Segmenting Customers: How to do it efficiently to improve enterprise products

July 21, 2010

A couple of quarters have passed since the echoes of the last product launch celebration. One day, your executive informs you that things are not looking good. The competition is gaining market share and Sales says that the product that you built does not meet customer needs.  As the product manager, you mentally race back in time – you have spoken to different types of customers, created buyer personas and diligently worked with your stakeholders in marketing and sales. So what went wrong?

The temptation is to look at the long list of enhancements.  While features may be a part of the issue, it could just as easily be product pricing, go to market strategies, and field enablement efforts. To understand potential problem areas, it is often helpful to take a step back and think about big picture questions like

  • Were there any trends that we have failed to address?
  • What types of organizations should we target?
  • Who are the “hidden” buyers of our product?

To answer these questions, we can leverage the principles of segmentation to analyze the true scope of this problem. 

Segmentation

Segmentation has traditionally been used by marketers to get an up close view of the market.  It is based on the principle of identifying variables that predict characteristics and behavior, using a mix of quantitative and qualitative approaches to categorize customers with specific characteristics. Identifying these variables and collecting the data is considered to be time consuming and tedious. However, applying the principles of segmentation can offer deep insight about problems at hand and even help come up with potential solutions.

We will look at nine segmentation variables in three categories that will help you perform quick and effective root cause analyses.

  1. Industry: to uncover trends about sales cycles, size and substitutes
  2. Company: to uncover patterns of purchasing, processes and people
  3. Individual: to uncover their personal disposition, demeanor and demographics

Segmentation

 

Industry

An industry segment typically refers to a grouping of similar businesses like telecommunications, financial services, etc. The traditional segmentation approach uses attributes like revenue, geographic location and type of business. While these attributes provide board categories, we can dig deeper and incorporate more useful details by focusing on attributes like size, substitutes and sales cycle.

Size

Traditional numbers like industry growth rate and market size are a good start but looking at spending and budgets can provide more realistic data.  Industries have different propensities to spend on a given problem and their annual spending budgets reflect this.  Gaining insight into size of the spending budgets by different industries is a good litmus test for the pricing model.

For example, some industries have bigger capital expenditure budgets and meager operating budgets. In these industries, a term-license that has a minimal impact on the smaller operating expenditure budget is a good fit. Another consideration would be selling in an appliance model where hardware and software are paired together.

Some industries are early technology adopters. Understanding the adoption rate and the typical roadblocks to adoption will provide insight into whether the current challenges are a result of incomplete features or alignment of industry specific field enablement to aid in faster adoption.

Segmentation

 

Understanding money spent by different industries to help identify
alignment between average list price and average selling price

Substitutes

Product manager often talk to customers and conclude that the product truly solves the right problems. However, one of the most commonly overlooked areas involves understanding available substitutes. The cost of switching is often underestimated, unless one of the drivers for change is a regulatory or policy requirement. Understanding the regulations of a given industry and the business policies around compliance, social responsibility and governance can provide a realistic measure whether the product will be switched from existing substitutes.

Sales Cycle

Sales cycles are often thought of towards the end of a product development lifecycle. The evaluation of the sales cycle will provide insight into entry points that have worked in the past and establish patterns that could be exploited for future deals. In addition to entry points, understanding existing sales relationships is key and how they are leveraged in a sales cycle is important. For example, to increase market share, features are often introduced to create up-sell or cross-sell opportunities. knowledge of the relationship between your sales team and the customer’s line of business provides an understanding if the current relationships exist for selling into an adjacent line of business. As an example, a testing product focused on quality departments can have features that are relevant to developers. This will mean that the sales team would need to have entry points both into QA and development organizations. However, if the sales team has relationships with QA managers, that relationship may not be as easily leveraged in industries where development and QA are separate, silo organizations.

Information Sources for Industry

To get specific information on size, substitutes and sales cycle related attributes, the win-loss analysis is usually the best source of information. The sales team has detailed information about spending budgets and signature authority.  The person who approves and signs the purchase order is indirectly providing the amount of money he/she has in their budget to solve the problem. Combining the information about the title of the person, the industry and the size of the deal, it is possible to infer the actual budget.

