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2.3.2 Segment Size and Attrativeness

Segment Size and Growth

1. Segment Size

  • Definition: The current demand potential for a product or service within a specific market segment.
  • Process:
  • Take a sample from the geographical area of focus.
  • Collect data on:
    • Purchase intention.
    • Willingness to pay.
    • Ability to pay.
  • Extrapolate the sample data to estimate the demand potential for the entire population.
  • Methods:
  • Surveys.
  • Statistical analysis.

2. Segment Growth

  • Definition: The expected rate of growth of the market segment over a future period.
  • Factors to Consider:
  • Demographic trends (e.g., age group growth in a region).
  • Data from government census, research papers, journals, or articles.
  • Evaluation:
  • If the segment size remains stagnant over time, it indicates poor growth potential.
  • Measure growth rates (e.g., 2%, 5%, 10% over 5 years) to assess the viability of the segment.

Structural Attractiveness (External Analysis)

Structural attractiveness determines how conducive a market segment is for sustained profitability. It can be analyzed using Michael Porter’s Five Forces Model.

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Michael Porter's Five Forces

  1. Threat of New Entrants:
  2. Definition: The ease with which new competitors can enter the market.
  3. Implications:
    • High threat: Market becomes less attractive due to competition increasing and profits diminishing.
    • Low threat: Attractive market with limited new entrants.

  4. Barriers to Entry:

    • High: Requires heavy regulations, investments, technology, or specialized manpower (e.g., pharmaceuticals, steel).
    • Low: Minimal requirements to enter (e.g., retail businesses).

  5. Threat of Intense Segment Rivalry:

  6. Definition: The degree of competition within the segment.
  7. Entry vs. Exit Barriers:
    • Entry Barrier: How easy it is to start competing in the market.
    • Exit Barrier: How easy it is to leave the market.
  8. Implications:
    • High rivalry and low exit barriers lead to overcapacity and reduced profitability.
    • Ideal: High entry barriers and low exit barriers.

  9. Examples:

    • Retail businesses: Low exit barriers; easy to leave.
    • Established brands: High exit barriers due to existing investments (e.g., manufacturing plants, customer base).

  10. Threat of Substitute Products:

  11. Definition: The availability of alternative products that customers can switch to.

  12. Implications:

    • High threat: Market becomes less attractive as customers can easily shift preferences (e.g., tea vs. coffee).
    • Low threat: Market becomes more attractive when substitutes are limited or non-existent.

  13. Bargaining Power of Buyers:

  14. Definition: The ability of customers to influence prices or terms.
  15. Factors:
    • B2B (Business to Business): Buyers often have significant power due to bulk purchasing.
    • B2C (Business to Consumer): Individual buyers typically have less power, but this may change with social media influence.

  16. Modern Context:

    • Individual consumers can influence businesses via viral social media campaigns, increasing their effective bargaining power.

  17. Bargaining Power of Suppliers:

  18. Definition: The ability of suppliers to influence costs or terms.
  19. Factors:
    • Dependence on suppliers for critical resources (e.g., raw materials, logistics).
    • Consolidation of suppliers (e.g., unions or fleets in delivery services).
  20. Implications:
    • High bargaining power of suppliers reduces market attractiveness as they can dictate terms (e.g., Zomato's dependence on delivery partners).

Ideal Conditions for Attractive Segments

  • Low Threat of New Entrants: High entry barriers protect profitability.
  • Low Threat of Intense Segment Rivalry: Limited competition ensures sustainable margins.
  • Low Threat of Substitutes: Unique value proposition reduces customer switching.
  • Low Bargaining Power of Buyers: Limits customer influence on pricing.
  • Low Bargaining Power of Suppliers: Ensures manageable input costs.

Note: A utopian market with all conditions perfectly favorable does not exist. Instead, compare segments to identify the one with the best overall balance across these parameters.