ment), customers requiring specific applications or uses may be more profitable than others and therefore considered the “best” customers.
After defining the best customers, the next step is to attract more like them and/or enhance the profitability of the existing customers. The flow chart of customer analysis is featured in Figure 6.1.
revenue and profitability of existing customers in these segments, and similar variables. Then it rated each segment on a 1–5 scale with 1 being
“unattractive” and 5 being “highly attractive.” General distributors (segment A) were rated 3, specialty distributors (segment B) were rated 4, fast-food chains (segment C) were rated 2, commercial operators (segment D) were rated 3, and noncommercial operators (segment E) were rated 1. Note that there is some blurring of customers and non- customers at this time, since we don’t want to limit the analysis to what is happening now but keep in mind the potential for growth. Compare the size, purchase volumes, and growth rate for each segment in the entire market with the size, purchase volumes, and growth rate for the respective segment of existing customers. Ask questions during this analysis. What is the demand in each segment for the product? What is the product’s penetration? How many prospects are there in segments that purchase only competitive products? Why do they purchase only those products? Are you gaining or losing share? Do you participate in the most profitable segments in the industry? Summarize the informa- tion in a table similar to that shown in Figure 6.2.
Figure 6.1 Flow Chart of Customer Analysis Process Identify and profile “best” customers.
Develop customer value profiles.
Attract new customers who have a similar profile.
Enhance the profitability of the existing customers.
Increase the amount of business they do
with you.
Extend the length of relationship with
you.
To determine whether it had any competitive advantages in address- ing the segment-specific needs, Progressive honestly appraised its own competencies and rated its ability to satisfy the needs of the segments.
Again using a 1–5 scale, Progressive rated itself 1 if there were strong competitors with significant abilities to satisfy the specific needs, 3 if it was at the same level as the competition, and 5 if it was significantly superior to the competition. Progressive’s competitive ability-to-serve ratings are shown in Figure 6.3. The “Requirements to Satisfy Needs”
column highlights improvements or changes Progressive would need to make to address the needs of each of the five identified segments.
The ratings identify how well Progressive can meet the needs com- pared to its competitors.
Combining the information on market attractiveness and ability to serve yields the matrix shown in Figure 6.4. For example, the Gen- eral distributors segment has a “3” for market attractiveness and a
“3” for ability to satisfy needs, placing it right in the center.
All else being equal, the best target market(s) would be in the upper right-hand quadrant where a company has determined it has a highly
Figure 6.2 Attractiveness Ratings of Market Segments for Progressive Foodservice, Inc.
Market Segment General distributors Specialty distributors Fast-food chains
Commercial operators
Noncommercial operators
Characteristics of Market Attractiveness (size, growth rate, purchase volumes, etc.) Top five play a pivotal role in the industry. Price is a driving factor.
Showing growth due to special food service demands of aging population.
Approaching saturation for our type of product. Heavy competition and price pressure.
Pockets of rapid growth (e.g., retail delis) due to dual-income families.
Strong potential for our type of product.
Static or declining potential.
Percentage of Company
Sales
39%
14%
16%
22%
9%
Percentage of Industry Sales
27%
13%
22%
30%
8%
Rating (1–5)
3 4 2
3
1
attractive customer segment and a high competitive advantage in serv- ing the segment. As expected, there are other considerations. First, there may be no segment that falls solidly in this quadrant. In that case, a firm might target the most attractive segment that exists and determine what products and skills it would be necessary to develop to shift the segment to the right. Second, there may be a segment in the upper right quadrant having relatively little future profit potential compared with other segments. To help visualize this, the circles can be adjusted in size to represent the potential opportunity in that segment. Third, a seg- ment in the upper right quadrant could already be dominated by the company, with little to be gained by increased resources. In that case, allocating sufficient marketing dollars to customer retention may be appropriate, with more resources being diverted to other promising seg- ments. To help visualize this in the matrix, it is useful to draw the cir- cles as pie charts with a distinction between attained market and future potential. Finally, some segments that appear to be less attractive on an absolute basis might indeed turn out to be quite attractive if they are underserved by the competition.
Figure 6.3 Ability-to-Serve Ratings for Progressive Foodservice, Inc.
Market Segment General distributors
Specialty distributors Fast-food chains Commercial operators Noncommercial operators
Requirements to Satisfy Needs (products, skill set, locations, costs) Improved carrier terms, established extranet
Commitment to R & D and new product development
Shared cost shipping services Consulting chef de cuisineon call; test kitchens; educational CD-ROMs
Product development efforts on extending shelf life
Needs
Centralized purchasing; volume buying at discounted price;
specialized distribution specifications Unique products;
merchandising support Just-in-time shipments at lowest possible price Menu support; presentation suggestions
Consistent inventory replenish- ment; long shelf-life products
Rating (1–5)
3
4 2 4
1
To compile this information, both internal and secondary (pub- lished) sources are necessary. From an internal perspective, sales records should be correlated with demographic characteristics to determine which variables relate most closely to profitability. Does company size, geographic location, type of application, or any other variable help “pre- dict” sales? Once these variables are identified, you can extrapolate them to noncustomers to estimate market and growth potentials. The
“deliverable” from this step of the background analysis is a “knowl- edge chapter” in the product fact book summarizing the drivers of loy- alty and defining profitable customer segments.
Noncommercial Fast food
General distributors
Specialty distributors
Commercial operators Market
Attractiveness
Ability to satisfy needs (better than competition)
1 2 3 4 5 5
high 4
high low
low 2
1 3
Figure 6.4 Market Attractiveness Matrix for Progressive Foodservice, Inc.
It’s worth noting that as companies design and implement new ser- vices to satisfy customer expectations, their processes usually become more complex and costs usually increase. Conventional cost-account- ing methods do not properly identify differences in cost-to-serve. They fail to identify some of the postproduction costs that are caused by addressing segment-specific needs. As will be discussed in Chapter 11, it’s important to recognize that costs are not just uncontrollable occur- rences, but rather are caused by measurable factors that can be man- aged. Therefore, an understanding of segment reporting and possibly activity-based costing needs to be part of the product manager’s reper- toire of skills.
Worksheet 6.1 Attractiveness Ratings of Market Segments Market
Segment Segment A
Segment B
Segment C
Segment D
Segment E
Percentage of Company Sales
Percentage of Industry Sales
Characteristics of Market Attractiveness
(size, growth rate, purchase volumes, etc.)
Rating (1–5)
Once these two worksheets are completed, the product manager can create the visual matrix described earlier for Progressive Foodser- vice, Inc. The information can then be used to identify primary and secondary target markets, their needs, and the issues a firm will need to address to satisfy the needs.