November 2002

Scratching a Niche

Continued from page 1

By Michael Schrage

While there is no question that the future of segmentation and the future of innovation are increasingly intertwined, strategic innovation generates a portfolio of questions about innovators' desire to service the segments that matter and ignore those that don't. Most innovators could afford to invest far less creative effort on improving their innovations in favor of investing more ingenuity in finding customer segments that matter. That's what HugeBank is now doing. The pleasant surprise? Improving the segmentation enhances the innovation. The needs of that 90 percent become clearer; the trends for that vital 10 percent stand out.

So a most intriguing aspect of a digital medium such as the Internet is that it turns the traditional practices of marketing inside out. Ordinarily, innovative companies spend lots of management time and effort identifying key customers and defining strategic market segments. But as the HugeBank anecdote demonstrates, the rise of Internet-based product and service innovations gives customers the opportunity to unconsciously  segment themselves.

This change should mean a marketing revolution for savvy innovators. Instead of shepherding their customers into predefined market segments, innovators can creatively leverage digital interactions to enable customers' cost-effective self-segmentation. In other words, instead of spending money to sort out customers, spend money to let customers do it themselves. More often than not, the economics and insights that are derived from self-segmentation prove more favorable than traditional approaches. HugeBank has discovered that it's cheaper to model services that are based on how customers actually bank online than it is to design new products and marketing campaigns that attempt to change customers' behaviors.

The fact is, network economics allow innovators to outsource the vital market-segmentation function. That makes targeted innovation initiatives even more cost-effective. The business challenge is to pick the right segments. Should innovators follow the money? Can they afford to underinnovate or underinvest in what might be the segments of tomorrow?

To be sure, some business pundits believe that the ultimate destiny of segmentation is personalization and that technology will transform mass production into mass customization. Perhaps it will. But in the final analysis, customers have as many traits and preferences in common as they do differences. Market differentiation emerges from the differences, but economies of scale emerge from the commonalities. The economics of segmentation will drive tomorrow's economics of innovation.