More not always merrier

By Kay Plantes

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Many companies are seduced by an abundance of consumer or industry groups that need their service, product or technology. Under such conditions, leaders often choose to serve multiple segments in order to reduce business-cycle risks or to grow revenue. Sounds reasonable if you believe the primary driver of your company's revenue is market size. But is it?

In fact, revenue is influenced by four other factors: awareness rate, the percent of the market that knows about your company's offering; consideration rate, the percentage of those who are aware that are considering buying your offerings; win rate, the percent of "considerers" that chose you; and average revenue per customer. Increasing any of these drivers will increase revenue.

Focusing primarily on market size by trying to meet the needs of many segments results in high awareness and consideration rates, but low win rates and revenue per customer. If getting considered requires resources, as requests for proposals or retailer category reviews require, not winning a customer pours that investment down the drain.

Dowco, a commercial sewing company in Manitowoc, found itself in just that situation. The company makes protective covers and other fabric accessories for medical equipment companies, industrial companies, and manufacturers of power sports equipment (like motorcycles and snowmobiles), among other industries.

With growing global competition, price became more important in customers' purchase decisions. While the company offered impeccable service, it was getting harder to translate superior service into cost savings for its customers.

The company faced hard decisions. Should it shift production abroad? Or, was there a better way to escape the quicksand of increasingly commodity-like competition?

A new strategy was developed to be more things to a much narrower market. As part of this strategy, they decided to target only the power-sports equipment market, consisting of companies like Harley-Davidson, Polaris and Mercury Marine.

Narrowing your target market will do nothing for your company's bottom line unless you deliver greater benefits or significantly lower prices to target customers than competitors offer.

Despite selling a lot of fabric accessories for their products, Dowco's manufacturing customers oftentimes felt accessories were a complicated albeit necessary component to their core businesses (the power-sports equipment itself). The second part of Dowco's strategy was to offer a broader array of services to make the category more profitable and less time-intense for its customers. Dowco offered to understand end-user needs, develop new accessory products, manufacture them, and then merchandise them through their customers' dealer networks.

The result? The company increased its consideration rate, win rate and average sales per customer, resulting in revenue gains that far offset the proactive reduction in its served market. More importantly, margins grew as Dowco moved from a commodity market (competing on prices) into a "market of one" (being the only company to offer the suite of services). Furthermore, with a broader set of skills, Dowco successfully grew its own consumer brand of motorcycle accessories.

Narrowing your target market is not always the answer. Furthermore, the right answer for a company may change over time. This is why strategic thinking is a vital component of leadership. Has your leadership team discussed the best target market breadth for your
business?
plantes@execpc.com

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