Market Segmentation Strategy: Finding the Right Balance Between Too Broad and Too Niche
Image courtesy of Tom Hilton
Do not miss the forest for the trees, and vice versa.
Market segmentation strategy is always a contentious topic for any management team looking to optimize their go-to-market strategy. This is natural, because driven, successful executives at fast-growing companies must know their market well AND have very strong opinions (some of which are totally justified) on how to approach their market.
Being consultants to our portfolio companies, we often find ourselves in the middle of such rigorous debates, and actually encourage such discussion to happen in a portfolio senior management team. Only in such an open forum will assumptions and hypotheses on segmentation criteria (how the total market is segmented into distinct subsets), segments-based needs and use cases, and segment prioritization (how to allocate resources to the most profitable market segments) be challenged. It will spur better fact-based analysis, objective evaluation of hypotheses, and above all, it is the only way to reach a very high level of consistency and clarity in the way the executive team views their market segmentation strategy. These debates are exactly what we aim to stimulate with our upcoming segmentation clarity assessment, a topic that I have discussed quite a few times on this blog.
Too Niche or Too Broad? The Challenge of Defining Market Segments
Now, assuming that the team has worked together to validate their hypotheses and assumptions, there is yet another set of decisions to make that can be a cause of endless debate — the actual definition of each target segment. The challenge here is balancing the needs for defining very specific criteria for each market segment without making these segments so narrowly defined that they do not provide sufficient coverage of the overall market, leaving your team with a very focused but very niche target market.
Alternatively, the team may start off with a drive to target a really big market segment, and may choose to define their target segments with broad, catch all criterion. In this case, they end up with a broad target that is not a distinct segment at all.
Either way, these over-defined or under-defined market segmentation strategies create massive issues in go-to-market implementation.
Downsides of Focusing Too Niche
On the one hand, targeting a very finely defined target market is very difficult because you will need a lot more qualifying information about each of your prospects. Additional qualification steps increase friction and dropoff rates in the marketing funnel, and ultimately increase cost of leads. It is also very hard to scale up hyper-focused marketing campaigns and tactics, because they need to be finely customized for each individual market segments, and your market team will be overloaded with the busywork of targeting too many segments.
Downsides of Focusing Too Broad
On the other hand, when target segments are broadly defined, prospects are easier to find and target with scalable marketing channels and tactics, but there will be a significant level of variation of needs and buying behavior within each market segment. Prospects will not react consistently to your content and messaging, making it hard for your team to optimize your marketing mix and implement fully targeted campaigns.
Adopting the Right Market Segmentation Strategy for Your Company
There is no strictly correct or incorrect answer for this challenge, because the level of specificity for each segment also depends on the company’s available resources and capabilities. Early-stage companies may choose to target broadly because they do not have the resources to customize their marketing activities to individual segments. Later-stage companies may segment their go-to-market teams for each target market segments, and therefore can adopt a finely tuned segmentation strategy.