Senior Management Programs
Organic Growth: Rethinking Segments to Find Opportunities
In a belt-tightening time, premium-priced organic foods may seem like a losing proposition. But as Wharton Professor Ian MacMillan walked through the aisles of a local Whole Foods supermarket recently, he saw many strategic opportunities arising from understanding changing customer needs, attracting new segments, and redesigning offerings. "You need to expend your imagination to keep profitable old segments and entice new ones," says MacMillan, a faculty member of Wharton’s Advanced Management Program and academic co-director of the Strategic Thinking and Management for Competitive Advantage program. "Price cutting is the most mindless thing to do."
Some customers who might have spent money at an expensive restaurant may now be eating at home. While they may not have as much disposable income, dual career couples still have little time for preparing food. By offering more prepared meals, the supermarket could appeal to former heavy restaurant-goers, at a much lower price than a dinner out. The supermarket also could step up catering offerings, appealing to budget-cutting companies that might have hired a more expensive catering service in the past.
Do deep-dive segmentation. Find out how you are going to morph, and morph your offerings to match.
–Ian MacMillan, The Dhirubhai Ambani Professor of Innovation and Entrepreneurship; Professor of Management; Director, Sol C. Snider Entrepreneurial Research Center; Faculty member, Advanced Management Program
By better understanding customers, the supermarket can better target and retain loyal segments. Parents, for example, who may not be willing to buy organic products or supplements for themselves might pay the extra money to ensure their children’s health. By creating a child-centered section of the store or making marketing appeals to the instincts of parents, the store can succeed in selling more products. Customers under dietary restrictions can also benefit from having sections of the shelves devoted to attending to their specific dietary needs.
Carve Out Segments Before Cutting Price
To find opportunities, MacMillan urges managers to carve up their markets rather than merely cutting prices. "As these economic changes occur, we see a downward shift in many markets," he says. "Some customers will enter into your market and others will leave. You need to recognize that this morphing is going to take place, and do resegmentation proactively instead of cutting prices across the board, which will destroy your profit streams."
This argues for very careful segmentation of the market. Some segments are not price sensitive. Others will continue to shop but in different ways, and others will defect due to cost. Some potential new segments or needs may be related to other trends than the economic downturn. If the supermarket created an aisle for people with diabetes or high cholesterol, for example, it would appeal to a growing U.S. segment. "Don’t cut prices; reconfigure your store mix," MacMillan says.
Similarly, manufacturers who make a specific product can redesign their offerings. As a frequent airline traveler, MacMillan notes that he would be willing to replace a perfectly good briefcase if it would improve the efficiency of his trip. Products with superior design and function still have legs, as can be seen by Apple’s success in a constricting technology market.
Companies also need to understand the difference between good customers and the ones who will likely take the money and run. A company that serves small businesses may have tight credit for many of its clients. By extending credit to the best customers, it can build long-term relationships that will sustain its business now and drive growth when the economy turns. "If you happen to be in a strong position, the downturn gives you an opportunity to do what others can’t do," MacMillan says.
Offer Future Benefits
With tight cash flow, managers should think about how they can offer customers benefits that don’t have an immediate cost. A car dealer, for example, knows the customers who buy a car religiously every three or four years. Instead of offering ever deeper price discounts, now dealers could offer something like an agreement to contribute to college tuition for the customer’s children years from now. This can encourage an immediate sale without draining current cash.
"Do deep-dive segmentation," MacMillan says. "Find how you are going to morph, and morph your offering to match."
Next month: MacMillan explores strategies for tapping the creativity and skills of your employees and knowledge of customers to generate new opportunities.
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