5 Customer Segmentation Strategies for Dominating Your Market
At OpenView, we spend a lot of time helping our portfolio companies on their customer segmentation strategies and then developing a plan for what segments they should attack, how they should attack them, and when.
There are lots of strategies to consider and unfortunately many companies don’t take the time to thoughtfully develop and execute any of them. Below are five basic strategies for you to consider that will help you think about which potential customers you should be focusing on. Your mission is to figure out which ones are best for you and how to execute them.
1) The Best Bell Cow Strategy
Using the best bell cow strategy is probably the most effective way to get more customers. Just as a herd of cows tends to follow the bell cow (literally the cow with a bell on it), the idea is that lots of prospects will want to become your customers once you have a few bell cow customers who lead the way.
In the world of B2B SaaS companies, bell cows can take a variety of forms. They could be customers that provide great references for you or they could be the technology leaders that other companies look to before making their own decisions. Alternatively, they might just be active evangelists for their function or industry. Examples include companies that have CIOs who are very active networkers or companies that are considered very difficult to sell to.
Using the best bell cow strategy is a great way to get the market to view you as a leader and should result in much lower customer acquisition costs and significantly higher win/loss ratios for future customers. The downside to this strategy, however, is that it takes more work and capital to get these key customers since lots of other companies are going after them too.
2) Crowd Sourcing Strategy
Companies that are first coming to market with their product should consider utilizing a crowd sourcing strategy. The basic idea is to let the market tell you which customers are best for your product. To do so, you have to get in front of lots of customers and determine which customer segments are best for you using information like cost of acquisition, revenue and gross margins over time, attrition rates, and customer satisfaction data. The strategy could also be used tactically to help you determine what customer segments exist in practice, how they relate to what you are doing, and what segment(s) you might want to dominate.
This strategy could also be used to help to make your company appear as if it has a broader reach, to allow you to constantly monitor the effects of product iterations on the market, and to allow you to acquire customers in multiple segments that could be used as a beachhead for more focused customer segment strategies in the future.
It’s important to note that you shouldn’t use this strategy alone. It’s not the easiest way to build your company and you will have more success using it in combination with other strategies. Even if you do use other strategies, you still need to be careful not to put too many resources against it relative to the others, or you likely won’t grow as fast as you could.
3) Dominate Your Best Customer Segment Strategy
This is a very good, pragmatic approach to building your company as you enter the expansion stage and beyond. The idea here is to analyze your customer base to determine who your best customers are, identify their characteristics that contribute to them being the best, and then actively target customers that have the same characteristics.
This strategy has a lot of merit since it generally will allow you to take your company to the next level the fastest while using the least amount of capital since it is focused on acquiring customer revenue as easily and cheaply as possible. You can also continue using this strategy over time.
4) The Lightweight Strategy
The lightweight strategy is often used in today’s SaaS world. The theory behind it is that smaller, emerging businesses should focus on making it incredibly easy for users to start getting value from their product. From a pricing strategy perspective, for example, the businesses can fuel initial growth through free, advertising-based, or very low average sales price (ASP) models. The strategy is generally coupled with friction free user experiences and occasionally with features that help users market the product to others.
The idea is that once the company has a solid set of users, it can either introduce paid features over time that allow the business to grow existing monthly recurring revenue (MRR), or it can start developing approaches that target larger prospects.
This model has a lot of merit for companies that have:
- A large number of potential customers. The best SaaS models appear to be the ones that have both a consumer angle and a broad, small business angle such as DropBox, LogMeIn, or SurveyMonkey.
- A small number of users/buyers, with the best being a single user who is also the buyer.
- A product that is easy for a user to understand and use, and for the buyers to buy without a lot of human touch such as SolarWinds, New Relic, or Kareo.
- A product that has a network effect or social features such as DropBox, Box, or Atlassian.
Note that while I describe the strategy largely in terms of product, it is generally aimed at the consumer, prosumer, SOHO, and small business customer segments. This strategy should be combined with more customer-focused strategies to determine the best customers to focus on.
The lightweight strategy can also be used by companies as a brand-building tactic. For example, VersionOne has a free product that helps agile teams run their agile processes while its core products are aimed at prospect companies that have multiple development teams.
The downside to the lightweight model is when your ultimate target customer segment is large enterprise businesses. It’s harder to re-design a simplistic product to meet the complex needs of big businesses than it is to develop a sophisticated product that meets the needs of large businesses from the start. If your plan is to ultimately tackle large businesses, it might be easier to have a different strategy that focuses on large businesses from the start.
5) The “Find a Market from Scratch” Strategy
While the strategies above are relatively straightforward to implement and end with solid results when you have a basic market segment in mind, they don’t necessarily find your absolute best customer segment. And, if you’re a pure startup trying to find a market to enter, the strategies don’t work at all. In this case, you need a more comprehensive research approach. I recommend that you follow the advice in Bill Aulet’s book, Disciplined Entrepreneurship: 24 Steps to a Successful Startup.
There are many approaches that you can take to focusing your resources on specific customer segments and attacking those markets. I have outlined a few that we have found to work well for companies.
As one of my advisors once told me, “any segmentation is better than no segmentation. The trick is to get management teams thinking about different segments and then executing against their first priority segment.” The most important point is that you have a management team that thinks about various targeting options and then focuses and aligns the entire team around the targets that you feel are best for your company.
Photo by : Pete