This is one of the more misunderstood tasks in the process of starting a new company or launching a new product. It might even be a task relegated to a marketing summer intern long after the product is built and the sales team hired. Instead, the segmentation analysis should be drafted at the same time as the product plan and commercial strategy is done. Let me explain why…
Segmentation is CRITICAL to product, sales, and corporate strategy
creation and definition of market segments is more art than science and has the ability to drive success or get in its way if it’s not done well. A solid analysis and clear articulation should benefit all key teams across the company by providing:
Good segmentation is in the eye of the beholder
Market segments should be defined (IMHO) as groupings of potential customers with similar needs and similar buying behaviors. These similarities are what makes the segments USABLE. The segments need to be big enough to make it economical to create messaging and solutions around their needs but small enough that targeted, meaningful value propositions can be created that resonate within. This may sometimes create groupings that look odd or combine companies from different areas.
Segmentation that works for one firm may not work for another though I would expect it would be very similar to all the competitors in a space. For example, if you're selling a portfolio management solution, you might group insurance, pension funds and institutions asset managers (stratified by assets under management tiers) as your segments. These are clearly very different types of businesses but you can find large numbers of each that manage their own assets and the process for creating, assessing and tracking portfolios is similar across the three so there are sufficient similarities to be useful for the product, marketing, and sales efforts. The messaging for the portfolio managers (who would be the primary users) will be fairly similar. Differences between the users within the segment will likely be by asset classes and strategy rather than firm type. (If these are significant enough, you might argue for sub-segments within or instead of the AUM tiers.) If you’re selling an underwriting solution, however, this segmentation won’t work at all. An insurance company or pension fund underwrites risk very differently than a bank or another securities issuer might. The institutional asset managers won’t have any need or interest in your underwriting products. Therefore, you would expect that a firm selling portfolio management tools might have a totally different segmentation than one selling underwriting solutions, even if they’re both selling to financial services firms and ultimately have significant overlap in their target firms.
Bottoms up meets top down.
Segmentation should be a process of understanding the problem that you are solving for your customer and then figuring out who has that need and grouping like targets together. It’s a multi-step process that involves bottoms-up analysis to determine similarities (problem, features function priorities, workflow, buying patterns, etc.) but it’s important that a critical eye is cast from the top down as well. Segments that look very logical at the needs-analysis level, might not make sense from a practical perspective. For example, it may be true that firms that only manage a particular type of security have the greatest need for your product but if there is no practical way to be able to identify those firms, that segment may not be practical for use. In that case, a broader definition (such as all those with a particular strategy type, which is publically available) might be a better option. Conversely, if the geographical location of target firms is too widespread and your sales process is very high-touch, a sub-segmentation by region might make sense (especially if there are different local languages) or relevant regulatory requirements. Driving aggregations and sub-segmentations to get to that happy place of the ‘right’ number of meaningful segments is really where the experimentation and experience become important.
Feedback is critical.
To help with the process, sales and marketing outreach teams will also have important feedback for your segment definitions. They can tell you whether the segment is easily identified for targeting, can be used to build sales campaigns around and whether messaging designed for the segment (once designed) is resonating. Is the hook actually effective at getting meetings? Does outreach produce the expected yield for feeding the funnel? Both sales and marketing metrics that look ‘out of whack’ can be indicators that the segmentation definitions are not MECE (Mutually Exclusive, Completely Exhaustive). Perhaps there are dissimilar firms lumped in and the message is off target or the value proposition isn’t the same. Perhaps the segment is too finely cut and the response values are low as a result. Of course, there are other reasons that there could be issues as well but using both qualitative (e.g. sales meeting stories) and quantitative (e.g. conversion metrics) to un
Without a solid segmentation analysis and definitions to base commercial and product strategy around, it’s hard to have the nice, tight feedback loop that helps your companies to fail, pivot, enhance and grow or successfully scale as needed. Segment definitions help provide context. They provide inspiration for new products and growth strategies. They keep the team honest about the prospects for any new development effort. (You can’t grow a $10,000/firm product to $100M if you only have 10 firms in your segment no matter how good you are!) They provide the basis for internal as well as external conversations about direction. Done well they keep the team focused and make it possible to grow efficiently.
