VCs Weigh In: How, Why & When Startups Need to Conduct Market Segmentation

Devon-McDonald by

I recently had the honor of speaking at SalesLoft’s Rainmaker conference, a sales engagement event for modern sales leaders. Over the course of three days, speakers and attendees focused on sales technology, best practices and new philosophies and ideas in sales. At the event I was asked to share collective thoughts on market segmentation and account-based sales from OpenView. Here, I’ve provided a sampling of the most insightful feedback gathered from across our firm.

1. What’s the goal of a market segmentation effort? When is it really necessary?

You’ve identified a massive TAM (total addressable market) for your product. That’s great, but how much marketing budget do you have? How many sales reps have you hired to call on prospects in your target market? In all likelihood, not nearly enough.

Without focusing on a subset of your target market, you risk wasting resources and failing to gain traction at all. A segmentation effort helps you find where you have the best opportunity for success, which makes you much more efficient with your sales and marketing dollars. It also helps your company attain a leadership position in a specific market segment, which has the benefits of virality and pricing power that go along with being the market leader.

It’s never the wrong time to do a market segmentation exercise. What changes are the level of rigor and data that go into your segmentation. Make sure to do a rich, analytical segmentation when you’ve hit the expansion stage – you’re north of $1 million in ARR, you’ve found product-market fit and your team is intently focused on scaling but hasn’t built a repeatable go-to-market motion.

– Kyle Poyar, Director of Market Strategy, OpenView

Market segmentation is all about smart prioritization of resources. No matter the size of your company, one thing we can all relate to is limited resources – whether that’s time, people, capacity, tools…the list goes on and on. At OpenView, we help our portfolio companies with market segmentation with the end goal of maximizing impact through focus.

Market segmentation provides a data driven approach to understanding your total addressable market and helps you to identify the segments or accounts that are the best fit based on key factors like size, growth rate, CAC, win rate, average LTV and competitive intensity. Once established, your key segments should not only guide marketing and sales activities, but also inform your product roadmap.

In my opinion, market segmentation is always necessary. So often we hear “the best thing about our product is it’s for everyone, the worst part about our product is it’s for everyone.” Without taking the time to conduct a market segmentation exercise, you run the risk of messaging so broad that you’re actually speaking to no one and sales and marketing end up swinging in different directions. Marketing may have a bias towards segments where leads are easy to capture, but where the win rate is low. Sales may just be after big logos, even if your company isn’t ready to best serve their industry.

– Ashley Minogue, Market Strategist, OpenView

Market segmentation is the practice of identifying the best one or two segments of a market that you can dominate to deliver the best results to your company and customers. Well defined customer segments inform your entire business, allowing you to 1) create winning product features that appeal to customers within a given segment and 2) create and execute efficient sales and marketing strategies that can be effective for all participants in that market.

Resources are scarce, especially for startups, but the better you’re able to hone in on a market, the farther your dollars and efforts will take you. Said differently, segmentation is critical in finding and enhancing product/market fit. The defining characteristics of companies with strong product/market fit include an efficient customer acquisition model and strong customer retention and upsell on the back end.

Market segmentation, to some degree, is an exercise that can and should be done at any point in a company’s lifetime, but it’s especially important as you transition from an early to expansion stage GTM model and begin to step on the gas. The unfortunate truth is that segmentation isn’t a one-time activity. Your segment of choice will often be a moving target and will need constant refinement.

– Arsham Memarzadeh, Associate, OpenView

2. Where do you start? Who do you put in charge for this effort and what kind of skills do they need?

Like any scientific process, start by listing out your hypotheses. Without looking at any data, what do you think are the most attractive customer segments? What characteristics might influence what makes a good prospect – industry, size of the company, the buyer’s role, company growth rate, something else?

Next it’s time to test your hypotheses and dive into your Salesforce opportunities data. Pull all of your opportunities from the past year and clean the data as needed. Look for the expected LTV per opportunity versus the CAC across different characteristics, such as industry, company size, buyer persona and use case. The expected LTV incorporates your win rate (the percent of opportunities that become closed won customers), the average deal size and your dollar retention achieved among closed won customers. The CAC represents how long the sales cycle is with those segments and what sales resources you put against different deals.

– Kyle Poyar, Director of Market Strategy, OpenView

First, identify an owner of this effort, backed by a cross-functional team. You’ll likely want to appoint a data-driven marketing (or product) person who is comfortable rolling up their sleeves with the data, but is also creative – not all of the analysis will be black and white.

The effort should be a combination of quantitative data analysis and qualitative interviews. If you’re fortunate enough to have some seasoned sales folks, talk to them! Listen to their opinions and use them as a sounding board for potential hypotheses. Also be sure to talk to the market – customers and prospects included. These market interviews are often overlooked, but can unlock unique perspectives on willingness to pay, brand reputation, competitive landscape and more. This is crucial information that can’t be gleaned from data alone.

– Ashley Minogue, Market Strategist, OpenView

First, set out to understand the entire addressable market, followed by the segments that make up that market. Then, follow a framework to help you land on the optimal segment around which to build your company’s GTM strategy.

The last task is the most challenging. We’ve found that the most effective framework to start with is the practice of answering a set of questions that leverage a mix of team insights, customer data and market research. These include but are not limited to the following:

  • What are the most important criteria for selecting the best segment to target?
  • What is the market value of each segment?
  • What is the expected success rate in each segment? What has it been historically?
  • What is the cost of targeting each segment?
  • What are major trends relevant to your product in each segment?

– Arsham Memarzadeh, Associate, OpenView

3. What other resources are needed, such as tools?

There are several routes you could take and the corresponding resources vary for each of them: 1) investigating the market opportunity, 2) enriching your data and 3) conducting customer discovery to really get to know your key segments.

