Divide and Conquer – Segment Your Markets

Volume 4 Letter 3

The BOC Group based in the United Kingdom is a major supplier of industrial and medical gases. In 2001 BOC embarked on a program to improve its service offering yet at the same time drive down delivery costs – two seemingly conflicting strategies.

BOC started by segmenting their market. Customers were grouped into two distinct customer segments – those who valued good service and those that wanted a low price. It should be noted that up until this point in time all customers received the same level of service.

As it turned out the Pareto rule applied and approximately 20% of BOC’s clients were “service buyers”. This segment would often opt for a long term contract commitment. The other 80% were “price traders” who as their name implies were looking for low cost and only low cost.

For the “Service Buyers” BOC added a flag to their incoming order system thus making it easy to identify their incoming orders. They redesigned their order fulfillment and delivery processes giving priority in their system to Service Buyer orders. In the plant, short-term production was realigned to ensure product was in-stock for these clients and trucks were rescheduled to ensure timely deliveries.

For the “Price Traders” a very different strategy was devised. Since this segment was only price driven BOC developed a program to lower the cost of sales to this group. Ordering was automated. Contract delivery trucks were used to lower the delivery costs ensuring this segment got the lowest possible delivered cost. Customer support and marketing was all but eliminated as this segment didn’t value it. To keep focused on lowest delivered cost for this segment, BOC created a ‘Cost to Serve’ metrics, which put a company-wide focus on lower delivered cost.

As simple as all of this sounds, the result of this strategy was that the BOC business unit which devised it grew at a significantly faster rate than peer business units in other countries. The service buyers who negotiate long-term contracts with the company have allowed BOC to lock in a revenue growth stream through the volume commitments these customers make. Meanwhile the simpler, lower-cost strategy with “price traders” has allowed BOC to better serve this more volatile market segment successfully without subjecting the entire business system to that volatility.

In an article titled “Smart Customization: Profitable Growth Through Tailored Business Streams” the authors argue that a single business focus is not the key to profitable growth. They suggest that successful companies in their study rarely had a single point of focus and that businesses should adapt their business model for each segment they serve. The authors found that companies which “adapted and aligned” their strategies to customer demands had a two to one performance gap over those that kept a single minded focus (one product or service fits all).

BOC’s segmentation strategy of separating value purchasers from low price purchasers wasn’t rocket science. Sometimes the obvious can be great competitive advantage – in this case doubling BOC’s profits.

What did BOC do right?

1. Set a clear objective: BOC set an objective to grow their business in a mature industry.

2. Segmented their market: They segmented their market place identifying two distinct customer segments – Service Buyers and Price Buyers.

3. Positioned their product for each segment: BOC designed specific offerings for each market segment. (Please note one does not need to pursue each segment identified.)

4. Developed systems and incentives to support the strategy: The Company flagged “Service Buyers'” orders and changed their stocking system to ensure there was always product for this segment. They also rescheduled trucks to ensure timely delivery for this group. For the price group they developed a measurement system to focus the company on delivering low cost, they eliminated marketing to this group and outsourced private contractors to keep the delivery costs down.

One size doesn’t fit all. Segment the market to develop your business strategies to fit your clients’ needs – then match your company processes to them.

(For the full Story See “Smart Customization: Profitable Growth Through Tailored Business Streams” K. Oliver, L Moeller, B. Lakenan, Booz Allen Hamilton Spring 2004)

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