Tuesday, January 21, 2014

Strategic Planning Analogy #519: A Whole Foods Bag at Aldi

Last week, I was shopping at an Aldi supermarket. While there, I saw a shopper in the Aldi store using a reusable shopping bag from Whole Foods.

In case you are not aware, Aldi is a low end, no frills cheap store selling a limited assortment of private label products. By contrast, Whole Foods is a huge, high end store full of high quality organic and Vegan products. Whole Foods is such an expensive place to shop that it is often referred to by customers as “Whole Paycheck.” You could not find two grocery chains at more opposite ends of the spectrum.

But there it was before my eyes—a customer in Aldi who also apparently also shops at Whole Foods. She was well dressed and looked rather sophisticated—a cut above the appearance of many in the store. And she was purchasing low-end private label goods at Aldi using a Whole Foods bag.

I was thinking how strange that was until I realized that I was also shopping at Aldi. Maybe it isn’t so odd after all.

A big part of strategy can be segmentation. Questions debated include “who should be my segment” and “how to appeal to that people segment.”

The problem is the “who.” Did that woman I saw at Aldi belong in the Aldi segment or the Whole Foods segment? It’s obvious that Aldi and Whole Foods are targeting two totally different segments of the grocery business. Yet this woman appeared to fit into both segments. Where should we put her? Which marketing message should she receive?

This is not just a problem for supermarkets. Problems like this crop up all the time in business, where individual consumers do not neatly fit into a single segment. In fact, large portions of the population usually defy simple classification into a single segment. They appear to exhibit seemingly inconsistent behavior, doing different things at different times in different ways. They seem so illogical—defying the logic of my segmentation scheme.

As we shall soon see, the problem is that we often focus on the “who” of segmentation when instead we should focus on the “when” of segmentation. Making this change will vastly improve the segmentation portion of strategy. The illogical will become logical again.

The principle here is that superior segmentation is typically occasion-based, rather than individual-based. People react differently based on the situation or occasion. For example, the same individual may:

  1. Buy one brand of beer when trying to impress others and a different brand when drinking alone.
  2. Go to one kind of restaurant when eating with his/her kids and a different restaurant when eating with their boss.
  3. Wear one type of clothing when going to work and another type when exercising at the gym.
  4. Shop at a big stock-up grocery store at the beginning of the month just after getting paid, shop at a convenience store to pick up milk when running out in the middle of the week, and shop a cheap store at the end of the month when money is tight. 
Does this inconsistency in behavior mean that these individuals are illogical? Not at all. Every behavior is logical within the context of the particular occasion/situation.

  1. When impressing others with beer, price is less important and image more important. Therefore, it is logical to buy a different beer than when drinking alone (when price is more important and image less).
  2. A restaurant suitable and desired by children (kid-friendly food and environment) is not one suitable for business lunches with the boss (quiet and sophisticated), so one naturally chooses differently depending on who one is eating with.
  3. A business suit makes no sense at the gym and gym clothes make no sense in the office.
  4. The amount of money in one’s pocket, the size of the shopping list, and how much of a hurry one is in determines where one go for groceries. As these variables change, so changes the shopping destination.
Therefore, it is the wrong question to ask as to which segment I am in:

  1. The image beer or cheap beer segment.
  2. The child-friendly or boss-friendly restaurant segment.
  3. The suit or sweats clothing segment.
  4. The stock-up, convenience, or low price grocery segment.
I’m in all of these segments. It’s like the lady who is both in the high-end organic grocery segment (Whole Foods) and the cheap private label grocery segment (Aldi).

So does that mean that segmentation is worthless? Not at all. It just means we have to move from designing segments around “who” to segments around “when.”

If you look at the “when” of segmentation, then you are looking to own a situation or an occasion. You try to become the ideal solution for anyone whenever they find themselves in that chosen situation or occasion. At that point, that person becomes a part of your segment. And when that person moves on to a different situation, they fall out of your segment. You target the moment, not the person. When the moment is appropriate for your brand, you make your move.

Grocery Example
For example, I did not see that woman at Aldi purchasing any meat or fresh produce at Aldi. When she runs out of those products, that occasion probably prompts a trip to Whole Foods, because she values their extra quality, variety and emphasis on organic. And these attributes are important to her on fresh food.

But I suspect that in order to afford those expensive items at Whole Foods, she needed to save money on items where freshness, quality, variety and organic are less important. Thus, when the occasion comes up to buy basic staples, like rice or pasta or paper plates, she went to the store focused on low price—Aldi. This explains why I saw her in the pasta section at Aldi.

So the occasion/situation dictated which attributes were most important. Then the store which owned the attributes associated with that situation got the business—Whole Foods when the occasion required quality, variety and organic and Aldi when the occasion required saving money. As long as Whole Foods and Aldi continue to excel at their differentiated solution sets, they will win when a person’s occasion causes them to desire that particular solution set.

Steps to When-Based Segmentation
To succeed at when-based segmentation, you need to do the following:

  1. Choose a situation or occasion where you can win (your position).
  2. Build a business model that makes your brand the ideal solution for the problems most relevant to that occasion.
  3. Let people know which occasion-based solution you are relevant for and why you are best qualified to solve the problems relevant to that occasion.
  4. Do a good job of getting your brand inserted into the moments when the occasion is relevant.
For example, let’s say that you own a restaurant. The first step is to find an occasion to position yourself around. Let’s assume you choose to own the occasion of business lunches.

The second step is to build a business model that will give you superiority as a place for business lunches. So you start by doing research to learn what is most important when choosing a place for a business lunch. Perhaps the research says that the following qualities are most important: quiet area where you can hold conversations confidentially, close proximity to the office, ability to cater meals, food that has a sophisticated adult taste isn’t messy. Then you build your business to win on these attributes in terms of location, offerings, and skill sets.

Third, you make sure people are aware that you are “the best place for a business lunch.”

Fourth, you try to make sure you are inserted in the moments when that occasion comes up. For example, you may buy ads on search engines for terms like “business lunch.” After all, when people are looking up the term, they are probably entering that occasion. Perhaps you get in good with all the top administrative assistants in the offices nearby. After all, they may be the ones called upon to find their boss a place for a business lunch. If the admins control the choice, then you want to control them when the occasion rises.  

Finally, don’t get upset when all those business people drive home to their families in the suburbs and are not coming to you for dinner. Their situation has changed and they are no longer trying to solve the “lunch with boss” problem. They are no longer in your segment. Their meal needs have changed. And if you try to change your business model to meet these new situation needs, you can ruin your ability to win at the business lunch occasion.

Be patient. They will come back to work tomorrow. And many will need to solve the “lunch with boss” problem tomorrow. Just be ready when they drift back into your situation-based position.

Segmentation is a key element of strategic planning. Usually, the best segments are those that are defined around situations rather than around individuals. The problem with individual-oriented segments is that individuals act differently based on the situation. Therefore, it is virtually impossible to create a solution that is best for all the situations a particular individual experiences. The better alternative is to choose a position revolving around a particular situation. If you own the best solution for that situation, then you will get the business whenever someone drifts into that situation. And don’t be upset when the customer drifts into a different solution and chooses someone else. Just be ready when they drift back into the situation where you can win.

Follow the solution to the situation, not the individual. If you follow the individual, you will become unfocused in what you offer as you try to be all things to all of their situations. By contrast, if you follow the solution to a situation, you will continue to get better at owning a point of focus.

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