The Hardest Part of Market Segmentation

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How to Start Thinking about Segmenting Your Market in the Right Way

In the market research toolkit offered to OpenView’s portfolio of expansion-stage companies, our Research and Analytics team is often asked to segment the company’s market and recommend the most suitable segment(s) for the company to target. In some cases, the market in question is an existing, mature market with well established players, while in other cases, the market is a new market made possible by new innovation by the company and its competitors.

Discovering a Competitive Edge

In order to give our portfolio companies impactful recommendations, we always aim to develop new perspectives. Whether they are operating in a mature market or a newly developed one, the nature of technology competition is that any obvious segmentation of the market is most likely to be tested and pursued by incumbents or potential entrants. To give our portfolio companies the edge, we want to either help them focus on a particular niche that they are uniquely poised to win, or help them position themselves with a totally different set of value propositions that are more pertinent to the evolving market segments that have yet to be discovered by their competitors.

The challenge in such a project is always to develop a set of comprehensive ideas on the way a total market can be broken into distinct, uniquely identifiable segment(s) of prospects so that those who are in the same group have sufficiently homogeneous needs and buying behavior, while prospects in different segments will have different levels of needs or buying behavior. This allows a company to differentiate its product to be more optimally targeted to those buyers.

Finding Your “In”

The temptation in segmenting an established market is to follow the way existing players segment their market, by assuming that the existing players know best when it comes to their customers. But in reality, they might have only known best. Their goals are also to serve the mainstream majority of  customers, and therefore their segmentation will not take into account emerging niches nor the factors that will cause those customers’ needs and behaviors to evolve. That provides essential openings for challengers to establish themselves in the market.

When analyzing a new market, companies typically start by falling back to a set of commonly used segmentation criteria such as customer industry, customer company size, customer location etc. This is obviously a straight forward and attractive approach because it makes the identification of targets in each segment really easy. The problem, however, is that it can be severely deficient because it is an arbitrarily imposed view of the market that does not help explain the differentiated needs and buying behaviors of customers in each of the segments. 

How to Develop Powerful and Unique Market Segmentation Hypotheses

So how can you find the right segmentation factors that really apply to the emerging, underserved niches of the market that are best customers for your company to target?

First, we have to start with a comprehensive list of all the possible factors. This is a combination of all of the following segmentation criteria:

  • obvious, often-used criteria such as industry and size (as described above)
  • criteria around usage and manner of use such as consumption volume, consumption mode, use case, etc.
  • criteria around related issues such as related technology, related regulatory requirements etc.

In B2B markets, there is an endless number of potential factors that can impact whether a business might need or not need a technology, and therefore this list can easily become an overwhelming set of ideas. In order to maintain a focused, relevant list, you have to be selective. In order to be included, there must be a clear rationale as to why the particular criterion will impact or differentiate the needs or buying behavior of targets as it relates to the product in question.

In many situations, there is a simple direct logical link between the two, for example: companies working in highly regulated industries have higher needs for compliance solutions, and therefore are better targets for compliance-related technologies.

Nevertheless, the challenge is to find correlation that is not as obvious, and needs that are not as readily understood. By identifying and evaluating these logical links, you are actually developing a set of hypotheses on how to define the market segments and why those segments are the right ones for your company to target. By investigating these logical links, you are actually evaluating the potential value propositions that your company can use for each of these market segments, and evaluating whether there is a true economic opportunity in those segments.

Later on, these hypotheses will be further refined by subsequent analyses, and then validated by primary research. However, creating that initial list of ideas and developing a consistent list of hypotheses around the segmentation variables is truly the most important step in the beginning. It is also the hardest. Not only do you start out with the least amount of information available, you also have to cover as much ground as possible, lest subsequent steps miss important segments and niches in the market.

In my next article in this series, I will describe a number of approaches to develop and refine these hypotheses, so that you will have a powerful, unique set of ideas to be tested in subsequent research steps.

Are there any specific aspects or issues with market segmentation you would like more information on? Let me know in the comments.