Market segments


I came across an interesting question at the Customer Management IQ site today that should be of interest to any executive or manager responsible for voice of the customer at their organization. The questioner wanted to know how to leverage her VOC, and whether some customer opinions are more imortant than others. Here’s my $.02:

Her question really has several facets: (1) what type of VOC will be most leverageable? (2) How should that VOC be analyzed? (3) Which customers are most important?, and (4) How do you actually leverage that information? I’ll address those issues in that order.

(1) As you know, there are many types of VOC, ranging from the passive and reactive (complaints) to the more proactive but qualitative (interviews, focus groups) to the proactive and quantitative (surveys and panels). Each serves a purpose, but to truly leverage your VOC it should be proactive, purposive, and quantitative. Moreover, if you really want to leverage your customer information, you should extend VOC to become the Voice of the Market (VOM) – which means that you would be surveying not only your own customers but those of key competitors as well.

(2) Your next task will be to transform that survey data into meaningful metrics. By meaningful, I mean that the resulting metrics should (a) be predictive of future business performance, and (b) provide managerial direction. This will require a shift from the metrics of customer satisfaction to the metrics of customer value. There is now lots of evidence (Gale, Reidenbach, Reichheld, and others) that the metrics of customer satisfaction do not correlate well with business performance. Why would you rely upon a metric that is unrelated to your business goals? The metrics of customer value, on the other hand, have proven to be the best leading indicators of market share – leading to both high levels of customer acquisition and customer retention (loyalty).

(3) Now we get to the crux of the matter: the metrics of customer value are both product- and market-specific. People buying a luxury sedan will define value differently from people looking for a sports car. And the business user of a computer will define value differently than will the typical home user. You want to focus your investment in value metrics on those market segments that are most attractive for your business (they’ll provide the greatest ROI) – and you want to use those metrics to understand value within those segments better than anyone else against whom you are competing. There are some great tools available that will help you identify those high-priority segments.

(4) Finally, you want to be able to truly leverage your value metrics into superior business performance. Those value metrics should enable you to identify competitive performance gaps on those factors that are critical to quality from a market perspective (CTQs, in Six Sigma parlance). The nature of those gaps, whether positive or negative, will point you to the specific product (service), people, or process issues that you can improve to achieve or sustain a competitive advantage. You’ll find some great information on the “how to” in one of our most recent books, “Competing for Customers and Winning with Value.”

Just came across a question from a “Marketing Profs” reader regarding the communication of her organization’s value proposition.  Once again, the questionner revealed a fundamental misunderstanding of the difference between the organization’s existing value proposition and its promotional, or “sales” proposition.

 Every organization already has a value proposition – one that exists in the minds and perceptions of its current and potential customers. In fact, most organizations have multiple value propositions – one for each of their products or services within each of the markets they serve.  The first challenge these organizations face is to quantitatively identify those value propositions (i.e., measure them), and then to manage them in order to maximize the value delivered.

Stephanie’s question makes it clear that her CEO is really looking for a sales proposition – a statement that will effectively communicate what the organization provides.  That’s all well and good if the organization understands the nature of its existing value proposition, which means that it can quantify the relative importance of Quality, Image, and Price, and that it can further quantify the relative importance of the key components of Quality – those critical-to-quality factors, or CTQs, in Six Sigma parlance.  This requires the type of measurement that will produce a model of Market Value.

The second thing Stephanie’s CEO will require is a quantitative assessment of how the market perceives the value that his company delivers versus the value provided by competitors – because one of the fundamental aspects of value is its relativity.  This assessment will enable the CEO to identify value performance gaps – areas where his organization is outperforming competitive, and areas where his organization is underperforming.

Here’s where the real answer to Stephanie’s question comes in: she can now develop a sales proposition to summarize those positive gaps (organizational strengths) identified by the value measurement system.  Moreover, her organization can now also develop strategies and actions to “fix” those negative gaps (value-based weaknesses).  So, she gets a double whammy for her measurement efforts: an effective sales proposition, and the basis for the development of future organizational strengths.

Oh, and Stephanie made one other significant point: she thinks that the sales proposition should be unique for each customer, but is puzzled about how that translates into effective mass market advertising.  That goes back to the first point I made, namely: the organization will have a unique value proposition for each product/service it provides to each market it serves.  So, develop a product/market matrix for the organization, evaluate the importance of each business opportunity, and go after the ones that will provide the greatest return on investment!  It’s really pretty simple – but extremely powerful!

Virtually all Six Sigma gurus opine regarding the importance of the voice of the customer (VOC). Many organizations, however, simply pay lip service to customer needs. Most of the information that drives their Six Sigma deployments is internally generated either from “reliable sources” or more likely “myths” and customer “lore”. Here are a couple of points that you might want to consider if you are serious about using the VOC to drive your Six Sigma initiatives.

• First, there is typically more than one VOC. Most organizations serve more than one group of customers. Breaking these customers down into more homogeneous groups (markets or market segments) has a major benefit. The clarity of their wants and needs is crisper, more understandable, and more actionable. By focusing on markets or segments you eliminate one of the sources of measurement variance – between group variance – and deal only with within group variance – the two sources that make up total variance. This makes your measurement of customer CTQS (critical-to-quality factirs) more focused because the standard error of the mean (a measure of variability) is likely to be smaller. You have eliminated a portion of the noise that can confound interpretation. Second, the VOC is dependent not only on segments but also the products or services that these segments use. Men buying sports cars will have different needs than women buying minivans. The criteria they use to evaluate the different autos will vary significantly. Failure to capture the VOC at this level of granularity can lead to wrong conclusions and greatly warp your analyses.
• Second, if you are seeking to use Six Sigma as a tool to improve your market performance (increase top line revenues or market share) you will need to listen not to the VOC but to the VOM (voice of the market). Market share is won or lost based on the competitive dynamics of the marketplace, not solely the whims of your own customers. Customers are won either as new entrants to the market or as acquired customers who have chosen your product or service because of your superior value proposition. Consider what happened to Cadillac and AT&T during the 1980s. Both organizations were enjoying strong customer satisfaction scores among their own customers but were losing market share to their competition. What was happening was that these organizations were focusing on the VOC and not the VOM. Had they been focusing on the latter they would have understood that their competition was providing superior value and that they were losing customers to these competitors. Focusing only on the VOC can produce misleading guidance.
• Third, some product/markets (markets/segments that use specific products or services) are worth more to your organization than others. It is not uncommon to find organizations investing in product/markets that are actually unprofitable. Your Six Sigma initiatives are one such investment. Prioritizing product/markets based on such criteria as:
o Margins
o Competitive intensity
o Market share
o Market growth rates
o Synergies with other product/service offerings
insures that your organization is not wasting its resources investing in “dry holes”. Picking those product/markets that are most important to your future economic growth insures that your Six Sigma initiatives are congruent with your overall growth strategies. These are the VOMs that you will want to listen to.

A couple of questions: Does your organization have an effective market segmentation schema and do you prioritize your product/markets based on economic opportunity?

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