how to use SEGMENTATION
Consultants love segmentation. It allows people with limited knowledge about certain facts to develop powerful insights. Segmenting is often the master key to solving many cases.
Let’s learn how to leverage segmentation by using an example:
Meditest is a manufacturer of machines used in hospitals to test blood samples for their glucose levels. Meditest recently created Mediyou, a patient-operated machine that can do simple glucose level tests. These devices are small, portable, and easy to operate. However they can treat only a subset of patients with non-critical levels of glucose, since they are less accurate than the big machines normally used in hospitals. The final stage development and FDA approval would cost $2 Bn.
How would you think about the market size for this product?
I would segment the total population following four steps to get to the potential market, and then assess the proportion of this market that we are going to capture:
- Step 1: I would look at which share of the total population is affected by diabetes
- Step 2: Out of the above subset, I would I identify those affected by non-critical diabetes, that can be treated with Mediyou, our new device
- Step 3: Out of the above subset, I would look at those who are insured vs. not insured. The insured sector represents a potential market, provided that Meditest reaches an agreement with the insurers
- Step 4: I would further segment the non-insured segment in those who will be able to afford the product and those who won’t based on their income
The total potential market will be given by the sum of those who are insured and those are not insured but can afford to purchase the product. The market will be given by weighting the two figures by the penetration rates in the two segments.
Your segmentation skills will reassure your interviewer that you have a clear plan, and minimize your chances of getting lost: you’ll always know what the next step is.
THREE RULES FOR YOUR SEGMENTATION
RULE#1: START BIG, GET SMALLER
You should use a progressive method, breaking down elements step by step as opposed to doing it all at once. Look at the example below:
Assume that for a case, we want to segment the fuel cost of a car fleet.
Transport Cost = (#Cars) x (#Trips per Car) x (Distance travelled per trip)/ (Avg. mileage) x (Cost of fuel)
Transport Cost = (#Cars) x (Cost per Car)
= (#Cars) x (#Trips per Car) x (Cost per Trip)
= (#Cars) x (#Trips per Car) x (Fuel per Trip) x (Cost of fuel)
= (#Cars) x (#Trips per Car) x (Distance travelled per trip)/ (Avg. mileage) x (Cost of fuel)
There are three key advantages of using the progressive method for your segmentation:
- Avoids unnecessary analysis: You often do not need the entire segmentation. Let’s say we were segmenting to do a competitor benchmarking of why our fuel costs are higher compared to competitors. If we find out that we have more #Cars but our (Cost per Car) is at par, then we don’t even need to break-down (Cost per Car) further
- Easier to understand: Segmenting all at once is not easy for the interviewer to follow in a conversation
- Fewer mistakes: The progressive method minimizes the risk of making mistakes, since you are simply breaking down each variable, one step at a time
RULE#2: BE REASONABLE
You should apply the 80/20 concept: with 20% of the effort you can obtain 80% of the result. Do not add unnecessary segments overcomplicating the segmentation, be detailed as long as you are adding segments or drivers that can actually make a difference
RULE#3: REMEMBER THAT SEGMENTATION IS NOT THE FOCUS
Segmentation is not an end in itself, its purpose is understanding what has changed within the segments we identified.
The purpose of segmentation is helping you to pin down problems. Often problems lie in negative trends in profitability due to changes in revenues or costs. For example in case of a change in revenues segmentation enables you to pinpoint in which channel revenue fell. But in order to understand this it is absolutely crucial that once you complete the segmentation you ask WHAT HAS CHANGED in the different channels.