Who the hell should be my customer segment?? contd..

So, where were we the last time? I had to define no focus on "who can be satisfied through similar distribution channels" part of the definition. If you are just wondering what I am talking about, please read my previous post.

First of all, I hope you know what distribution channel means. Even if you don't, don't worry I 'm explaining that also. (I have lots of time:)) Distribution channel is the way the product reaches the customer. So, you can use an indirect distribution channel whee you supply your products to the distributors, who then supply the products to the retailers, who then in turn finally sell those products to the consumers. Or you can use a direct distribution channel in which you directly supply your products to the consumer. Example could be online retailing or mail orders.

Now, the reason of having this condition of satisfying through similar distribution channels can be illustrated through an example. Suppose there are two persons X and Y. In all other aspects, they are similar but X shops only through brick and mortar shops and Y only through online. Now, from company's perspective, they would different service levels, offer different margin levels and would require different ways to reach them. So, in this way they would be different.

So, I have completed the definition of a customer segment. Now, moving on to the question of choosing the customer segment for my products or services. One answer is to say that the segment which has the maximum profit potential should be my customer segment. Is this definition right? Partially is my answer.

I mean it is right but how is the profit potential defined. Suppose there are two segments X and Y. X has 1 lac customers who can spend 1 thousand each and Y has 10,000 customers who can spend only 100 each. So, does Y has more profit potential than X? Yes or No. My answer is I don't know. Suppose my product costs 50 only. This means each of X will buy 20 items and each of Y will buy two items. So, is I am the only one in the market, my revenue from X would be 100 times from X. But what about the profits? Would profits from X also be 100 times profits from Y? May be. May not be. It depends upon a number of factors. Some of the factors could be:

• How much marketing effort do I require to sell my products to X compared to effort required to sell my product to Y? If X will not buy my products until I have Shahrukh in my ads or I sell the products only in the elitist malls, then it is very expensive to sell my products to X.
• How much service is required by X compared to Y? If X is an idiot and keep calling my customer care to know about every small feature or benefit of the product or just for time pass, then it's expensive to serve X.
• How loyal is X customers compared to Y? In case when I am the only supplier, the question may not apply?

There could be other factors which could affect the profitability of a segment. So, it would be naive to only look at the size of the segment. A comprehensive analysis is needed.

The problem becomes even more interesting when I have competitors also. Now, I have to ask one question. Why would anyone buy my product over my competitors product? If the answer is only price, then I'm in for a price competition. The only differentiator between me and my competitor is price. So, we'll both play on price and keep on reducing the price to match each other and try to undercut each other. The result would be we'll reach a point where our costs would be equal to our prices and we'll be making zero profits. The condition can worsen than this also like it happened in airline sector in 1990s.

But there can be other answers like quality or service or brand or distribution or something else. In that case, I and my competitor will be playing with different variable and we'll both possibly end up making profits. In this case, I have to ask myself which segment should I serve. The answer is that I should serve that segment in which I have a competitive advantage over my competitor. I mean if I am a small player and don't have big distribution and segment X is spread out and thus demands a good distribution, then I should possibly look towards segment Y because I don't have what it takes to satisfy X. I am small player and thus very nimble and can maintain a very good service level because my decision making is fast. Suppose Y want very high service levels. Then I can serve this customer segment better than my big competitor who may not be able to provide service level comparable with me.

A thought may come to your mind that if Y requires such high levels of service, won't that increase my costs and decrease my profits. The answer is possibly no. As you are the only one who can provide what Y requires, you can charge higher amount to Y for providing higher level of services and believe me, Y won't mind paying that. Just think do you mind paying more for a private hospital when you have a chance of going to a government one.

Hope you enjoyed reading.

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Who the hell should be my customer segment??

First of all, I don't mean to be aggressive here (which you may think looking at the title). I think I am just expressing the frustration of a marketing manager, who is thinking whom should he sell his product to or who would buy his product or what should be his target customer segment?

Let me first define what does the term "customer segment" mean? But it's not so easy. It is not very easy to define this term. You pick up five top books on marketing and I am sure you will find different definitions of customer segment in them. (I think there would be books entirely focusing on customers and even customer segments. I still don't think they would be having the same definition). Though all different from one another but somewhere all would be using words like homogeneous customers and similar needs.

Let me have an initial try at the definition: "A segment is a set of homogeneous customers having similar needs which can be satisfied through similar distribution channels". Well, you might have noticed I have gone beyond just homogeneous customers and similar needs. (It doesn't mean I am a marketing guru. I must have read all this somewhere. But the point is that I agree most to this definition than any other).

Let’s see what this definition means. Firstly, who all are homogeneous customers? (Here, I would not like to go into seeing who is a customer. I am ignoring this for this post). Homogeneity can be defined in several ways. It could be on the basis of gender. So, I can say females are one segment and males other (you could have a third segment too). It could be on the basis of income. So, I could say, all people with income above 3 lacs is one segment and people below 3 lacs is another segment. As you can see, on the basis of income, we can have n customer segments. Homogeneity could be on the basis of height, weight, home ownership etc.

So, when we say "homogeneous customers", what do we mean? It means for my product category, they are homogeneous. For example: If I am selling some perfume or deodorant, then homogeneity could be on the basis of gender. If I am selling some club membership or credit cards, income could form the basis of homogeneity. If I am selling home loans or even other loans, homogeneity could be on the basis of home ownership (whether the person has his own home or stays on rented home).

Let me clarify one point here that I am using just one variable for defining homogeneity i.e either gender or income or height etc. But generally, a number of variables are generally used to define homogeneity e.g. I can define a set of homogeneous customers as "females with age between 25 and 30, earning more than 3 lacs per annnum, living in metropolitan areas in rented apartments along with their families" (Calculate the number of variables I have used. It's 6). So, I am defining my homogeneous sections on the basis of 6 variables. How many such sections can I define?

