really well. It will make your future life easier and quite likely, richer.

Verinder, Author: Discover The Entrepreneur Within

Written by Verinder Syal
Verinder is the Principal at Thoughtful Simplicity, an award-winning teacher at Northwestern University, and the author of Discover The Entrepreneur Within.