Set Boundaries on the Business
Setting boundaries on the business you want to segment sharpens the focus on the important products and competitors in the market. You may have a good sense of your business definition. However, this step becomes helpful when you have new, especially nontraditional, products or competitors coming to the market. You define the business by carefully specifying its products, competitors, and Buyers. If one of these components changes you may have a separate business. If two components change, you would have two separate businesses.
Products and price points
You begin the business definition by specifying the unit sales and average prices of the products the business sells. Units, rather than currency, of sale underpin potential economies of scale in every market. You list the market’s total units of each product sold to find the most common product in the market. We call this most common product the Standard Leader product since this product describes the market’s base product for performance and price. The Standard Leader product commonly represents between 60 and 90% of the total units sold in the market. Its average price sets the market’s benchmark price.
You might define performance on three simple dimensions: the function or features of the product for its Buyer, the reliability of the product and of the Supplier’s relationship with the Buyer, and the convenience with which a Buyer may purchase and install the product.
Once you have identified the Standard Leader product, you describe the other market price points and their units of sale. You array the remaining products in order by their average unit prices, ranking them from the highest to the lowest average price. We name those products with average prices above the Standard Leader product, Performance Leader products. These products offer higher performance in the form of features, reliability or convenience than does the Standard Leader product, at a higher price to cover the additional cost of this higher performance. In practice, Performance Leader product prices start at about 7% or more over the average Standard Leader product. There may be several Performance Leader products at the high-end of the market. In total, Performance Leader products usually hold less than 20% of the market’s unit sales, though they will control a higher percentage of the market’s total revenues.
Those products with average unit prices below the Standard Leader product we name Price Leader products. These products offer less than the Standard Leader product’s feature, reliability, or convenience benefits for a lower average unit price. These Price Leader products offer average price discounts to the Standard Leader product beginning at 10%, but usually averaging 30% or more. As a group, the Price Leader products usually command less than 20% of the market’s total unit sales and a smaller percentage of the market’s total revenues.
Do all these products belong in your definition of the business? That depends on what your competitor and Buyer definitions reveal.
Competitors
You identify the competing Suppliers at each of these three price point groupings. Beginning with the Standard Leader product group, you list all the competitors the Supplier faces as it sells its Standard Leader product. You concentrate here on the top five competitors as ranked by each competitor’s unit sales. These five are usually the only important competitors in the market. The other suppliers are small and rarely affect your segmentation.
You make a similar list for each of the other product price point groups. You ask: do the same competitors, especially the top five competitors from the Standard Leader product group, compete in each of the other product price point groups? If so, you have identified the competitors in the business. If not, the product price point groupings with different competitors from those of the Standard Leader product group may form a separate business, or businesses. If the outlier group of competitors does form a separate business, you will confirm it in the business’ Buyer definitions.
Buyers
Many industries have at least two types of Buyers: channels of distribution and final Buyers. The evaluation criteria each of the two Buyer types uses is unique to that type. The first Buyer to whom the Supplier sells, the channel of distribution, is the focus of this business definition. Where you as a Supplier sell to both types of Buyers, channels and final Buyers, you treat the two types of Buyers as part of separate businesses. Mixing them causes confusion.
How to define a business
Some businesses also have more than one type of channel Buyer selling to final Buyers. While the different types of Suppliers vary from one another in their Buyer benefits, they usually all sell to your channel Buyers using the same performance criteria. This happens because the largest Buyers, not the Suppliers, set the market’s performance criteria. The largest channel Buyers specify the performance criteria they expect from each Supplier. All Suppliers then strive to conform to these performance demands. All the types of channel Buyers using the same broad performance demands are part of the same business.
Circling back to your product and competitor analyses, you would expect to see that the set of competitors serving the Buyers with performance demands that vary from the larger group of Buyers belong in a separate business with these atypical Buyers. This separate business may also be the locus for some of the products you reviewed in your definition of the products in the business.
With this final definition of products, competitors and Buyers in the business, you are ready in the next step to analyze the various Buyer sizes in the business. For efficiency, you conduct the next two steps of segmentation based on competition in the Standard Leader product. Conclusions there will usually apply to the other two product groups as well.