Having defined what "homogeneous customers" mean, let me ask do all homogeneous customer have same or similar needs. If you think yes, then think again! The answer is obviously no. Obviously because if my product is a matrimonial site and one of my section is "females with age between 25 and 30, earning more than 3 lacs per annnum, living in metropolitan areas in rented apartments along with their families", then definitely different people in this section will have different requirements. (You may ask here then what was the purpose of collecting them in a homogeneous section. The point is that though the requirements may be different but still many of them will have similar requirements). In my case, all of them would want a guy who can marry a girl with this profile! (I know not a great example!). So given that the needs of different people in a section may be different, the next job is to collect all the people in a segment who have similar needs.

So, have we arrived at a customer segment now? The answer is No. We have got a section of homogeneous customers who have similar needs but we have still not touched the second half of the definition i.e. “which can be satisfied through similar distribution channels". I am not touching this part now. I will take it up in the next post. (Otherwise you would sleep off till the end of the post).

PS: I know the scope of the title was to choose a segment and I did not even define a segment. This is cheating. You may call it. But I will be covering all this in subsequent posts.

Is it really cheating or an application of a marketing concept?

Recently, I went to a dtdc shop (don’t know if it was franchise or not. This shop gets the couriers from main Ahmedabad dtdc office and delivers them in its area). The shop is located in Vastrapur, Ahmedabad. I wanted to courier one package to Delhi. The guy there weighed the courier. It came somewhere around 275 gms. After weighing he started doing some paperwork. I understood he was basically preparing receipt for sending the courier. Wanting to know the amount, I interrupted him and asked what the charges are. He replied Rs150. I stood there silent for a few seconds giving an impression (and it was actually the case) that the amount he quoted was much higher than I expected. He asked whether he should continue. I paused for a moment and then was probably going to refuse him. At that time, he said that I can send it for Rs120 also. I was a bit surprised and asked him what the difference is. He said that there is a separate department dtdc+, which charges extra. He pointed me to a banner which had dtdc+ written on it and showing that it gives some delivery guarantee.

Even though Rs120 was also higher than I expected (I did not have some amount in mind but probably around 50-60 was in my mind), still I said yes. I was sending such heavy courier for the first time. So, I thought may be it costs that much.

On returning back, as I was still feeling that the amount was a bit high, I went to dtdc site. According to the site, it should have cost me Rs75. I instantly called that guy. He started giving lame excuses that no matter what is the weight we get, we have to pay this much…blah blah blah… I said ok now I can’t do anything, so good bye.

Then as I was thinking about the incident, I started thinking whether he has really done something immoral. I knew he has sort of cheated me. But was he really morally wrong to do that. One thought came to my mind that no, he has done nothing wrong. He has just extracted more customer surplus (for definition of customer surplus, see end of post) out of me. This is what the job of a marketer is: to provide maximum value and then extract maximum surplus out of the customer. The prices of all lifestyle products and even things like coke, pepsi, chocolates are not calculated on cost plus margin basis. The price is calculated on the basis how much can the customer pay. So this is the same he did. As I could pay Rs120, he charged me that. Rather than calling him immoral, I should call him a good marketer. Shouldn’t I? Is there something wrong with my argument?

As I was thinking about this one more thought came to my mind: Are money lenders exploiting or helping poor people? Most people hold the view that these money lenders charge unjustifiable interest rates and conditions to the poor people. But my point is that it is their choice how to price their product. Do we ever ask pepsi why does it charge Rs10 for a bottle that costs just 80 paise? So, money lender has money. They fix a price for lending. Now it is up to the farmer to get a loan or not. Money lenders are not forcing loans to the farmers. The value derived by the farmer must still be higher than the cost (even though it is very high), that’s why farmer is coming to the money lender. That’s the only reason he is coming to the money lender. So, money lender is actually increasing the value to the farmers by providing loans, even though at exorbitant rates. What’s wrong with this? Why people are severly against these money lenders? At least, marketers should never be critical of them. They are just doing what a good marketer is expected to do.

If you say that one should look at the social value also when trying to capture the customer value, then my first argument is you are walking on thin air. What is social value anyway? Isn’t pepsi wrong when it charges Rs10 for a 80 paisa bottle? Can you measure the psychological sadness that a person might be feeling when he wants to drink a pepsi but he can’t spend Rs10? I’m not joking. I am serious. How do you feel when you want to buy something but you can’t afford it. Similarly, a poor person sees a bottle of pepsi and wants to drink it but he can’t. If it had been for Rs3 or 4, he would have had it. Now who is the cause of this depressed feeling? Pepsi or someone else? Now if that’s not enough, Pepsi spends so much on advertisement and keep bombarding that person with advertisements continuously reminding him of his poverty.

One thought that’s just coming to my mind is suppose that a person worth Rs1000 crore gets a heart attack and is taken to a hospital nearby. There is no other hospital in 50km range. What should this hospital charge the person? How much would he be willing to pay?

Definition of customer surplus: Suppose if you are buying pop corn for Rs5, then the satisfaction or value you are deriving from consuming pop corn must be greater than the value you derived by keeping Rs5 to yourself. So, customer surplus is

Value (in monetary terms) derived from the product – Price of the product

So, suppose the maximum you are willing to pay for same pop-corn is Rs10, then that means this the point where you are probably indifferent to having pop-corn or money with you. Above price of Rs10, you’ll prefer to keep money and below Rs10, you would like to have pop-corn.

In this case, if you are getting pop-corn for Rs5, then customer surplus if 10-5=Rs5. A marketer job is to capture the maximum of this. So, a good marketer will price the product around Rs10.

Disclaimer: This is very simplistic explanation but it captures the essence