Should Your Horizonal Startup Focus on a Segment?

Over on Sprouter, I’ve been answering startup marketing questions and I keep getting variations on this one (I’m paraphrasing):

We are developing an application similar to Yammer. I’m struggling with defining my target market and positioning because my product can be used by small or large organizations in various industries. Do I need to focus on a niche or not? I know it’s important to go after a specific market segment in the beginning, but I don’t think Yammer did this and they are successful!

Market strategy isn’t as transparent as you might think.  Yammer seems like a good example so let’s look at them.  You can see a partial customer list here.  About half of the customers listed are in “Technology” or “Internet”.  There is anther group called “professional services” which includes folks like Deloitte and Edelman who either service tech clients or resell technology. Even some of those listed in other categories I might call Technology as well (For example, I wouldn’t call Pitney Bowes “Manufacturing” per se and Swiftcurrent Strategies is a social media consulting business that happens to focus on “Government”).  It’s possible they didn’t focus on technology as a segment.  Maybe they focused on “folks that understand the value of Twitter” which ended up being a lot of tech and services companies focused on social media.  However it happened, I can see an obvious segmentation there.

Regardless of whether other startups are segmenting or not – should yours?  I personally see some obvious benefits to taking a more targeted approach:

1/ If you have sold one deal there you know you can sell another one – You learn a lot selling to a company.  You learn what their pains are, you learn what they love about your product.  Much of what you learn selling to one customer in a particular segment you can apply to another customer segment.  I bet Yammer didn’t have to spend much time explaining what the service was all about to Mashable or Groupon because they already use tools like Twitter.  You can imagine what the sales pitch would be like and it would be the same for many internet companies like them.  Similarly companies like Cisco and Alcatel spend a lot of time talking about business communication and collaboration so Yammer would make sense to them. Sell one company like that and you can probably use the same sales pitch on another.

2/ Having a reference account in a segment makes it easier to sell into other accounts in that segment – Businesses like to see that other businesses just like them are using the product before they buy it.  Having a first customer reference in a segment makes it easier to sell the second. Having a couple of references makes it way easier to sell the next group, and so on, and so on.

3/ Traction in a segment, leads to increased awareness in that segment, leading in turn to more traction – In my opinion building awareness is one of the hardest things for B2B startups.  There are so many massive companies spending a fortune on marketing, how do you get heard above the noise? The easiest way is to not try to be heard by everyone, but focus on being heard in one particular space.  People in the same industry talk to each other, hang out in the same places online and quit jobs and move to other companies in the same industries.  Word of mouth travels around communities. The more traction you can build in a particular community the more awareness you will also build.

This is all classic Crossing the Chasm bowling pin stuff so it isn’t new or novel but in my opinion it still works.

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37 thoughts on “Should Your Horizonal Startup Focus on a Segment?”

  1. April
    It is a very relevant question and you discussed it well. My answer is categorial YES on the need for segmentation and choosing the segments to target regardless of whether or the product is horizontal or not. I would add to your reasons:

    Product Centric Vs. Customer Centric: There is really no horizontal product. If there is one it is based on looking at only the value delivered from a product’s features. The value delivered to customer includes product value, relationship value, convenience and other intangibles. Through this lens, customer becomes the center and not the product.

    Buying Process: How, why and where businesses buy vary widely, based on their size, location, etc. Knowing this is key to reach the customer segments through the right channels. Sometimes we even have to worry about buying behavior of that individual (be it end consumer or the purchasing manager) and position it differently.

    Competition: Different customer segments have different alternatives. Knowing this is key for messaging.

    and most importantly
    Pricing: Different segments pay for it differently and have different WTP. Knowing this is key to pricing the product. This in itself is a big topic that I write about.

    -Rags @pricingright

    1. Thanks for the comment!
      I agree that “horizontal” thinking is VERY product-centric rather than customer-centric and different segments will express value in different ways for the exact same product. That’s a great point.
      April

  2. RG,

    Another excellent post. I would humbly suggest these “segment” explorations/decisions become much easier when you understand the “Jobs-to-be-Done” idea ie. what job(s) is the customer “hiring” your product to do?. I think it was Theodore Levitt who coined the phrase, “People don’t buy drills, they buy holes.”

    (Search Outcome-Driven Innovation process if interested).

    I would completely agree with the bowling alley idea of Moore’s, but it doesn’t necessarily have to be based on what is traditionally thought of as “segments.”

    1. Hi Mike,
      That’s a great point and you are right, many “segments” are not defined by vertical industry or demographic but rather by the problem that needs to be solved.
      Thanks!
      April

  3. April,

    I had this very discussion on Friday with a sales guy. The company is still in the very early stages but have landed 6 customers, 4 in the same “segment.”

    He was very much focused on getting anything he can (I believe the euphemism was ‘maximizing revenue’), which is understandable because that’s what his comp plan says he’s to do.

    The interesting/challenging part is putting forward all the reasons for focusing on a segment and you and Rags do a great job but they are more for the CEO to hear. Any tips or tricks about putting this forth with a sales guy?

    1. Hi Tim,
      It’s true that your sales folks will sell to anyone and that includes folks that fall outside of your target. In my experience there is no one-size-fits-all way to handle it. One thing that I find works really well is to make sure that they have a long list of folks to call on in your target segments. If they do then they don’t tend to spend too much time looking outside that segment for stuff to do. If a bluebird lead comes in that’s outside, you will have to make the call whether or not you want to invest in the deal. Sometimes you can get a way with a few of these where they will accept the product as-is and won’t demand too much from you. Where it is a very large deal however, you will have to make sure that everyone understands the impact of investing in something outside of the target area and the cost of that short-term revenue (if you manage to win the deal) could be traction in the longer term. It’s not easy.
      April

        1. In my opinion it’s much riskier to step outside your segments when you are in a consulting business because the costs are higher for thing you are doing that are more “one-off” rather than repeat.
          April

  4. Pingback: Yes, your startup needs to worry about segmentation « Iterative Path

  5. I’ll gladly appoint a different account manager for every market segment, since my product has that element of being right for more than one segment. (I’m not there yet, but hope to get there in 2011.) What’d you say, guys?

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