As with most marketing terms, the phrase "market segment" is often tossed about carelessly by entrepreneurs, technologists, and yes, even by some marketers. To my mind, however, segments are a cornerstone of market-driven business plans. Market segments are fundamental to a process-oriented view of taking technology to market and building business plans from the "bottom up."
In 1991, Geoffrey Moore in Crossing the Chasm defined a market segment as:
- a set of actual or potential customers
- for a given set of products or services
- who have a common set of needs or wants, and
- who reference each other when making a buying decision.
Most of this is pretty intuitive. In a nutshell, a market segment is comprised of like buyers who share the same pain. But there's more to it. The reference part trips some people up. The key point to understand is that the customers and potential buyers must be willing AND able to reference each other.
So, for example,
- a CEO may not reference an IT manager buying the same product;
- a smaller company CEO might look to a larger firm's IT manager for guidance, but is there a means for referencing? Do they visit the same forums or social networking sites?
- a Network Engineer likely won't reference an IT Manager in the same company;
- A Telco Network Engineer likely won't reference a same level network Engineer for a Fortune 1000 enterprise;
And so on. Why is this important? Leverage. Each group of similar individuals is likely to be similar in terms of:
- what is their pain (compelling reason to buy)?
- how much budget authority?
- what is their buying process?
- who do they listen to?
- where do they congregate?
- what pubs do they read?
- what are likely product requirements?
- what is the method of finding and reaching them?
Clearly, the impact on the business plan is huge. The answers to these questions determine:
- who your competitors are;
- what your sales model should be;
- product roadmap;
- marketing activities;
- resources required.
It boggles the mind to think a business might only go through the process of determining potential market segments after writing a business plan, let alone after obtaining funding, scaling headcount in all departments, and marching to market with product in hand.
Market segments affect additional factors entrepreneurs should consider:
- Does they have a passion for a particular segment, or lack a passion in another? In other words, a particular segment might demand a particular product based on their technology, that solves a specific problem and therefore needs to sold through a reseller channel. Perhaps there's something about this that is not gratifying to the entrepreneur.
- Does the segment fit within the core competency of the company?
- What is the proliferation potential? Does it enable a "bowling pin" strategy?
- How long will it take to get to market; to sell product?
Most businesses naturally fall into a market based on their business model, technology, or key differentiators. A SaaS company, for instance, is typically carving out a niche in an existing market. A company selling wireless equipment to carriers already knows who each of its potential customers is. Such knowledge ripples through the entire business plan. There's not a great need for lead generation, for instance. Likely an expensive direct sales force is required, the members of which have high quality telecom contacts. They must plan for a long sales cycle and the ability to provide equipment for a pilot program.
You start with the company truths -- the reason you're in business -- and flesh out your possible segments from there. How do you decide? Two versions of an opportunity matrix should get you through the process.
The first, uses weighted criteria. Score the different criteria by importance, 1-5. Next score each segment for each criteria. For example, criteria A is the level of competition and may be very important (5). The 1st segment may have several entrenched competitors, so you score it a (1). Product fit, criteria B is important, but you have some flexibility so weight is (4). 1st segment represents is a good product fit, so you score a (4).
The normalized weighted mean is =(scoreA * weightA/sum all wt) + (scoreB * weightB/sum all wt)
or, (5/9*1) + (4/9*4) = 2.3
Some business plan characteristics are easier to evaluate in terms of costs, rather than subjective evaluation. So the second method uses a cost estimate comparison. Using real dollar estimates, presumably based on primary research, you attempt to compare the cost of doing businesses vs revenue potential. Marketing dollars, product development, sales model, time to market, length of sales, etc., are dependent on market segment. A simple spreadsheet tallying up the burn based on different scenarios should suffice.
If you are going to build a hosted platform for wireless mobile video, for example, out of a technology originally introduced as a 10K SMB software package, you had better figure out carefully whether there are enough customers who are willing to pay enough money to keep the datacenter operational.
Finally, a quick note on what a segment is not:
- a vertical. Healthcare is not a market segment;
- a horizontal. "IT Manager" is not a market segment;
- Big. A small, focused niche is better. Choose a segment you can dominate.