Segment Attractiveness Analysis

 

 

To sell your business for high multiples, you must convince a buyer that the segments you compete in are the most attractive possible for your business.  By doing this, you are showing buyers that your resources are efficiently employed in pursuing the most attractive market segments.

 

Marketing Segment Attractiveness

 

You are also standing out from the tsunami of “me too” businesses that are already coming up for sale as the first of the baby boomers start to retire and cash in to fund their retirements. Failure to distinguish your business could lead to not being able to sell your business for anything near its full potential.

 

Definition of Segment Attractiveness Analysis

 

One way of discovering untapped opportunities is to find the most attractive segments in your market that you can successfully compete in – both now (for you) and in the future (for your prospective buyers):

  • A Segment Attractiveness Analysis is a technique for identifying the segments in the market that are most attractive for your business to potentially align with.

Where Does a Segment Attractiveness Analysis Fit In?

 

A Segment Attractiveness Analysis is the second of a four stage process that shows you the best opportunities for your company to pursue – within the constraints of your resources.  The four steps are as follows:

  1. Divide your markets into groups of customers with a Segmentation Analysis
  2. Determine the attractiveness of each segment with a Segment Attractiveness Analysis
  3. Determine your ability to compete in each segment with an Ability to Compete Analysis
  4. Choose which segments to prioritise and then focus your business on these segments.

The Segmentation Analysis divides your markets into identifiable groups of customers.  A segment is a group of customers who you can expect to respond in a similar way to a particular offer or value proposition.  They have similar values (needs or wants) and they prioritise them in a similar way. The next step is the Segment Attractiveness Analysis.

 

Why Do a Segment Attractiveness Analysis

 

A strategic purchaser often does not want to buy a generalist business. It usually wants a specialist.  When you specialise, you have at least a chance of being number one.  No business can serve all market segments, nor should it.  That said, you need to choose segments that are attractive.

 

One prerequisite for a segment to be considered attractive is that it is big enough to bother with – for you and particularly for a purchaser of your business (they are often different things). Is the segment profitable?  Do you have rational competitors? Is it cost effective for you to service this segment?  Is there sovereign risk?  Importantly these days, does the segment have some chance of surviving?

Segment attractiveness is brought sharply into focus when you realise that there is no point being the best company in a declining industry. For example, industry sources estimate that nearly 20% of Australian vineyards are uneconomic. Chains of video and DVD stores appear to be in terminal decline.  Bookshops, bricks and mortar retailers, printing companies…. Sometimes we all have to listen to the “buggy whips” speech by Larry the Liquidator, Danny de Vito’s character in “Other People’s Money”:

 

“This company is dead.  I didn’t kill it. Don’t blame me. It was dead when I got here. It’s too late for prayers. For even if the prayers were answered and a miracle occurred . . . and the yen did this and the dollar did that . . . and the infrastructure did the other thing, we would still be dead. You know why?  Fibre optics. New technologies. Obsolescence. 

 

We’re dead, all right. We’re just not broke. And do you know the surest way to go broke? Keep getting an increasing share of a shrinking market. Down the tubes. Slow but sure. 

 

You know, at one time there must have been dozens of companies making buggy whips. And I’ll bet the last company around was the one that made the best goddamn buggy whip you ever saw. Now, how would you have liked to have been a stockholder in that company? You invested in a business, and this business is dead. 

 

Let’s have the intelligence–let’s have the decency–to sign the death certificate, collect the insurance and invest in something with a future.”

 

Conclusion

 

There are some segments that are just too difficult to be attractive. If you feel your business is in one, then a Segment Attractiveness Analysis may well confirm your hunch.  Alternatively, however, it may reveal other segments that are more attractive for your business – and ultimately for the buyer of your business.  The important point is to put some science around your thinking to either show a purchaser, or to realign your business before you go to market.

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