Market Segmentation Strategies Really Shine in a Scarcity Economy

Right now we are in a fairly unique market environment where pent-up demand is colliding with supply shortages across many industries. This is leading to a lot of discussion around the potential impacts of inflation in a “scarcity economy” not seen in many nations for over a generation.

But there’s an important strategic implication happening in many industries garnering less direct attention. With supply having been abundant for so long, top-line growth receives an outsized focus. There is rarely such a thing as a “bad sale”, because it has limited impact on ability to make a “good sale”. When supply is limited, the challenge shifts to isolating who companies want to continue selling their goods and services to. “Bad sales” can cost “good sales” and create longer-term challenges.

Understanding a shortage economy through the 80/20 lens

A shortage situation, in theory, is only a short-term problem. Competitive environments will motivate the supply chains to catch up, supported by whatever innovations and substitutions are warranted to adjust to new conditions.  During this time, it is very important to hold onto the “right” customers by whatever means possible.

To understand why, consider the situation where supply drops 20%. In most industries, the golden “80/20” rule applies – approximately 80% of profits come from 20% of the customers. If in the extreme case you lose that golden 20%, your business will suffer as profits all but vanish. On the other hand, if you keep all 20% of this “good” group, the bottom line might be minimally impacted by a decline in sales.

And that’s just looking at the short-term. In every brand study that I have worked on in my 20-year career as a researcher and consultant, past brand/product experience is the number one predictor of future brand/product purchase. We are creatures of habit and once a habit is established, it is hard to get out of it. An ill-timed price increase that costs a “good” customer today might reverberate for a long time if this former customer finds an acceptable or maybe even better substitute.

In times of market scarcity, market segmentation strategies really prove their value. Figuring out who to focus sales efforts needs to be the crystal clear focus – particularly in terms of keeping that top 20%.

This reality is particularly true for industries that rely on subscriptions, replenishment, or add-on sales – i.e. where the initial core product sale is a negative to extremely low margin “cost of doing business”, like the famous razor blade example. While ‘who’s willing to pay the most right now’ can land the wrong customers (from a lifetime value perspective) across all industries, in these it can be particularly damaging. Strategies to identify and connect with the top customers overall are required. Customized direct-to-consumer special offers might be particularly useful in these markets.

Using market segmentation to understand different groups within the top 20%

In all but a few cases the top 20% isn’t a ‘segment’ to go after. Instead it is typically a mix of different customer groups engaging with the brand for different reasons. The most successful segmentation in this type of market place requires the combination of 2 key consumer approaches (Category Need and Brand Affinity) and 2 key sales data points (Category consumption and Brand consumption) information. A thorough understanding of how these intersect will allow companies the ability to isolate and identify consumer groups that are the “good” 20% and drive long term consumer value and profit.

BrandSpark is uniquely positioned as a hybrid of consumer research and business consulting.  Our M.E.C.E. segmentation methodologies complement your existing data with consumer attitude context to provide clear direction how to optimize profitability going forward. Contact us if you would like to know how BrandSpark’s Marketing Segmentation insights and strategies can help you and your organization navigate these challenging times.