Do an experiment. Walk around your company and ask someone on the management team, someone on the front-line sales team and someone on the marketing team the following question: “what is the primary problem we solve for our customers?” Compare the answers. If you want the bonus points, now look at your website and product brochures and see if you can find the problem there?
I spend most of my time talking to product people, small and mid-sized company CEOs, startup founders and software salespeople. When asked about their companies, they invariably talk about the product – what it does, the features they’ve built in, how it’s better than the competition, etc. Sometimes they talk about the company’s growth or plans for expansion. It really doesn’t seem to matter whether they’re 20-year old undergrads starting their first company (I’ve been doing a lot of mentoring!) or experienced CEOs on the 3 or 4th company-leading experience. I mostly hear some version of “Our solution does this. We do it really well and our technology is really cool.” I’m always shocked by this (which maybe says more about me than them).
When you build a company – any company – it’s not about you.
Let me say it again: It’s NOT about you
or your product, or your team or your cool technology.
When you build a company, it should be about solving someone else’s problem (preferably one they'll pay you to solve unless you're a non-profit). Ok, it might have been your problem if you came out of the industry you serve but if it doesn’t also solve someone else’s problem, you’re sunk. In fact, I’ll go a step further and say that after you find someone with a problem that you can solve, you better make sure that there are more – lots more - with the same unsolved problem BEFORE you start really building out your company. (It’s ok, btw, if you don't find those people. Better now than later after you’ve spent a year building it, hired a bunch of people or raised a ton of money.)
To be clear, many entrepreneurs and product managers will build a prototype or a feature because they think intuitively or based on experience that it fixes a problem but they seem to lose sight of this genesis as soon as its built or sometimes the discipline of staying focused on the problem fades. Maybe they just think everyone understands it already so it doesn't need to be restated. But it doesn't matter how young or old your company or product is, if someone asks you what you do, the first thing you should respond is: it solves this problem for these kinds of people/companies. How it solves the problem is not the story until you get into the details necessary to differentiate yourself from competitors.
(Ok, I feel like I have to say that some founders are just ego-maniacs and really believe that because they built something cool, people will buy it. These people are beyond help and this blog is not intended to fix their problem.)
Your positioning, your website and, probably most importantly, your sales pitch should all be stated in terms of the problem you solve. Articulating this consistently across the product, marketing, and sales teams allows you relate to your customers and also to focus your efforts on the right things:
Product: What features are required for my users to solve the problem?
Marketing: Who has this problem? Where do they go to discuss it? What is the context that I can use to explain the problem and solution? Who helps them with it today?
Sales: Who has the most pain due to this problem? What is the value of the solution? Why do we solve this problem better than the alternatives?
Management: What other problems exist like this one that we could also solve in other industries/industry segments, in other departments/user groups in our current clients, or upstream or downstream from the problem we’re solving today?
Right now all of you are thinking: “not my company”. You’re in denial.
I’m hired in all the time to build out go to market for these products. You can’t build go to market until you can answer these questions. You need context and direction to position and message. You need to know whom you’re speaking to. You need to know why they will care (the problem!). I spend most of my time nailing down these answers and far less time figuring out what the go to market strategy should look like. Companies function better (and their revenues are higher) when all of the team is working on solving the same problem for the same customers. If your pipeline is full of deals with no common theme or requirements and your conversion rates are low, if your marketing campaigns are not yielding as expected, if your product roadmap isn’t terribly linear and can’t be distilled into a single page, you’re probably suffering from this problem.
Try it! Walk around your company. Ask. See what sort of reaction you get. See what answers you get. Then let me know. Send me your findings at firstname.lastname@example.org.