If you’re like many CEOs we work with, one of your primary areas of focus is growth. Growth, whether measured in terms of increased revenue, profit, and/or assets seems to be a common rallying cry. It is our belief that organic (versus inorganic) growth should be your business priority.
Why? Work by John Cummings of Business Finance found that organic growth, the rate a business expands through its own business activity, produces better financial outcomes. In his estimation, organizations who excel at efficient organic growth see total shareholder returns of 20-28% and revenue growth of 13%. On the other hand, organizations that derive growth efficiently from M&A typically see only about 13-15% total shareholder returns and revenue growth of only 8%.
McKinsey found similar results to Cummings, i.e., that companies growing organically outperformed other firms in terms of revenue growth and shareholder value. Upon further examination, McKinsey found that no matter which industry the high growth group competed in, the average market growth of their portfolios outperformed that of their peers because these companies tended to focus their growth in the right places at the right times, emphasizing faster-growing segments and introducing new product categories in their industry to achieve growth.
This level of performance has the additional benefit of protecting a company during a down cycle. In the McKinsey & Company study of 100 of the largest US corporations in 17 sectors they found that “a company whose revenue increased more slowly than the GDP was five times more likely to succumb in the next downward cycle, usually through acquisition, than a company that expanded more rapidly.”
How to Best Fuel Organic Growth
Organic growth requires a different approach than inorganic growth. To achieve organic growth you must create competitive advantages, differentiate and innovate your product/service offerings, and zero in on viable existing and new customer opportunities. The takeaway – innovation and segmentation is required to successfully expand organically.
Segmentation is the process of clustering prospects or customers into different groups so that each group is comprised of individuals that share a similar level of interest in the same or comparable set of needs. In simple terms, the purpose of segmentation is to discover meaningful differences among a target market. Market and customer segmentation matters when you want to tailor your offer (product, channel, price, and communication) more precisely to different groups based on their needs.
Marketing is most responsible for helping you with segmentation. Most organizations don’t have the resources to pursue numerous markets simultaneously. So, the most successful companies use data and analytics to evaluate segments so they can select which customers/personas, geographies, and industries offer the best headroom for growth. The philosophy behind segmentation is that members of a segment will respond in the same way to a value proposition and have similar needs. As a result, they should respond similarly to a particular marketing strategy. The Marketing team should have a data-driven way to divide a market into a subset of homogenous groups, with clarity around how each will react differently to your promotion, communication, pricing and other variables of your marketing mix.
In addition to greater shareholder value and increased growth, additional segmentation benefits include the ability to: better serve your customers’ needs and sustain customer relationships across the customer lifecycle, and develop niche strategies and focus marketing and sales activities and investments on the most attractive opportunities.
Three Steps to Build Your Segmentation Model
We highly recommend a disciplined fact-based approach to identifying segments where your company can gain traction and momentum – segmentation that will help you create a model for future efforts. This means, rather than selecting a segment based on subjective criteria, such as affinity for a particular market or sales peoples’ opinions, you would build a model using objective data-driven criteria for analyzing and prioritizing segments. Building a model allows you to compare customer and/or market segments on an “apples-to-apples” basis. Here are the three key steps we take our customers through:
- Defining the filtering dimensions. The key to building any model is to begin with selecting the filtering dimensions. We like to use two primary dimensions: accessibility and opportunity. Accessibility describes how easy the segment is to approach, given the organization’s current markets and expertise; opportunity describes the size and profitability of the target segment.
- Establishing your criteria. Once you have the dimensions, you will need to decide the criteria for each dimension. For example, accessibility criteria might include a technology platform or the number of customers you already serve in a market. Opportunity criteria might include the number of customers in the segment, the industry growth rate. Establish a weight and rank for each of your criteria.
- Gathering the data. After you have built your model, the next important step is capturing the data and applying the appropriate analytics. The data may be something you extract from your internal systems, append from external sources, or acquire from market research. Use the data to evaluate and score each customer and/or market segment against the criteria. Then “plot” the segments along the dimension or use some other prioritizing method to determine which segments offer the best growth potential.
Your organic growth strategy will only be effective if your Marketing strategy spells out what the target markets are, how they are segmented and what the value proposition is for each key segment. Done well, segmentation both directs and fuels organic growth, ultimately increasing shareholder value and revenue. Achieving these goals requires market and customer segmentation using a data-driven model approach that includes defining the filtering dimensions, establishing your criteria and gathering the relevant data in an objective manner.
Read this case study: Segmentation Methodology Identifies Profitable New Markets to see how one company applied the above scientific method to rapidly expand into profitable new segments.