Customer Segmentation in Emerging Markets

Who Moved My Cheese?

It’s no secret the emerging market business environment has become more challenging over the last few years.  Currently, MNC growth rates are contracting on average.  A FrontierView survey of 52 MNC executives revealed that while 1 in 5 had enjoyed emerging markets regional revenue growth above 20% in 2011-2012, by 2014 only 1 in 10 expected such high performance.

While capital flow reversals and other macroeconomic cyclical trends account for part of this change, much of it is due to a more permanent shift: the rise of serious local competitors and more discerning local customers.  Only 39% of MNCs surveyed are satisfied with their differentiation vis-à-vis competitors.  A more competitive landscape means that market power in emerging markets is shifting from the seller to the customer.

Opportunity is still plentiful for global MNCs, but it is not readily available by just showing up with a fancy global brand and finding a good distributor.  In the metaphor of the business classic “Who Moved My Cheese?” someone has moved the cheese in emerging markets.  The best MNCs are trying to figure out where the cheese is now, rather than sitting in their maze staring at the corner where the cheese used to be.

Redrawing the Market Map from the Customer’s Perspective

FrontierView research suggests that in this fluctuating environment, a management tactic that raises some MNC out-performers above the rest is a dynamic approach to customer segmentation that stays on its toes and really puts the customer’s perspective at the center of the matter.

Many companies would say they do “customer segmentation,” but what they actually do is segment their markets based on their own internal logic – their organizational geography, sales channel model (direct vs. indirect) and product lines.  And those that do engage in customer-oriented segmentation often take too superficial an approach, looking at outside descriptions of their customers, such as customer purchasing power (industry and size of the firm in B2B markets, gender and income bracket in B2C).

It may sound obvious, but the most powerful (both insightful and commercially effective) customer segmentation is customer-centric.  While there are differences in the segmentation techniques most applicable for different industries, overall there is a pattern of common principles among those that are getting this right:

1. Focus externally, not internally: What does the market look like from the buyer’s perspective?  What do they want, and what can they currently have at what price point?  These questions can only be answered by looking at the buyer’s options, which means incorporating competitive intelligence as a core input into any segments-refresh exercise.  In our survey results, MNCs that applied this principle closed an average of 15x more deals per month than the rest.
2. Review your segmentation annually: Markets can change significantly in twelve month, and so can customer’s preferences and options.  Make sure to review your segmentation on an annual basis to ensure your segment boundaries are still drawn in the right place.  This does not mean you launch a new segmentation approach every year – that would definitely be overkill.  Instead it is a considerate gut-check that should reveal whether or not adjustments are needed.  This is usually best done right before launching into your strategic planning season.  Companies that apply this principle enjoyed 41% better sales conversation rates.
3. Do not put a single function in charge of segmentation: Interestingly, while it is common for B2C companies to put Marketing in charge of segmentation, and B2B companies to put Sales in charge, the most effective companies make their segment reviews a truly cross-functional exercise, bringing to the table and empowering both Sales and Marketing but also Finance, Strategy, Product, and Operations.  When everyone understands what is meant by a customer segment, this creates a common language for coordinating commercial intent.  Companies that take this approach are 58% more likely to have an emerging markets regional revenue growth rate above 10% year-over-year.
4. Consider adjacent and new markets: Don’t just re-segment your old market space, think creatively!  Are there entire groups of potential customers we haven’t previously considered or taken seriously?  What are the barriers to entry?  Can and should we get there ahead of the competition?  Companies that persistently ask these questions enjoyed 153% higher market share growth over the past two years.

Together, these four principles ensure that an MNC regional or country-level organization is tackling the practical question of how best to delineate and name current pockets of greater and lesser opportunity.  The follow-up question is how to engage the high-opportunity pockets and find the cheese.

Going Deeper: Three Kinds of Customer Segmentation

So far we have been discussing “customer segmentation” as if it is a unified exercise, for a unified purpose – but it isn’t. FrontierView’s recent study goes deeper into three kinds of segmentation that are key to above-average sales performance.  They are:

• Market segmentation for building commercial strategy
• Behavioral segmentation for tailoring marketing and sales pitches
• Profitability segmentation for prioritizing sales team members’ efforts

Each of these segmentation approaches provides a low-cost, high impact strategy to allocate resources where it matters.  We will cover each of these three in more detail over the next few weeks in subsequent blog posts. You can also listen to the podcast on customer segmentation on our Emerging Markets Insights iTunes page.