To understand adoption, a survey can be used to ask about the last major product adoption or upgrade. This question usually reveals how long it takes for industries to upgrade their solutions.  Salespeople also have knowledge about sales cycles and asking them about their supporters at their customers will reveal the source of their relationship strengths. Once the information is available at the company level, a site like Yahoo! Finance can use used to find the industry. 

Most industries use specialized consultants when it comes to regulatory or compliance issues. The best way to find out about substitutes is to talk to these consultants or at a minimum look at their different case studies. 

In order to analyze the industry related attributes, try to answer:

  • What is the average selling price for each of your target industries?
  • What is the average discount for these different industries?
  • How long does it take for each of your target industries to update their products?
  • Is there any correlation between the departments (like Marketing, Customer Support,  etc.) in different industries and deal closure rate?
  • Are there any upcoming regulations that companies need to be compliant with today or the near future?

By combining the answers with information from secondary research like market size and industry growth rate, it becomes easy to indentify gaps that need to be addressed in the pricing model as well as identify industries conducive to profitable sales.

Company

After looking at the industry to understand if there are trends that are missing, understanding organizations within these key industries can help find the best match with our product’s value proposition. While traditional segmentation takes a look at quantitative data points such as enterprise, versus SMB, in this approach, we need to look at qualitative attributes related to purchasing, processes and people specific to the company.

Purchasing

To understand trends, we have looked into areas like spending triggers and overall spending from an industry perspective. However, every company in a given industry behaves differently. Companies have different purchasing strategies- some are inherently cost focused where others are innovation focused. Understanding a company’s strategy can help us with understanding gaps in the value proposition presented in the marketing messages. For example, a company focused on cost optimization will select products with marketing messages that talk about new ways to optimize costs.

In addition to understanding a company’s strategy, understanding their business goals is equally important.  While companies want to increase revenues and increase market share, it is important to understand if there is a focus on improving customer satisfaction, improving quality or driving down the costs of developing a solution.  For example, if a company’s products are constantly being commoditized, the customer may focus on increasing customer satisfaction and driving a culture change where customer service becomes a differentiating factor. As an example, customer feedback management solution targeting industries with commoditization will find that marketing messages that talk about making feedback and customer satisfaction metrics easily consumable will resonate more than just a listing of different types of reports.

Process

Companies in a specific industry can be characterized by understanding how they make decisions and solve business problems. In any given industry, some companies have a “top down” management style whereas others expect the recommendations be made “bottoms up”.  To understand the influencers, it is important to understand the decision making process and subsequently match this data point with personas. While one can assume large companies use structured processes to solve business problems, this may not be true in all cases. For example if a company is adopting process methodologies like Lean and Agile then the company is probably focusing  on embracing change. So the product messaging may need alignment to demonstrate that the solution truly facilitates and embraces change.

People

People in a company ultimately buy the product. Before we understand individual characteristics, it is imperative to understand whether people are rewarded for taking risks versus maintaining the status quo.  For example, products based on open source software will have a harder time with risk-averse organization because of the “perceived” risks. Understanding the general organizational culture and its ability to collaborate on problems is another criterion that distinguishes companies in a given industry. For example, if the company has a matrix reporting structure, collaboration will be an important attribute. Being able to talk about features that help share information or introduce social media style sharing in an enterprise will generate more interest in these companies.

Information Sources for Company

To get specific information on purchasing and process, a company’s SEC 10-K filing is a great start. The Form 10-K provides a comprehensive overview of company’s business and financial condition.  It provides a structured break down and the Business, Risk Factors, Market and Management’s Discussion sections in the document will yield valuable insight. For example, a company that is focused on cost reductions and business efficiency will talk about money saved in operations versus innovation focused companies will tout number of patents and R&D investment and growth.

