article | February 26, 2019
Why Most Market Segmentation Studies Fail the CEO
Market Segmentation analysis and reports are a foundational component of strategic analysis, planning and decision-making for any CEO. Understanding market opportunity and market dynamics is critical. It informs how to make investments in people, time and money.
In the planning process, you are trying to understand where to invest and where to double down. Here is a link to another SBI Blog on whether to double down or whether to broaden your reach.
Outputs of a Market Segmentation analysis provide baseline understanding of what direction to likely fly the plane. However, these reports are pervasive and a dime a dozen. How does a CEO know what content to use and what content not to use? Part of a CEOs job is to understand what data to leverage to make decisions. The 133 slide management consultant shelf-ware deck is all too common. So why are some Market Segmentation projects effective and others miss the mark? Often it comes down to depth, context, and actionability.
Depth and Context
Market Segmentation strategies are based on 4 core components:
The challenge of defining and subdividing large homogenous markets into clear identifiable segments is sizable. Providing a broad Total Addressable Market (TAM) study has value as a baseline but generally does not have depth and context. For a level of depth, using Service Addressable Market (SAM) and Profitable Addressable Market (PAM) input is valuable as the next level of detail.
Service Addressable Market by definition is a subset of the TAM.
SAM looks at the TAM and assesses what aspect of the TAM is a logical extension of the business based on a company’s historical performance or areas that are adjacent to the company’s core competencies. Output of looking at the SAM is an understanding of what is obtainable. The SAM has more depth than TAM because it takes additional context into account.
These are a set of examples that look a level deeper into a traditional Market Segmentation. But as you can see, they are core questions to making strategic decisions and driving shareholder value.
Using PAM to Provide Further Depth
Drilling a level deeper is the concept of Profitable Addressable Market (PAM). A PAM looks at TAM and/or SAM and diagnoses what markets are addressable profitably.
Making investment decisions based on opportunities that are not profitable may lead down the wrong path. Having the data and analysis around PAM is important in making capital allocation decisions. Market share and growth may be the core set of priorities based on current company stage. But having a lense on profitable and efficient growth is an important level of depth.
The Plan Requires Actions
Once the data is unpacked, so what? What do I do with it? Assessment of the opportunity is one thing. Most 133 slide management consulting decks do a good job of assessing the opportunity. The next step is making the content actionable to drive strategic alignment and strategy execution.
The How behind the What. This is generally the critical missing piece. When a CEO chooses to invest time into the research, the How needs to be front and center.
Market Segmentation is a core part of the ongoing planning process. Planning is not a one time event. Markets and opportunities change. Competition changes. Geographies having changing dynamics. Consumers value different things. Market Segmentation is not a one time event. It needs to be iterated constantly. Update the TAM. Update the SAM and update the PAM on a constant basis.
Drive Further Clarity by Drilling down into Account Segmentation
Once you have completed effective market segmentation, then move on to account segmentation. This will give you a comprehensive market research approach. One that then feeds into each of the strategies in the revenue growth chain. Account Segmentation allows you to truly understand what customers and prospects, at a granular level, will spend the most amount of money in the shortest amount of time. This allows you to deploy the right resources at the right targets. For additional insight into Account Segmentation read this SBI Blog on the value of Account Segmentation vs TAM.
SBI is a management consulting company. Deep, contextual and actionable insight is at the core or the firm’s delivery methodology. Download our Segmentation Tool and Market Segmentation Tool to help understand some questions that need to be answered when deciding to enter new markets.
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