One Size Fits All? Not Forever.

I recently had a discussion about whether a company should develop a niche product for a segment of the market where their horizontal solution had been well-received for many years.  It brought to mind a trend we have seen over the last 16 years of studying various markets.  As markets grow and mature, they fracture into more segments over time.  And that fracturing affects the need for new solutions.

I’d like to discuss that evolutionary process here, but first a brief look at segmentation to insure we’re all on the same page.

Segmentation is on the mind of anybody in marketing at some point.  And every market strategy document discusses segmentation as it describes the market landscape.  With all of this attention, segmentation must be easy then, right?

Segments are just different types of customers.  So, what is it about these customers that causes us to plop them into different segments?  Most of us would agree that a market segment is a group of customers with a unique need for value.   In our jargon, that means that each segment needs a different value proposition and/or a different way to deliver that value proposition.

Yet marketers too often segment customers into demographic segments that have little to do with real market needs differences.  This demographics-based segmentation is done for two reasons - it’s easy to find the segment sizing data, and it’s easy to target in marketing and sales campaigns.  And it’s supported by analysts who use this method because they too find it easier than doing the real work of segmentation for each specific client.

Segmenting a market is an inductive process requiring knowledge of individual customers and their needs.

• Customers segment themselves based on their needs for value, not just whether they look different, and it’s up to us to discover these segments rather than imposing them.
• Customers don’t segment themselves to make it convenient for marketers.  They do so based on their own goals and priorities.
• Segments are also dynamic, changing as the customers, competitive environment, technologies, regulatory environment or any number of other factors change over time.

It’s this last point that brings us to the second part of this post.  Let’s use the auto industry as a proxy for yours.  When Henry Ford introduced the Model T in 1908, he had found an under-served segment of the embryonic auto market that would favor a superior value proposition.

1. Provide a car at a price point that is well below others in the market, making it affordable to a broad group of customers who couldn’t previously afford to own a car.
2. Provide unprecedented quality and reliability, thereby reducing the hassle of owning the car.
3. Finally, make it easy to buy these cars through an independent dealer network.

This set of value was so compelling to such a broad segment of the market (those who wanted an easy purchase and ownership experience and were unwilling or unable to spend $2-3,000 for a car) that the Model T grew to half of all cars sold by 1918, in spite of a plethora of manufacturers.  By 1927 when the last Tin Lizzie rolled off the assembly line, Ford had sold 15 million of them.  It remains today one of the most successful automobiles in history, ranking #8.  And no other car has sold so many in so little time.

So, why did the Model A, the successor to the Model T (had Henry read the alphabet before?), sell fewer than 5 million when the market was much larger?  Market maturity and attendant fractured segmentation give us the answer.

Once the basic needs of a market are fulfilled by one or a few offerings, competitors work harder to differentiate from one another.   What usually happens is that there is no realistic value proposition that dominates like the original did for years, unless a major innovation raises the bar substantially.  Maturing, attractive markets increasingly fracture into more segments over time, reflecting the fact that basic needs are fulfilled and increasingly specific needs fulfillment is required to gain customer preference.

This same phenomenon is valid in all markets we’ve studied.  The lesson for all companies is to not get overly-enamored of the wildly successful offering that took the market by storm for years.  Over time, there will be attractive segments that will yield to offerings more tailored to their specific needs.  What differentiated you yesterday - your big bet - is simply the ante to play by tomorrow.  New conditions require new value propositions that are increasingly differentiated from others.