This article written in 2004
It's easy to make fun of sales teams caught in the "ready-fire-aim" trap. But when a product or a company is really new, the urgency of finding customers is far more important than comfortable theories about market strategy. So it's OK for companies to do the "fire-fire-fire" cycle for a little while, but over time these experiments have got to find a solid market space into which you can sell profitably.
The whole point of choosing target markets is to get repeatable business, to find the customers who will most consistently respond to your marketing message and competitive advantage.
Markets are defined by buyers, not by vendors. Except for "800 pound gorillas", vendors have a lot less influence on the market than they think. So it's important to understand a market space as a cluster of buyers, not a cluster of sellers.
The buyers are the business unit or functional managers who get enough business benefit to generate the purchase order, carve out the budget, and sign the deal with your sales people. The buyer is not the same as the user -- keep them separate in your thinking. B2B markets by definition do not explicitly include the user of your product, because the user does not actually do the purchase, the way they do in consumer markets.
The goal of selecting a target market is to identify the groups of buyers who have consistent tastes, preferences, and purchasing patterns. These groups - segments - can be defined along a wide range of axes:
Knee-jerk: company size (e.g., $250 M-$2 B), company location e.g., US), vertical industry (e.g., automotive and defense/aerospace)
Buyer technology base: users of BEA WegLogic, or IT operations people using CISCO
Buyer functional: business process (e.g., bid-to-cash cycle, product development cycle), organizational affiliation (e.g., CFOs needing Sarbanes-Oxley compliance)
User required qualities / attributes: for example, industrial engineers needing gasses with parts-per-billion purity, or time-domain reflectometers needing an 80 dB signal/noise ratio
User behaviors / psychographics: for example, open source java developers, or WiFi road-warriors.
Generally speaking, the more of these axes you can use in defining a target market, the more you understand the prospective customer. The biggest mistake you can make in segmentation is to make the segment too general, too large -- in other words, to specify your target only using #1 and #2 above. Targeting something like "US telecom companies using Cisco" represents something like a $500 B market. This isn't a market - it's a country. Targeting something like this doesn't bring any part of your marketing or sales into sufficient focus to be actionable (unless you're doing marketing for Cisco itself).
By the same token, you don't want to have dozens of microscopic segments. You can only afford to have a few segments (probably no more than one for every $10 M in business volume), so create composite segments to make them large enough. For example, merge "WebLogic developers, WebSphere developers, and JBOSS developers" into "J2EE developers."
A common problem in segmenting markets is "fuzzy borders." Due to impatience, lack of information, or just lack of energy, the company's description of its target markets seems to go in and out of focus, sometimes overlapping with other segments and sometimes not. If you can't keep your market definitions crisp and consistent, you're just not done with this homework assignment. It isn't easy.
Quantifying and Acting on Target Markets
Any properly-defined segment will behave consistently, but it has to be profitable to be commercially interesting. Making good marketing and sales investments means quantifying the amount of business that you can actually get to. Be realistic about commercial roadblocks and logistical complications that make the customer inaccessible (or at least uneconomical) to you. Demote segments that have these kinds of problem:
- Spread. Each of the customers requires personal visits during and after the sales cycle. But they're geographically dispersed and there's no economy of scale.
- Size mismatch. Large customers tend to buy from large suppliers that can afford to handle the overhead of dealing with purchasing bureaucracies. Smaller companies tend to buy from smaller suppliers who can afford to customize and "scale down" their offering.
- Unwilling to buy from a company like yours. Customers often have very specific ways of buying, and you need to understand if their standards and expectations exclude you. If they do, you'll need to find a partner they are willing to buy from.
- Odd-Ball. Every sales cycle will involve a ton of customization, one-off demos/POCs, unique feature requests, and un-leverageable learnings. For example, selling to the CIA won't help you sell to other US government agencies or even Britain's MI-6, let alone commercial customers.
- Partner unavailability. Some kinds of customers are best approached through particular partners. If you don't have access to these partners (e.g., GSA-qualified resellers), you may be hosed.
- Sewn up. Some segments have long-term vendor relationships that are difficult to break. If a segment is absolutely dominated by Microsoft and IBM, you need to think again.
- Unable to accommodate technology change. Some customers may actually need what you have, but aren't able to cope with or effectively use the latest technology.
- Customer can't pay what you need to charge. You can't make money selling to homeless people, no matter how much they need the product.
As you start to market and sell to a target segment, be mindful of these issues:
To the degree possible, keep the message and product offering consistent across your segments. Segment-specific variations are expensive and time-consuming for every part of your company.
Make sure to target the right part of your customer organization. Know where the budget comes from, and where the decision will be made. For example, any single IT product decision, either central IT or the functional / business organization will be the driver -- not both.
Every sales rep wants to sell high, but many product categories are decided at the director level even in small organizations. There's not much leverage in showing up in the VP's office if your product category is bought by low-level managers.
Understand where the buyers hang out. Where do they look for product information? Whom do they trust for advice? What professional organizations are they members of?
Determine how best to get to them. What do they read? What events do they go to? What's it going to cost to actually start a conversation with them?
Understand the sales cycle: What sales channel will work for this segment? How will you design-out channel conflict? How many steps and moving parts are involved in the sales cycle? Where are the roadblocks and antibodies?
Target markets are never chosen in isolation
As I presented in a recent VC/entrepreneur conference, target markets can never be identified or understood in isolation. To make for a solid, repeatable business, target markets must be developed and understood in conjunction with the target user, the product concept, and the value proposition.
Answering these four strategic questions simultaneously is not easy, and it isn't ever done in one pass. An iterative approach is what you'll do anyway, so the important question is "where to start the iterations?"
The MarketQuad™ diagram above shows the main elements of the product and market strategy cycle. It is tempting to start in the lower-left corner - with the product concept that you think you know - and proceed counter-clockwise to define the target market. However, it is often more informative to start with the target user, and proceed clockwise through all four corners of the quad.
I recently made the case for designing your customer before you design your product. User-centered product design not only produces easier-to-use products, it also helps you think clearly about the value proposition that will drive engineering, marketing, and sales over the entire life-cycle of the product.
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