The multi-segment strategy

Traditionally, two generic strategies[1] have been discussed that allow a company to succeed in a given industry: Cost Leadership and Differentiation, each with its variants in market scope and niche focus. But what happens to companies that fail to develop a competitive advantage to sell products at lower prices than competitors or to achieve differentiation to charge a premium? Should these “stuck in the middle” companies resign themselves to being unprofitable until they disappear from the market? One alternative for these companies could be a third way to compete: the Multi-Segment Strategy.

Cost Leadership
Let’s first examine the conditions a company must meet to compete through Cost Leadership. First, the manufacturer must be able to offer products or services at lower costs than competitors. This may occur because (1) it produces in larger quantities than competitors (economies of scale), (2) has more experience and becomes more efficient over time (experience economies), or (3) has access to cheaper resources than competitors (labor or raw materials). Tennis in Colombia or Zara worldwide are examples of fashion companies competing on low prices through scale and experience. Walmart sells consumer goods at lower prices than competitors thanks to its expertise in optimizing distribution systems. Second, a significant portion of the market must be price-sensitive, and demand should be largely elastic. For example, competing in the gold and jewelry market using this strategy would likely be unwise. While there may be a price-sensitive segment, catering to the broader segment seeking prestige and exclusivity at high prices is more profitable. Third, the company’s cost structure should be fixed-cost intensive. Auto manufacturers, metalworking companies, and airlines can leverage economies of scale because most costs do not vary with units sold. The more units sold, the lower the unit cost, making pricing more competitive—a virtuous cycle.

Differentiation
At the other extreme are companies that compete by differentiating attributes of their products or services. These companies must, for instance, offer better or innovative products or serve customers faster and better than competitors. Silvia Tcherassi may not sell higher-quality clothing than Chevignon or Americanino, yet it can charge a premium because each garment reflects design, exclusivity, and prestige. A woman wearing Silvia Tcherassi signals, “I can afford this dress, not everyone can.” For this strategy to be profitable, either (1) the price-insensitive market segment is large enough, or (2) the company can profitably serve a small niche thanks to a primarily variable cost structure. Not all categories allow this strategy. Some products or services are hard to differentiate or require high capital investment, demanding critical sales volume to cover fixed costs. For instance, mobile operators cannot target small niches because network investment requires a minimum subscriber base, and mobile communication is not sufficiently differentiable to justify a high premium.

Stuck in the Middle
What can a company do if it offers a minimally differentiated product or service requiring critical mass for financial viability? What if it lacks a cost advantage to compete on low prices? How can it position products that are not easily differentiable? Many companies face this challenge, including hotels, telecoms, airlines, cinemas, and sports clubs. While some companies employ pure Cost Leadership or Differentiation strategies, most cannot. Their products and services cannot be simply labeled “expensive” or “cheap.” They are stuck in the middle.

Consider Cine Colombia, which fits this “stuck in the middle” category, compared with its main competitor, Cinemark. Both have theaters in Bogotá’s Zona Rosa, but Cinemark targets higher socioeconomic segments with comfortable auditoriums and a wide film selection, reflected in ticket prices between $9,500 and $12,000 COP. What about high-stratum students unwilling to pay $9,500? They cannot enter Cinemark, which has no offering for them. What about customers willing to pay over $12,000 for a premium seat? Cinemark fails to capture this value.

Cine Colombia, however, welcomes these customers. Price-sensitive students who cannot pay $9,500 can watch a film three blocks away at the same time for only $8,000 COP, accepting a slightly less ideal seat. Cine Colombia also offers limited premium seats at $14,000 COP, capturing value from price-insensitive customers overlooked by Cinemark.

Cine Colombia thus exhibits the undesirable traits mentioned earlier: minimally differentiable service, fixed-cost intensive, requiring critical mass to fill theaters, and no cost advantage to be the cheapest chain. How does it differ from Cinemark if both serve similar markets with similar products? Cine Colombia has recognized it can offer a superior experience while attracting a broader segment, whereas Cinemark limits price levels ($9,500 and $12,000) and therefore market segments. Cine Colombia’s diverse pricing allows it to serve more valuable market segments and minimize “money left on the table.”

In Summary...
Like Cine Colombia, other companies have realized they need not adopt purely Cost Leadership or Differentiation strategies to compete. Gyms, airlines, and telecom companies have discovered that serving multiple market segments maximizes revenue and profits. Offering varied products and services in value and price allows them to satisfy a broader portion of the market, serving highly price-sensitive customers without destroying value for those willing to pay more. These companies have discovered a third option to compete: The Multi-Segment Strategy.

[1] Michael Porter, “Competitive Strategy: Techniques for Analyzing Industries and Competitors”