While the SEC Form 10K provides a Top down perspective of a company, companies like Glassdoor (www.glassdoor.com) provide a more bottoms up view of the company by allowing employees to submit reviews of their company and senior management.

In order to analyze company related attributes, try to answer:

  • Are the target companies investing in initiatives that bolster the top line or bottom line?
  • Are there any specific processes being used by these organizations?
  • Are these companies distributed with matrix organization structures?
  • What are the business risks for these companies?
  • When someone gets promoted in the company, what is cited as the reason for promotion?

This analysis should result in understanding the personality of the company, helping develop aligned marketing programs.

Individual

An individual ultimately purchases a product. Developing personas is an effective way to understand a day in the life of an individual. Quantitative factors like demographic information can provide insight into product adoption and qualitative attributes like demeanor and disposition can provide insight into the personal motivation for product selection.

Disposition

It is often important to understand how your product and organization help meet an individual’s goal and contribute to their personal success. When a product help its users advance their careers by making their daily lives simpler or providing opportunities for greater visibility, they will often go that extra mile to make the product work despite its shortcomings. For example, if the user has experienced previous success with a product from your competitor, the user may choose to buy another product from your competitor simply because she believes the new product will also result in additional success.  Understanding the aspirations of your users can help design customer recognition and advocacy programs.

Demeanor

Understanding demeanor focuses the learning process on general awareness and attitudes about the problem. Sometimes the problem being solved is not big enough for some individuals in an organization to care but there may be others that place a high value on the solution. Finding information about the attitude towards the product and the company can help narrow the reasons for seemingly unreasonable bias. For example, individuals who have established process or center-of-excellence programs earlier in their careers will likely have a bias for features and innovation around process governance. These individuals value structure and will believe products that match their structured thinking are a better fit.

Demographic

Traditional segmentation attributes like age and education play a role in how a person evaluates uses and ultimately recommends product.  People performing the same role in an organization but from different generations will place a different value on the same product. Education can also impact on how a product is received. For example, when trying to find the balance between investing in features that showcase performance and computational power versus design elements, knowing the person has a science background may be a tie breaker in the favor of computational power related features.

Information Sources for Individual

Networking sites like LinkedIn is one of the best sources to get specific information on disposition, demographic and demeanor of your prospects. A quick name search will reveal a lot about your buyers. Demographic information can be understood by looking at their career and education history. Reading their recommendations and looking at the types of certifications, we can learn about a person’s demeanor. For example, if the person has a Six Sigma black belt they will most likely have a affinity towards measurement and process improvement.  Using the advanced search, it is possible to determine potential connections to competitors and get a general sense of their predisposition to the competitor’s products. 

In order to analyze the individual related attributes, try to answer:

  • What are typical education and certifications?
  • How long have they been in their field and how receptive are they to change?
  • How have they been successful in the past?

This analysis should add more color to understanding buyers. By recognizing their needs, it is possible to uncover potential gaps in customer advocacy programs as well as functionality gaps.

Tying it all together

We have looked at nine different areas related to industry, company and individuals. While this article outlines 9 different evaluation areas, not all of these areas are needed to perform a root cause analysis. Evaluating different segments ensures we can provide quick insight to executives and senior management.

A good way to start is to take a look at the top and bottom 20 customers (or top and bottom 10%). This list provides a finite workable set of information where emerging patterns or gaps are easy to identify. Since the goal is to find issues quickly and effectively, the best approach is to evaluate the company related variables first, and then perform the analysis up to the industry level or down to the individual level to get detailed insight.

Summary

When a product is not producing desired results, resist the natural instinct to prioritize the feature request list. Instead, use the principles of segmentation to identify the gaps in understanding of industry, company and individuals. Understanding these gaps is the key to honing in on the issues that will have the maximum impact in turning around the product performance.  But why wait for the product to fail; use these techniques to proactively address existing gaps and launch a product that meets business goals. Now you can look at the future and solve the next batch of interesting customer problems.


© Copyright 2010 by Dutta Satadip. All rights reserved.

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