Often times, it’s a fine line and just one big mistake can sink a seemingly great business concept. Maybe it’s poor market timing, a buggy product update, a handful of mishires, a disruptive corporate culture, or something else entirely. But business failure (and success, for that matter) is very rarely accidental.
One of the biggest factors I’ve seen contribute to a business’s success or failure, however, is its ability to target the right customer segments and deploy strategies that allow its team to absolutely dominate them.
At OpenView, we spend a lot of time helping our portfolio companies segment their customer markets and develop a strategic plan for which segments they should attack, and how and when they should attack them. It can be a complicated process, largely because there are many different strategies to consider, and some are better than others depending on the circumstances.
Unfortunately, however, many companies don’t ever take the time to thoughtfully develop and execute any of them.
If your goal is to grow into a great, big business (and what startup software companydoesn’t want to do that), don’t make that mistake. Your mission should be to figure out which market segmentation strategies are best for your business and develop a plan to execute them.
5 Segmentation Strategies that Work
Here are five great market segmentation strategies that I’ve seen deliver big results for expansion-stage software companies:
1. The Best Bell Cow
The best bell cow strategy is probably the most effective way to get more customers. Just as a herd of cows tends to follow the bell cow (literally the cow with a bell on it), the idea is that lots of prospects will want to become your customers once you have a few bell cow customers who lead the way.
In the world of B2B SaaS companies, bell cows can take a variety of forms. They could be customers that provide great references for you or they could be the technology leaders that other companies look to before making their own decisions. Alternatively, they might just be active evangelists for their function or industry. Examples include companies that have CIOs who are very active networkers or companies that are considered very difficult to sell to.
Using the best bell cow strategy is a great way to get the market to view you as a leader and should result in much lower customer acquisition costs and significantly higher win/loss ratios for future customers. The downside to this strategy, however, is that it takes more work and capital to get these key customers since lots of other companies are going after them, too.
2. Crowdsourcing
Companies that are first coming to market with their product should consider utilizing a crowdsourcing strategy. The basic idea is to let the market tell you which customers are best for your product. To do so, you have to get in front of lots of customers and determine which customer segments are best for you using information like cost of acquisition, revenue and gross margins over time, attrition rates, and customer satisfaction data. The strategy could also be used tactically to help you determine what customer segments exist in practice, how they relate to what you are doing, and what segment(s) you might want to dominate.
This strategy could also be used to help to make your company appear as if it has a broader reach, to allow you to constantly monitor the effects of product iterations on the market, and to acquire customers in multiple segments that could be used as a beachhead for more focused customer segment strategies in the future.
It’s important to note that you should not rely on this strategy alone. It’s not the easiest way to build your company and you will have more success using it in combination with other strategies. Even if you do use other strategies, you still need to be careful not to put too many resources against it relative to the others, or you likely won’t grow as fast as you could.
3. Best Current Customer
This is a very good, pragmatic approach to building your company as you enter the expansion stage and beyond. The idea here is to analyze your customer base to determine who your best customers are, identify the characteristics that contribute to them being the best, and then actively target customers that have the same characteristics.
This strategy has a lot of merit since it generally will allow you to take your company to the next level the fastest while using the least amount of capital. It’s also beneficial because it’s focused on acquiring customer revenue as easily and cheaply as possible.
4. The Lightweight strategy
This is a heavily used segmentation approach in today’s SaaS world. The theory behind it is that smaller, emerging businesses should focus on making it incredibly easy for users to start getting value from their product. From a pricing strategy perspective, for example, the businesses can fuel initial growth through free, advertising-based, or very low average sales price (ASP) models. The strategy is generally coupled with friction free user experiences and occasionally with features that help users market the product to others.
The idea is that once the company has a solid set of users, it can either introduce paid features over time that allow the business to grow existing monthly recurring revenue (MRR), or it can start developing approaches that target larger prospects.
This model has a lot of merit for companies that have:
- A large number of potential customers. The best SaaS models appear to be the ones that have both a consumer angle and a broad, small business angle such as DropBox, LogMeIn, or SurveyMonkey.
- A small number of users/buyers, with the best being a single user who is also the buyer.
- A product that is easy for a user to understand and use, and for the buyers to buy without a lot of human touch such as SolarWinds, New Relic, or Kareo.
- A product that has a network effect or social features such as DropBox, Box, or Atlassian.
Note that while I describe the strategy largely in terms of product, it is generally aimed at the consumer, prosumer, SOHO, and small business customer segments. This strategy should be combined with more customer-focused strategies to determine the best customers to focus on.
The downside to the lightweight model comes when your ultimate target customer segment is large enterprise businesses. It’s harder to re-design a simplistic product to meet the complex needs of big businesses than it is to develop a sophisticated product that meets the needs of large businesses from the start. If your plan is to ultimately tackle large businesses, it might be easier to have a different strategy that focuses on large businesses from the start.
5. Build a Market From Scratch
While the strategies above are relatively straightforward and end with solid results when you have a basic market segment in mind, they don’t necessarily find your absolute best customer segment. And, if you’re a pure startup that’s trying to find a market to enter, the strategies don’t work at all.
In this case, you need a more comprehensive research approach. I recommend that you follow the advice in Bill Aulet’s book, Disciplined Entrepreneurship: 24 Steps to a Successful Startup.
Of course, the list of approaches above aren’t an exhaustive, comprehensive tally of segmentation strategies, either. Your business might be using another segmentation tactic to dominate its market — and that’s fine.
As one of my advisors once told me, “any segmentation is better than no segmentation. The trick is to get management teams thinking about different segments and then executing against their first priority segment.” Thus, the most important takeaway is that successful companies have a management team that thinks about various targeting options and then focuses and aligns the entire team around the targets that you feel are best for their company.
