I first started talking about the importance of horizontal segmentation as it related to product development a few years ago after seeing a TED Talk by Malcolm Gladwell. Malcolm Gladwell references the importance of the work done by Howard Moskowitz, an expert in consumer habits of the food industry. Horizontal segmentation is the idea that a set of consumers may want different products rather than the typical ideal. This stems from the assumption that the ideal for a consumer base is highly individualized.
We can use Pizza as an example. It’s one of the most beloved foods in the American diet and is adopted by our Italian cousins across the pond. There are different styles of pizza across the United States, but by far the most popular kind is thin crust. It’s deemed as the authentic New York style pizza. All across America, local pizzerias market their pizza as “thin crust” or “New York style.”
Yes. Everyone in America thinks New York thin crust is the best. That is, everyone but the people of Chicago. The capital of America’s heartland has a different take. Their pizza pie is quite literally a pie. While New York style pizza is as three dimensional as necessary, Chicago style is as three dimensional as possible. It’s thick. In fact, it’s so thick that the last time I was in Chicago, I exclaimed to a group of colleagues I was eating with, “it’s fantastic, but it’s not pizza.”
In my native Connecticut, we have New York style pizza and New Haven style pizza. The only serious difference is if local pizza joints decide to sell it Yale based hipsters. Both styles are as flat as could be. In recent years, I’ve lost much of my sense of sinat hinam against Chicago style pizza. This being said, if the Ari of four years ago was to open up a pizza joint, the only pizza that would be served would be New York thin crust.
That kind of closed mindedness is something that dangerously disadvantages businesses. Howard Moskowitz warns us that the conservation of the “authentic” is fine, so long as it is reflected in consumer purchase habits. Sure, in Connecticut, most people probably do prefer New York style pizza to Chicago style pizza. That being said, if only twenty percent of Nutmeggers (Connecticut folk) prefer Chicago style, only selling New York style can be self restricting.
Many industries have a long legacy of production that creates for an authentic product. In a noncompetitive market, having a monopoly on sales often allows the producer to take a laid back approach to product development. Without a proactive approach to horizontal segmentation, this can cause a few outcomes. This first outcome is that the producer slips quality standards and produces a subadequate product. Another outcome is that the producer defines an initial product as optimal and creates internal policy to match the output standards to the initial product. The third possibility is that the producer redefines internal policy over time and updates standards to improve the initial product. In this last situation, even though a product may be continually improved upon, outside attitudes may change that could make for lesser appeal.
Horizontal segmentation is a crucial approach to product development in a monopolistic enterprise or a traditional competitive market. In a noncompetitive market, a lack of horizontal segmentation in product development can lead to lost opportunity and in a competitive market, that close mindedness can lead to stagnance in the face of competition.
What’s more is that through clever marketing and distribution, a seemingly non rival enterprise can edge out a more dominant traditional player. Maybe it is the case that in Connecticut, residents actually do prefer Chicago style pizza to it’s flatter East Coast cousin. Even durable goods are subject to consumer game theory; the repetitive sale of all goods will eventually reflect consumer preferences. If a consumer likes New York thin crust, but likes Chicago style more, an opportunity cost decision will come into effect. The “only thin crust” pizza makers of Connecticut won’t only lose potential business, they’ll lose existing business.
Stay tuned for part two on vertical segmentation...