The Importance of Customer Segmentation to New Technology Companies
Hamilton Consultants White Paper
Andrew Donavan had a problem. He was once again being forcibly reminded that technology companies without effective, actionable customer segmentations have a challenging time marketing effectively. As he stared into his tenth cup of coffee of the day he tried to gain some perspective on his situation.
Andrew was a senior marketing exec who had joined his new company, Big C, five months ago. Big C was developing a potentially breakthrough technology in the B2B exchange space. The company was well funded by a VC consortium, had a few hundred employees, several offices in the U.S., and was starting to think about an IPO. If successful, Big C’s technology offering could become part of the core technology for all of the public and private Internet exchanges in the world. Their obvious route to market was to form alliances with the major exchange infrastructure players and systems integrators in this space. Andrew knew that gaining their interest, however, would require marquise reference accounts demonstrating the real world value of this technology.
Easier said than done. Andrew had quickly come to the realization that while everyone at Big C shared this vision of success, they all had a different vision of how to get there. A fly walked across his desk. Compound eyes, Andrew thought, were really bad for focusing on one thing.
Andrew knew that the foundation of any successful marketing plan was the correct definition of target markets. All resources could then be aligned to penetrate that target, and expanded after these "segment beachheads" had been established. Unfortunately, he found himself as one voice among many trying to choose a direction for Big C. The limited sales resources wanted to chase every big lead that came their way, no matter
what direction it pulled them in, but they were having extremely limited success in closing. The Product Development team was focused on matching the best-in-class attributes of all of the other competitors' offerings, with no focus on an agreed-upon target segment to prioritize design trade-offs. The CEO was more of a salesman than a marketer--that is, he could be very compelling when describing his product to prospective investors and clients but unwilling to restrict his freedom of action by "betting the ranch" on being successful in one specific target segment. To make things more challenging, Andrew had the distinct impression that his role was viewed within the organization primarily as a Marketing Communications function, with little impact on strategy development.
With morose thoughts about the demise of Betamax, Andrew sighed, finished his last cup, and went home. Tomorrow would be another day.
Is Strategic Marketing Dead?
Many of today's new technology firms act as if traditional marketing is not germane to them. Organizationally, this ambivalence about marketing often manifests itself in silos that compete for strategic leadership. The Sales silo targets anyone and everyone, touting products that are great at every conceivable competitive attribute, and sold, of course, at a lower price. The Product Development silo can't understand why Sales isn't more successful at closing deals on a product that is so clearly "best-in-class." The Marketing silo is often limited to developing advertising, public relations, and event management for a broadly conceived market. It focuses on tactical go-to-market plans and has no real role in strategy development.
The result of this dilemma is that true strategic marketing gets done by no one. The product goes to market and fails to get any "traction," resulting in underwhelming sales. Often, in fast-moving new technology markets, the best that can be hoped for is that some other player buys the company for its core technology, potentially at a steep discount to the founder's aspirations.
Focusing Resources
New technologies often have grandiose visions of the markets they will ultimately conquer. Just because a solution can solve many problems, however, does not mean that it should--at least not initially. The simple truth is that resources are always constrained. Even the largest companies can only tackle a limited number of objectives. Attempts to try to sell the same solution to everyone will always be hit or miss, miss, miss. For every one quality new customer, two bad ones will be signed up, two more won’t sign up because they didn’t receive sufficient attention, and five good prospects won’t have been contacted at all.
An actionable segmentation analysis, then, is far from an academic exercise. On the contrary, it serves the vital function of aligning the organization around markets in which it has the greatest initial chance of success. The development of this segmentation forms the basis for the strategic alignment of sales, product positioning, pricing, and channels. Moreover, the segmentation will have a significant impact on further product development and refinement and on post-sale customer service.
Segmenting the market signals a shift in mentality from "what can the product do" to "what do potential customers want the product to do." Many new technology companies fail to make this shift. They support a new product by throwing huge amounts of money into advertising campaigns that blanket the market with "averaged" messaging that is meant to appeal to all prospects, but is compelling to none. In effect, they are hunting a fly with a shotgun. As a company becomes market-driven, it is able to allocate resources more efficiently. Some flies may require a laser; some may only require a fly swatter. In either case, the company can be sure that it is hitting its target with the appropriate tool.
Developing a Roadmap
The Marketing function, properly understood, has a key role in helping an organization determine the target markets on which they should focus. Contrary to the belief of many newer technology companies, Marketing is not just Marketing Communications (MarCom). The latter is the tactical assessment and implementation of the modes of communication that are appropriate to reach these targets. The former is strategic in focus.
By focusing on customer segmentation analysis, the Marketing function can use solid data to replace the "shotgun" approach with a concrete plan for maximizing the potential of a product/service within its addressable market. From a marketing perspective, the roadmap to optimizing a new technology company’s success in the marketplace is straightforward*:
- Segment the addressable market
- Choose segments with the highest potential
- Tune the offering for target segments (product offering + target segments define strategy)
- Create a go-to-market plan that is focused on target segments (tactics)
- Align the organization with your marketing strategy/tactics
- Put metrics in place to measure success
- Expand once segment beachhead is secured
From Segmentation to Strategy
It is important to note that while developing a segmentation analysis is a vital part of strategic marketing, it is but one step in a process that orients an entire organization towards the market. Therefore, it should never occur in isolation. Sales, Product Development, and Customer Service can provide valuable insight into the current state of the market and of technology. This data can inform and improve the segmentation effort. At the other end of the process, senior executives will use the segmentation information to make decisions about the long-term strategic direction of the company and the allocation of resources. Furthermore, the organization itself may be altered to better reflect and respond to the segmentation. Changes might include:
- Ensuring that all relevant divisions are measured on the same market-driven metrics based on profitability and penetration on a segment-by-segment basis. Ensure that understanding of these target segments and metrics is ubiquitous throughout the organization.
- Creating cross-functional teams that own products from design through market launch.
- Restructuring the entire organization around market segments, with marketing support reporting into these segment groups.
Whatever the ultimate organizational and strategic implications of the segmentation effort in a specific company, it is clear that the effort can and should drive a company’s thinking and allocation of resources. Without segmentation, a company can have no focus. Without the willingness to take action based on the segmentation, the analysis becomes completely academic. In either case, any tactical go-to-market plans will be imprecise at best and, at worst, risk being a total waste of time and resources.
*Hamilton Consultants' experience indicates that organizations often need the most assistance in selecting the correct segments, detailing the go-to-market plan, and in aligning the organizational resources once the correct targets have been chosen.
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