Mistakes in marketing strategy: From the school of hard knocks

Part 2: The art of segmentation

This is part rant, part treatise on common mistakes I see with marketing strategy at high tech companies in the time I have spent in Silicon Valley. This started off as me listing a compilation of mistakes I have made and witnessed — often from very senior people but as I started doing it, I figured it might be more useful to not just list mistakes but also provide simple tools and tips that could lead to a better way to think about the problem and hopefully lead to better outcomes.

I have focused this exercise on B2B companies aka firms selling solutions to enterprise customers, where in the absence of a lot of data (vs direct to consumer firms like Uber where marketing tends to be more evolved due to a lot of data and perhaps more structured A/B testing), there often lacks a structure and consequently a poor understanding of how startups and established firms ought to think about planning and executing a successful marketing strategy.

The first edition of my series focuses on “Source of volume” and how a more structured understanding of this aspect is a key to nailing down an effective marketing plan for any product introduction

https://medium.com/@karthikkrishnan/mistakes-in-marketing-strategy-from-the-school-of-hard-knocks-27bc691fb0b1

The second edition in this series focuses on “Segmenting customers” and the fact that there are more ways to do this than just to divvy up segments based on the size of a customer. E.g. A small customer who has 10–100 employees or a Fortune 500 firm with annual revenues greater than US$5B

In crafting a target market for new product introduction, a key requirement is to identify the profile of a customer and a critical exercise in this regard is segmenting your customers and identifying the appropriate customer base to target. The most common segmentation option is “demographic segmentation”

Approach 1. Demographic segmentation:

This is segmenting the customer landscape using physical attributes such as geography, vertical, size etc

For e.g. this is North American data on the number of firms segmented by size (Source Census stats)

1. Firms between 100–500: 88,586
2. Firms between 500–2000: 13,522
3. Firms 2000–10000: 3,814
4. Firms >10000: 975

A target segment that you could choose to go after could be firms with >10000 employees in North America

Another example of demographic segmentation is by vertical.

This is North American data on the number of firms segmented by vertical and by size (Source Census stats)

No of firms with 500+ employees

1. Finance and Insurance: 1500+
2. High tech: 2000+
3. Pharma: 150+
4. Retail: 2000+
5. Manufacturing: 3000+

There are obvious benefits to demographic segmentation

• They are easy to identify and target
• Traditional marketing execution works off of lists and it is easy to buy a list of all European pharmaceutical companies that have a certain size if that were a target

The downsides are

• Demographic segmentation is easy and what is easy for you is just as easy for your competitors
• Making decisions on for e.g. size may not be the most efficient segmentation strategy because the needs of a 1000 person company may look very similar to the needs of a 10,000 person company. Targeting companies that have >10,000 employees when the needs of a 1000 person company may be no different could lead to an inefficient segmentation model that artificially leaves out legitimate candidates for your business

At almost every company I have worked at, segmentation has inevitably stopped here. Most companies will have a fortune 500, large enterprise, Small and Medium Business (SMB) segmentation strategy that divvies up the customers into the various segments by size and there are strategies to win customers in each segment. When categories are more mainstream and needs are more homogenous, this is not a bad strategy.

However, for many up and coming companies, especially startups, demographic based segmentation is too blunt of an instrument for an effective segmentation approach. There is need to be more creative about how they think about segmenting to think outside the box, identify the right segment to target and message towards as well as line up their product strategy to more optimally support that segment.

All is not lost as there are plenty of other options available to segment the market creatively

Approach 2: Behavioral segmentation:

This is segmenting users based on their actual usage patterns or behaviors e.g. NetSkope, a leading Cloud Access security broker (CASB) startup, for their solution, segmented and targeted users of Office365 as candidates for their solution to help secure and protect. Exabeam, a User and Entity Behavior Analytics (UEBA) company, initially segmented and targeted users of Splunk customers for their behavioral analytics solution where they leveraged data collected in a Splunk repository for their analytics and user security profiles.

