Market Research

How Segment Focus Can Increase Revenue Growth

August 3, 2011

Over the last couple of years I have watched two of our portfolio companies shift the majority of their focus towards specific market segments. The segment focus was transformational in the case of both companies. And for both companies, an interesting and unplanned consequence was the dramatic increase of their average selling price.

First, let’s make sure that we all understand the extent of their segment focus. A customer segment is a group of potential customers who have similar enough needs that a single product or service can competitively satisfy them; a group with similar enough buying characteristics that results in a tailored engagement experience.

A real focus on a market segment requires:

  • Complete understanding of segment needs/dynamics: the organization must get very deep in understanding the dynamics of customers in the segment, the business challenges they face, the operational needs they have, how they address them today, and how they would want to consume your solution.
  • Redefinition of user persona: a segment focus allows you to be much more precise in defining the user persona and its specific usage needs. For example, your customer support group would have to figure out how to customize/support the user experience based on the specific segment need.
  • Product evolution: your product will likely need to change to address the specific needs of the segment. It typically evolves from a set of generic feature/functions to capabilities that facilitate segment-specific business workflows or user persona nuanced use.
  • Redefinition of buyer persona: marketing needs to figure out the buyer persona and what marketing channels are needed to reach them; sales needs to figure out the sales channels and how the customer would want to license the solution.
  • Competitive landscape: the competitors within a segment may significantly vary from those of the broader market landscape. What may have been a minor competitor in the broader market may end up being a significant one in the target segment (perhaps because the competitors had already decided to focus on the same segment and had already made business/product changes to adapt to the segment). Understanding the competition and how to position against them is key when attacking a segment.

This brings us to pricing. By better aligning your product and use case to a specific customer pain point, you will be in a much better position to price your product based on the value you will bring to your customers (rather than a generic license pricing model).  Inevitably, the segment specific price will be higher.

In the case of the two portfolio companies I observed, the average sale price went up by a factor of 10x. Both companies had an ASP below $10k (annual subscription) for their non-segment customers. Both companies are closing deals in their focal segments in the range of $60k to $100k. And in the case of both companies, the rate of revenue growth has risen by 10-20%.

So how did these companies figure out their segment pricing? By “winging” it. Shrewd sales managers floated higher quotations and negotiated based on value promise. Was it done through a formal, analytical pricing study? Certainly not.

For more on segmentation strategy, check out Market Segmentation: The Means to More Profitable Growth

The Chief Executive Officer

Firas was previously a venture capitalist at Openview. He has returned to his operational roots and now works as The Chief Executive Officer of Everteam and is also the Founder of <a href="http://nsquaredadvisory.com/">nsquared advisory</a>. Previously, he helped launch a VC fund, start and grow a successful software company and also served time as an obscenely expensive consultant, where he helped multi-billion-dollar companies get their operations back on track.