Importance of Market Segmentation

sushiMr. Suzuki was in the sushi restaurant business.  By nature, he was bold and ready to take chances.  Mr. Suzuki happened to be my friend. Almost 15 years ago, he was one of the first business persons who established a sushi restaurant in his home town. The idea of a sushi restaurant was not new. It is a very traditional business in Japan. However, almost 15 years ago, someone started the concept of “Kaiten” (revolving) sushi.

In short, the restaurant sets up a conveyer which surrounds sushi chefs situated in the center, and the conveyer moves in a clockwise direction. Sushi chefs make sushi and place a pair of sushi onto a plate. There are several different colors of plates and the color of the plate determines the price of the sushi you choose to eat.  A conveyer moves sushi plates in front of you and you get to choose your favorite sushi. You pay based on the number and color of the plates that you pick up from the conveyer.

Kaiten sushi is cheaper and simpler. The average meal time is about 15 to 30 minutes. People eat steadily and leave. This gives a restaurant good revenue and good gross profits.

Mr. Suzuki put his first Kaiten sushi restaurant on one of the two main streets of his home town in Japan.  His Kaiten sushi restaurant was the first in the town and it immediately attracted a huge crowd. Instantly, his restaurant generated a significant amount of cash. He was grossing almost $300,000 a month. Within a year, he went on to establish the next Kaiten sushi restaurant on a different main street. This was also a big success. For the first three years, he enjoyed great revenues and significant profits.

Well, good days do not last too long. By observing his tremendous success in his home town, a much larger sushi restaurant enterprise decided to enter the market. Soon on the two main streets of Mr. Suzuki’s home town, there were more than ten Kaiten sushi restaurants. Those restaurants look newer and are bigger and more attractive. Obviously, a large company had more cash to spend than Mr. Suzuki. Within several blocks, many new Kaiten sushi restauranst popped up.

Mr. Suzuki started losing money. Without customers, he could not pay the salaries of his employees, utility costs, fish for Sushi, etc. Within six months, he went bankrupt.

Mr. Suzuki’s dark days started. He had to ask for money from his family members because banks would not lend him any money. He talked to his friends about how he would turn around his business. However, the answer did not come to him easily.

One day, he was riding a train. In Japan, a train is one of the major modes of transportation. Often, a commercial builder builds a building on top of a populous train station.  The reason is simple. You can guarantee the flow of commuters. Once you set up a building on top of a busy train station and establish various shops and restaurants, there will be at least a certain level of customer traffic.  People who use trains want to shop or eat conveniently in the building connected to the station.

Mr. Suzuki thought about building his Kaiten sushi restaurant in the building. After all, the building owner does not want the same types of restaurants in one building. Instead, he wants to have a good variety of restaurants so that the commuters have choices and can satisfy their appetites.

Bingo!

If the building owner did not allow a second Kaiten sushi restaurant and if his restaurant is the first restaurant in the building, Mr. Suzuki would not have to worry about a bigger and stronger company destroying his sushi business like before on the two main streets of his home town.

So he scrapped losing money on the Kaiten sushi restaurants in town and started focusing on building Kaiten sushi restaurants in the train station buildings. Today, he has six Kaiten sushi restaurants in his state (prefecture in Japan) and enjoys healthy sales growth and profits.

This leads to my discussion of segmentation. If you are a business owner, you have to clearly identify the market with which you conduct your business. In Mr. Suzuki’s case, he segmented his business to buildings on top of larger train stations. With his business model, he generally does not worry about competition like he had to do on the wide open streets. He successfully segmented his playing field so that he could ensure his success.

When you start your business, you have to choose a market in which you can sustain your growth for a long time. Let me give you another example. Many businesses focus on China, the world’s most populous country. Also, many focus on Shanghai, the most populous city in the world. Many people forget the fact that large corporations and many competitors are also focusing on Shanghai.

Once you establish your new business in Shanghai, you face an unbelievable amount of competition in the form of businesses with more cash and more resources. I am not saying that you, as  a small business, cannot survive in Shanghai. What I am saying is that you have to carve out a playing field like Mr. Suzuki, so that you can stay profitable. The segmentation or focus can be a different side of town, only certain sections, a certain age group, an ethnic group, one gender or another, etc.  In other words, you focus on the segment with which you can keep winning. You can conquer other segments after you establish your successful status in the first segment.

You can also consider a smaller town in China that your competitors do not pay attention to. This is another idea for segmentation.

Another tip is that you have to work this out quietly. You do not want your competitors to learn or know your secret strategy. Mr. Suzuki ensured that no one knew his plan of focusing on train station buildings until after he was done establishing his sixth restaurant.

So, let me ask you:  What is your market segment and what are your secrets of sustaining your revenues and gross profits?

Koh Fujimoto

Koh is the Principal-in-Charge of the International Practice. He concentrates his practice in the areas of financial statement audits, transfer pricing and internal audit services. http://www.cdhcpa.com
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