The benefits of a usage based segmentation approach are

• It is a lot more creative and perhaps leaves you with a more precise segment of users to target
• It also has a massive side benefit in that it can also place a lighter load on product development as you can more surgically tailor your product to the specific usage for e.g. if NetSkope focused their use cases around O365, they could tailor their product to work extremely well in delivering value to O365 customers and not care so much about Google Cloud or DropBox customers as an example

The challenges of such an approach

• How do we find these customers systematically? Traditional marketing tactics rarely stray into this territory and it may require some “internal selling” to get your marketing and sales teams on board with this approach
• Are there enough of them even for a short term strategy? This often becomes a hard question to answer for e.g it is easy to estimate the number of Fortune 500 companies but a lot harder to estimate the number of Office 365 customers and this is often a reason why many companies shy away from a usage based segmentation strategy

Having listed the cons, I still believe that a behavioral segmentation approach is very much worth exploring for early stage companies as a way to introduce some precision into a “early customer target profile identification” exercise and less of a blunt instrument compared to attitudinal segmentation

Approach 3: Attitudinal segmentation:

This is segmenting customers based on their future desires and not current usage patterns. For e.g. customers who wish to make security a core part of their IT strategy or those who aspire to transform their company through IT. An example of a customer in the B2C space that has used attitudinal segmentation to great success is Nike. Nike used the desire for customers to be cool to help push their brand of sneakers to a wide range of customers.

The benefits of an attitudinal based segmentation approach are

• These customers have macro needs and in so far as your products/solutions help meet those macro objectives, there is ample room for you to be able to set the agenda with these customers for e.g. a customer may wish to “improve their cloud security” and less clear about that means. A firm that may be a player in the cloud security space can target these customers and shape the customer’s thinking to what their solution may provide
• Many category leaders are born out of taking this approach where the core benefits of a product/ solution are often synonymous with the attitudes or future desires of the customer. This leads to sustainable competitive advantage in that as the “new” category starts to form, the early startups that take the need in evangelizing “newer attitudes/demands”, they end up getting in a pole position in being targeted by customers for those early conversations, proof of concept trials and eventual purchase.
• Once you find a systemic way to identify these customers, it is very hard for your competitors to match this strategy as your strategy/marketing/sales plans have to be aligned to execute on this strategy and difficult to do vs just buying lists

The challenges of this approach are

• How do you find these customers systematically? Defining a total addressable market (TAM) for customers interested in transforming their cloud security capabilities is not easy. Demand generation is not straightforward. You may still need some usage based and demographics based proxies to find these customers, engage them in a dialogue and filter out the ones that fit this profile. The good news is that you can choose to have an “attitudinal” segmentation approach and use a “behavioral” segmentation approach to sub-segment and leverage more mainstream marketing strategies to go after these customers.. A successful example of a company executing on this strategy is NetSkope that adopted a strategy of targeting customers who care about cloud security as the “attitudinal” segment and used O365 users as a “focused” sub-segment strategy to go after these users
• In addition, you may have to get creative around getting to these customers For e.g. if you are a big data security company that believes that a big data platform gives you unique advantage in the market, you may want to target big data meetups or conferences in addition to traditional security events or conferences to find prospects with whom your message may resonate. Caspida, a big data security solution (acquired by Splunk), targeted many big data conferences initially to connect with prospects who may be interested in “big data” approaches to security
• If this ends up being the approach, it is important to make sure that your messaging (website, analyst, press etc) is oriented towards your intended segment (attitudinal) and only use proxies such as “behavioral filters” as tactics to reach such prospects and not conflate the two.

In closing, demographic, behavioral and attitudinal are all legitimate and equally worthy segmentation strategies to use. Said differently, there is more to segmentation than just divvying up your target customers as large, medium, small or finance, legal or high tech customers.

Done correctly, investing the time and effort to move beyond a segment based approach can yield sustainable competitive advantage, facilitate a category leadership position and act as a successful moat to prevent competitors from easily replicating your approach. It is that important and so please take it seriously.

Thoughts? Want to engage? Leave a comment or Ping me at Karthik.k16@gmail.com . Happy segmenting!!!!