How we use Advanced Segmentation on a client project
Our definition of Advanced Segmentation
Dividing product/market/cost/profit information into small fractions – down to low levels where one can identify the “real economics” of each key product or variety sold to each market or submarket, through each channel and to each group of users and even individual customers.
What is the purpose of using this kind of segmentation?
To understand and pinpoint where profit contributions really come from and exactly where they go. In any company, even one that is losing money, there are almost always some segments that bring positive cashflow beyond direct costs. And there normally are some other segments that don’t bring any contribution or even a negative one.
A company’s total net profit is always just an average of segments and sub-segments that contribute well and others that don’t. Minus overheads, often in several different places open to questioning as to their size and relevance. And minus financial costs and taxes.
Analysis data are often available somewhere in every company. But we go a lotdeeper than traditional management accounting, concentrating on ”costs directly caused” by segment and subsegment, to identify actual contributions beyondthose costs. We then study any overheads and similar items that reduce or even eliminate contributions earned.
What can that info be used for?
Basically, to find ways to maximize overall company profit contribution through strategic decisions and operational changes. And especially, to make more out of “positive” segments through giving extra push to those. Equally important, to get decisions taken on what exactly to do with any “flat” or “negative” segment:
- Launching stronger and more targeted marketing/sales/product development efforts to improve results in segments where potential is good and improvements possible
- Taking a hard look at any segment that is not promising enough – dropping or reducing efforts versus products, markets or customers where a new push would require greater resources and higher costs/risks – than these segments are worth
Regularly, it proves a lot more useful to concentrate on segments that show realpotential than spending money and efforts toward those without it. Deciding on the right strategy for low or zero-potential segments may be tough however, since there are often traditional links to customers or markets that managers for various reasons prefer to maintain.
Yes it might. But in numerous cases we have seen that Advanced Segmentationbrings key information from below up to the surface, That often results in certain surprises even to able and generally well-informed managements and Boards.
When we present a detailed segmentation analysis and show what will come out of better strategies and contributions by product, market and users, managersoften comment:
“Yes, we know this, at least partly, but we now see some factors differently and do need new approaches to step up growth and profitability by segment and overall“.