It’s a given that I see many companies focused on operational matters and hardly any on business strategy. This way of doing things, though coming with its various downsides, still allowed businesses to survive and in some instances thrive in a rather stable environment. However, that stable environment has now vanished. In order for any business to succeed both now and more so in a post-pandemic era, businesses must think harder than ever before on their strategy and business model.
The main change brought by the pandemic, that few businesses seem to be aware of, is Fragmentation. Before the pandemic consumer behavior and needs where more homogeneous. People work up, went to work, came back etc…Many managers who rose through the ranks in the pre-pandemic era simply assumed that their age-old, tried-and-true, broad-market business models would remain effective.
Today we have much more fragments – people working from home, people working from home with online schooling children, people working on a hybrid system between working from home and working at the office…and the list goes on. So the pandemic sharply accelerated market fragmentation. So while any profitable business needs to focus on (1) increasing your customer value, or (2) lowering your cost to serve (or do both), doing so is now more complicated by the need to transition from the previous broad market targeting to the new segment-specific targeting.
Which leads me to the next point. Segmentation.
I strongly believe, that in the reality of this higher market fragmentation, it is of pivotal importance that the starting point in determining a new business model is segmentation. You may ask me, but segmentation on what basis? In my opinion, its profit segmentation. In essence, which customers are most profitable to you?
Research clearly indicates that customers fall into three broad profit segments:
- “Profit peaks” these are the high-revenue and high-profit customers. Typically about 20% of the customers that generate the vast majority of profits, many times over 100% of profits. These are the clients you want to keep a close watch on, to see how your business model needs to be adapted to service them.
- “Profit drains” these are high-revenue but low-profit/loss customers. Typically about 30% of the customers that erode even as much as 50% of profits. What will your business model do with regards these customers? Can you upsell them? Can you reduce your cost base further?
- “Profit deserts” these are low-revenue, low-profit customers that produce minimal profit but consume about 50% of the company’s resources.
In my opinion, businesses should shape their new business model to target any of its profit segments, although it’s extremely difficult to engage more than one.
My message to business leaders is that when markets change businesses need to rethink their strategic positioning and business model….and in the present circumstances and also in a post-pandemic world, this is a life-or-death need.
So to recap, please think on your business model by:-
- Making sure to you need to get the two basic things right: You have to target a defensible market segment, and you have to create a business model that enables you to win against competitors who are going after your target segment.
- You have to choose your customers, saying no to those who don’t fit and then you have to create an innovative, high-profit business model based on providing your target customers with more customer value or lower cost to serve them, or preferably both.
If we are to learn anything from the success that Amazon managed to have is that its success is not based on targeting and winning customers that everyone else missed. Amazon targeted the small customer market segment that everyone else already had and managed to service them better through intensive innovation. This meant that Amazon constructed a comprehensive, winning business model to capture this small customer segment and stayed focused on relentlessly improving they way it serviced this segment.
Markets change and business models have to change in parallel. Success depends on constant business model innovation. By keeping a steady focus on targeting the right segment with the right business model, you’ll create years of profitable growth.
At EMCS, we specialise in helping businesses build a strategic mindset, analyse their business model and have all the information needed at hand to build their strategy and business model on a deep analysis of critical information. We also offer the service of market research so that you can understand the change in consumer behaviour brought by the pandemic and the new market segments that have emerged. Through, our coaching service, we also hand hold business owners and leaders to help them implement in detail changes to their business model. Feel free to contact me on email@example.com, for a free initial chat.