Customer/Market Segmentation: Slice It Up!

Just because you are a market leader in some areas, there could still be other markets or segments you could tap into. You can slice your existing market segments (or addressable market) in different ways, such as by demographic segments. You can look at different geographies, or different customer wants and needs, and consider modified versions of your product or service to address these new market needs and opportunities.

Developed Markets versus Emerging Markets

Given that there are many ways to segment a market, we will focus our analysis on segmentation by geography and by the respective customer (or buyer) characteristics. For the purpose of this exercise, we will divide the market into developed markets and emerging markets.

Developed markets are typically markets in Western countries, such as those in Europe, the United States, and Canada. As early adopters of technology with established infrastructure, developed markets have experience, are savvy, and have access to many options. They are financially stable and/or financing for a purchase is readily accessible, and they have minimal budgeting constraints.

Emerging markets include those in emerging Africa and evolving Asia and those in Latin America and Eastern Europe. While the degree of development progress varies among these nations, in general they have socioeconomic development goals, significant leaps to make from a country development perspective, and ambitions to catch up to the advanced economic positions of developed countries. Availability of financing is often an issue requiring a longer-term payment schedule, particularly if funding is coming from international development banks or other funding sources that we will examine in greater detail later.

Emerging markets are interested in acquiring new technologies or products but often are not consistently engaged by more established vendors. One primary drawback for Western vendors with respect to customers in these markets is the duration of time required for decisions to be made and executed versus the customary shorter sales cycles of Western companies.

Setting Goals: Looking at the Chinese Target Market Strategy

So, if you were a Chinese vendor expanding into new markets or new industries, what would you do?

You would do your research. You would get to know your prospective customers, then do a self-assessment. You would determine your strengths and weaknesses relative to your top competitor or incumbent, then you would target customers accordingly (per The Art of War principles). Maybe one of your targets is the customer who cares more about the extras than the actual product or offer—which incidentally is exactly what you are good at supplying. For example, you could target emerging-market customers, who want and appreciate more attention, guidance, and a higher-touch engagement.

Next, based on your analysis, you would determine your market expansion goals. Where do you want to go? How do you get there? Sometimes it is the winding, curved road (with its requisite intermediary steps) that gets you to the ultimate goal instead of the straight line.

In the case of China, its goal is to become recognized and appreciated by customers in the developed world as a leader or worthy contender in a given industry. However, the Chinese are challenged by established incumbents who have set standards and have already acquired customer bases. Thus, the goal of Chinese companies may be to establish themselves with second-tier customers before targeting first-tier customers.

OSPF (Open Shortest Path First)

What do you do when you have a less than superior product? You open shortest path first (OSPF): Sell to customers with lower expectations and work your way up.

OSPF protocol is a networking technology term that I have applied to marketing. It works like this: Once new market entrants determine their goals for establishing themselves in a new industry (e.g., achieving a global market share ranking of number four in product market X in five years), they determine their starting points. Some questions that need to be answered include:

• Where will the initial market-entry point be?
• Where can some level of success be achieved most quickly?
• Where can some sort of presence in an industry that has low barriers to entry be established?
• What customer base can best be satisfied given today's available offering?

The Unsatisfied Customer = My Customer

Companies from developed markets have been in a rush to get business and leave. Western companies haven't taken the time to truly understand their customers' needs, and/or they have used emerging-market nations to recycle their mature technology—to dump and run. Chinese companies, on the other hand, know where, when, and by which customer base their offerings will be most accepted. They also realize that another success factor for rapid market penetration is to target less-addressed customer pools. In this case, dissatisfied or overlooked customers have become their targets. The Chinese have had the resources, inclination, time, and cultural savvy to give these customers the attention they were lacking from established, Western suppliers.

A level of empathy has been at play as well—one emerging-market nation understands the challenges of another. There is nothing like the power of association: a supplier who can relate and who knows what is important to customers in an emerging market. These customers want a supplier who is in it for the long haul, one who is going to do some hand-holding through the purchase and implementation process, and who is investing in its emerging market customer and not just asking the customer to invest in it.

Customer Profiling: Knowing Your Customer

It is important to profile each of your customer groups: What do they really need versus what you are currently selling? What is their budget or ability to pay? Which of their behaviors and activities indicate the applicability of or need for (or not) your offer?

In emerging countries, relationships are key and paramount in how customers decide whom they will choose to deal with. If the solution is only adequate but the customer has a high level of trust in the seller or vendor, trust will almost always supersede and win. Emerging countries have been cheated before by those looking only for short-term gains, and they do not want to experience this again.

The Chinese are very good at recognizing this sensitivity and capitalizing on it. They make up for their competitors' shortcomings by turning on their innate cultural instincts and treating their prospective customers with the high level of care and attention that they seek and desire.

Practice Makes Perfect

There is also another advantage to a market penetration strategy that starts in emerging markets or with a second-tier target—it allows new market entrants to practice. They get to practice their product manufacturing, delivery, product evolution, and implementation.

When an emerging-market customer has experienced disappointment, the expectations are lower or different from those of customers in developed markets, and other factors are given higher consideration in the decision-making process. These factors may include being offered financing or enjoying efforts made toward building strong customer relationships.

Emerging-market customers give new market entrants the time and the opportunity to get better at the product quality component of an offer. By acquiring customer references, regardless of how well known they may be, the emerging supplier gains some market recognition and establishes some level of presence in the industry. This prepares the new supplier for market entry into more demanding customer segments, such as those in developed markets.

Getting to Know Your Future Target Customer: Back to Goals

We know that Chinese companies will not stop at having emerging markets as their sole target customer base. They are glad to use emerging countries as a starting point, as a secondary target market (and as a primary target market for their national goals), but they also continue to chip away at their principal target—the developed market—where their ultimate credibility and recognition will lie.

Because it is more difficult to gain credibility in established markets, the Chinese have used the following tactics (some of which are used for emerging markets too):

• Win reference account(s) from first-tier customers.
• Hire a local executive (a CxO) to satisfy the local culture and norms.
• Offer aggressive financing.
• Acquire local, Western-based companies.
• Target a peripheral, less consequential solution as an entry point into an account (perhaps a low-end, low-cost, commoditized product—which would be a low-risk trial for a first-tier customer).
• Commit to creating jobs in the local developed economy.
• Commit to R&D investment.
• Focus on developing successful partnership models—this also is used to address security concerns.
• Invest in larger trade agreements (e.g., China has a strong relationship with Canada and natural resources are a key reason for this).