Wellsprings of Growth

Abstract: Smart segmentation can present continued opportunities for growth. Simplistic methods like demographic segmentation fail to uncover and profile smaller but faster growing customer groups. To find them, one must use variables that predict customer behaviour and the way they think and feel about their needs.

Examples of Nike, Praxair and Windshield Experts show how incisive methods of segmentation can yield opportunities for rapid and sustained growth in consumer as well as business markets

Published in The Economic Times, 20 September 2007

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Most companies practise segmentation in very rudimentary ways, and not very effectively.

Companies in business markets tend to favour segmentation by size and industry type. It tells them something about how customers use what they buy. The buyer’s size may indicate prospective volume, economic buy size, and the size of wallet. But these methods don’t provide insights into how customers behave, what impels them to buy this product or that, and how they reach those decisions. Simplistic methods give the false impression that one is addressing large markets. In the process, managers overlook opportunities that lurk in segments within.

The way people, and firms, think and feel influences their buying behaviour. Their circumstances, strategies and ambitions for the future – and they change with time – determine the choice of brands they buy, vendors they keep and how they decide. Their needs and feelings establish their value perceptions of products in the context of personal or business goals. Growth and profit opportunities are hidden behind these higher order variables of segmentation.

Nike has brilliantly exploited this fundamental principle. In each broad segment of sport, athletic shoes, equipment and apparel, they have targeted customers who desire, value or identify with high performance. They design products for high performance and position them for the serious athlete. They signal it through brand ambassadors who are world leaders in their fields: John McEnroe, Michael Jordan, Tiger Woods and Roger Federer, among others. They establish leadership in one sport before moving to a new product category within, or another sport. Nike has used smart segmentation as a repeatable source of growth.

Sophisticated segmentation is not always easy in business markets. Unlike individual consumers, purchase decisions are made and influenced by a number of people, some of who are invisible or unavailable. Their perceptions shape the customer’s behaviour but remain hard to map. An unknown mix of rationality and subjectivity conditions the way business customers reach decisions.

Circumstances also determine how customers feel about their needs. In hard times, a firm may wish to buy economically; in good times they may be inclined to the long-term view. A rapidly growing company may see investment in information technology as necessary to maintain momentum. A business facing pressure on margins may use IT to control and reduce cost. Smart companies exploit these factors to segment their markets in new ways.

Praxair India has used circumstantial need as a useful variable for segmentation. They pioneered the use of Argon for gas metal arc welding (GMAW) in India. Traditionally Carbon Dioxide has been used to envelop the area being welded, from oxidation. Argon based shielding gases facilitate superior weld quality and faster production. The challenge was to sell Argon-CO2 mixture at prices three to four times that of CO2.

Praxair sliced the GMAW market further using these additional parameters.

Firms or fabricators that sell to quality conscious customers.

They, or their customers, compete with global majors.

Those to whom welding is a critical process that contributes to functionality, safety and aesthetics of end products.

Where cost of gas for welding is small compared to the selling price of their products.

Businesses that wish to grow and can easily sell increased production.

Praxair reasoned that such companies were likely to consider a superior alternative. They began by targeting companies like Bajaj Auto, Hero Honda and L&T. These firms knew Argon was better but were using CO2. Their key value driver was the ability to increase production. They turned out to be early adopters. In turn they encouraged, even persuaded, their ancillaries to adopt Argon.

Praxair’s annual revenue from the segment has been rising at over 40% CAGR since 2000. In 2005 it topped Rs. 120 million. Powered by demand from 150 customers, business is expected to double to Rs. 250 million in 2007. By astutely separating customers who were keen and able to grow in competitive markets, they created a profitable revenue stream.

There are many reasons why the practice of segmentation continues to be rudimentary. Managers cast in the objective rationality mould abhor absence of hard data. Customer behaviour is nebulous, messy and notoriously hard to quantify. Reluctance to base decisions on insight is exacerbated by an unwillingness to ask customers, observe their behaviour and detect patterns. Managers don’t do enough to mine collective insight within the company. What is available, remains buried.

The more insidious reason, however, is that many companies are blinded by the ambition to grow. Size rather than shareholder value achieves primacy. A large market appears more attractive than a smaller one. When growth at any cost becomes the driver, it makes sense to aggregate segments and prepare offerings that have broad appeal. Not surprisingly, products are built with least common denominator features and priced to suit all pockets. They become price warriors, belie the initial promise, limp along or die expensive deaths.

In the year 2000 Windshield Experts (WE) took a bold step by opting to enter a non-existent market in India: the business of repair and replacement of automotive glass.

Vehicles that suffer damage to glass but not the body have traditionally been repaired either by the distributor, or an authorised service agency. They promise reliability, assurance of genuine parts, and usually take one or two days to finish the job. Windshield Experts chose to target customers who value quick turnaround more, provided reasonable reliability was assured. Those who are dependent on their vehicles for livelihood – people who are constantly on the run, or ply their vehicles commercially – find compelling value in WE’s proposition to repair or replace glass in a matter of hours rather than days.

WE sub-segmented the market for automotive glass replacement and targeted those who value speed. From four outlets in year 2000 and thirty-seven in 2006, they will be sixty strong by end 2007. They plan to cross a hundred in 2008-09. Revenue has risen from Rs. 7 million in 2000 to 250 million in 2006-07 and continues to grow.

Praxair and Windshield Experts sought opportunities in slices rather than larger market segments. Praxair gained a new stream of profitable revenue that has grown steadily for ten years. Windshield Experts have created a whole new business. By targeting narrow segments both have managed to create enduring competitive advantage and uncovered practically inexhaustible opportunities for growth and profits. Nike will testify it is possible.