Market Segmentation & Goals

A much talked about topic at OpenView and our portfolio companies right now is target market segmentation.

Market segmentation is a key component of any product management process, and it is often not explicitly or effectively addressed by expansion stage software companies, at least not at the time of our venture capital investment.

Given how important market segmentation is to everything from competitive positioning, to creating competitive advantage, to product management and development, sales strategy, partner strategy, inbound marketing, content marketing strategy, customer support, account management, and so on, it is important to talk about market segmentation and understand what it is.

And so I’m glad that our management teams and staff are talking about market segmentation and starting to focus on it.

But there is one crucial idea that I see missing from these conversations: the business goal. Why do target segmentation? What are you trying to achieve? Once you have identified your target segments, what do you do with that?

These are critical questions because a document listing and describing priority market segments and their needs is not an ends in and of itself. It is a means to some other ends, and knowing clearly and sharply what that end goal is determines how you define your segments, what data you collect, how you prioritize them, how deeply you research them, what questions you seek to answer, and so on.

Furthermore, if you’re doing segmentation definition, research, and analysis just for its own sake, there is a danger (and I’ve seen this a bunch) of doing lots of work, and creating something that never gets used by anyone for anything.This down side taking place makes sense, since in this case the segments aren’t created for a specific business purpose in the first place.

Therefore, it is very important to define your strategy, and have very sharp business goals. Then when considering of how to achieve those business goals, assess the impact of having a set of priority segments, or just one segment, well defined, and go from there.

For example:I want to increase my revenue from new and existing customers. I want to do this by raising the average price customers pay up front and the dollar stream from them over time.

It would be quite helpful to identify segments that are willing to pay more for your product (i.e. what are the common characteristics of customers who will pay more and why will they), determine how much they’re willing to pay, and can keep paying in the long term, and then to determine what product benefits and messaging will compel them to pay more, and align strategy and tactics based on those insights.

This is just one example, and many goals associated with product development, services, sales, and marketing can be tied back to identifying sharp segments, prioritizing them well, and then understanding them.

So target segmentation is important, but start with the goal first, and then determine the optimal means of getting there.