  1. To understand your market opportunity with potential segments, the Bureau of Labor Statistics is your best friend. This is the go-to source to learn the number of companies and total employment by industry and by company size.
  1. Data enrichment allows you to test even more segmentation hypotheses, which could provide leading indicators about what makes an attractive customer. For example, many companies target prospects based on their existing tech stack, which you can find out from Datanyze or Clearbit.
  1. Conduct a deep customer discovery with your prioritized segments to get to know their purchase triggers, pain points, value drivers and competitive alternatives. This will further help you hone your product and marketing to crisply speak to your targets’ specific needs, which resonates far better than a one-size-fits-all approach.

– Kyle Poyar, Director of Market Strategy, OpenView

The maturity of your business will warrant the amount of rigor and resources you put behind this effort. The biggest piece of advice I would give is no matter the maturity of your business, remember this isn’t a one and done exercise. This is something you’ll want to refine over time so keep that in mind as you set up the analysis and process.

Focus on ensuring that your data is tagged with all of the necessary key variables – data enrichment solutions can be useful here if your database is limited. If you’re on the sales side, make sure all of your team’s activity is logged in your CRM. Understanding length of deal, number of touchpoints to close a deal, loss reasons and so forth are all valuable data points to help you assess where you are winning and losing and why.

– Ashley Minogue, Market Strategist, OpenView

4. From the sales perspective, isn’t a market segmentation effort “marketing stuff”? How can it influence the composition of your organization or overall process?

The business development (BDR) team should be the front line of your segmentation. In an ideal world, 100% of the folks BDRs are calling have been prioritized through your segmentation effort, and the call scripts will look different for each segment. Tailor the pitch with customer references from that segment and messaging that’s in their language.

– Kyle Poyar, Director of Market Strategy, OpenView

It’s easy to get caught up on the internal implications of an exercise like this – how will this impact a sales reps activity, how will this impact how I spend my marketing budget, etc. But I’d encourage you to first think about what this segmentation effort will mean for the end customer. If executed properly, market segmentation should result in sales, marketing and product all trying to win in the same target segments/accounts and deprioritizing everything that falls outside of those targets. This laser focus inherently enables you to create a story that is more personalized. Every touchpoint a buyer has with your company, whether that’s through your website, a white paper, on a discovery call or through conversation at an event, will be more relevant and consistent – and at the end of that day that will help you close deals.

– Ashley Minogue, Market Strategist, OpenView

It’s no more “marketing stuff” than it is “sales stuff.” As a sales leader, how will you know which prospects to focus your team’s time and effort on without having a sense of the optimal segment? Your sales leaders and reps should all have an understanding of your product’s buyers and the language they use, the stakeholders involved in the buying journey, the time-to-success of each channel, and the makeup of direct verse channel sales. That information and the resulting sales process can have massive variations from segment to segment.

– Arsham Memarzadeh, Associate, OpenView

5. What are the practical applications or output of a market segmentation effort? How can it be used to accelerate the deployment of account-based engagement in an organization?

Market segmentation efforts should result in prioritized customer segments that have buy-in from sales, marketing and product on where you’re going to focus and win. This shouldn’t just be something you present to your board, but should inform the activities across sales, marketing and product:

  • Sales: The first actionable step for sales should be determining your territory structure based on prioritized segments. There are so many ways to slice and dice territories when you factor in product lines, geos, industry, size and so on – market segmentation is the first step in using data to drive your team structure. From there, every rep should determine their target account list within their universe. The goal of a target account list is to make sure you are spending your proactive time engaging with the right account. There’s so many things that come up over the course of a day, without it it’s easy to lose focus.

  • Marketing: Your budget should be focused on acquiring, retargeting and retaining your target customers. Everything from your digital marketing assets to your content should be designed with these customers in mind. To hold yourself accountable and track results, you should create specific goals around each of your targets.
  • Product: Market segmentation isn’t just for sales and marketing. It’s equally important for prioritizing product enhancements. Your product can’t be everything to everyone – there will need to be trade-offs. With a deeper understanding of the size of your segment and the LTV potential, product leaders should be able to make more informed decisions on how to drive their roadmaps.

– Ashley Minogue, Market Strategist, OpenView

  • bobapollo

    You’ve highlighted some critical concepts here: I’d particularly stress the importance of going beyond conventional demographics when describing market segments. In B2B, size, sector and location can only establish the boundaries. It’s MUCH more important to identify the target customer clusters where you can deliver uniquely relevant value by taking into account key structural, behavioural and situational characteristics.

  • Assaf Eisenstein

    Thanks for sharing Devon
    Another tool for data enrichment you might want to try is Lush.co

    Lusha is a powerful chrome extension that allows you to find contact details, such as email addresses and phone numbers
    through social networks. the basic plan is FREE

    Thanks

  • Funny how this started with a “when is it time to start segmenting?” It should be core to your 1st go to market strategy and then just repeat as you conquer the 1st. Given data mining is hard or not available in most cases the qualitative market interviews can achieve your goal almost standalone. We have found going heavy into a purely unbiased voice/need of the customer mode with your top five segment candidates will literally sort and prioritize themselves if you do enough of them. Usually after a 15 or more open ended discussions, the patterns will form lay out logically as to who will be the easiest to close and how best to talk with each. Always best to have a non-KookAid drinking outsider driving the interviews.

    • Ashley Minogue

      Thanks Doug for the comments. I agree, segmentation is a fundamental pillar of a go-to-market strategy. It will start off basic & evolve over time. Here at OpenView, we are big believers of qualitative interviews as input regardless of size. We often do them on behalf of our portfolio companies to act more as an “unbiased 3rd party.”