Understanding market segmentation can mean the difference between actually reaching customers or missing the mark entirely. Although many vendors tend to believe that markets are fragmented, markets are really clearly defined and established. It's just a matter of understanding them. Vendors tend to say that they have something for everyone. This shotgun approach delivers a broad message in an effort to appeal to everyone. What becomes fragmented, as a result, is the delivery of meaningful solutions to the customer on their terms.

To increase customer adoption, IT executives and vendors need to:

  • Recognize that different types of users (segments) exist.
  • Identify priority segments based on your product and capabilities.
  • Understand those segments and their requirements.
  • Develop solutions specific to the needs of the targeted segments.
  • Communicate to them in their language and on their turf.

New technologies and product categories are sometimes mistaken as new markets. The Internet, for example, is often seen as a new market when, in fact, it's a technology. In some cases it has created new markets, such as the market of Internet service providers. There is a fallacy, however, that the people who use the Internet have become a new market by their common use of it. The assumption is that Internet users now speak the same language, attend the same conferences and have the same strategic business issues. In reality, the people who use the Internet are already part of other established markets, e.g., industries such as construction and manufacturing or departmental job-oriented segments such as human resources and IT.
The manufacturing market provides an example to illustrate the result of this perception. The manufacturing market consists of thousands of different segments (such as automotive, consumer packaged goods, technology, clothing) each with different methods (such as discrete, process, repetitive and job shop ­ see accompanying chart) and different priorities, needs, buying motivations, languages and business issues. Vendors often look at all of the different people and groups as "the manufacturing market." They tend to treat all segments as if they are the same. As a result of this broad marketing focus, vendors often feel that the market is fragmented and hard to reach. The truth is, when understood, the market is not fragmented and it is easy to reach.

Requirements Chart

According to the 1997 U.S. Census Bureau, there were 472,086 manufacturing establishments. Within manufacturing there are five distinct production system categories, each requiring a different information system. They are:

  • Discrete Manufacturing. Use of single level product structures (bills of material) and standard lot sizes from which standard costs are developed. Actual costs are measured against standard costs. Usually, one location or manufacturing facility.
  • Process Manufacturing. Discrete quantities are produced in batches to a formula. Have inventory requirements and a master schedule. There is variability in the raw materials and the batches produced. More is required to support the laboratory, with its interfaces to production and customer service. Can involve multiple manufacturing facilities in different locations.
  • Repetitive Manufacturing. High-volume production with long production runs typically extending over multiple production shifts.
  • Job Shop. Individual jobs for purchasing and production. Use process sheets and routings.
  • Industry Oriented. Designed to meet the specific needs of the industry segment. Typically these shops are in the aerospace industry.

There are more options to choose from when you don't view the market purely from a technology or product standpoint. For example, if you view your audience as having many groups that are interconnected, you might consider marketing your product to specific segments that use the process manufacturing methods as opposed to job shops that have estimating and job costing requirements.

Data warehousing presents an example of market segmentation, with IT as one market and end users as many others. IT responds to the technology, but users want solutions. Companies are now positioning themselves as solutions providers of business intelligence, decision support, etc., and not just as data warehousing technology providers. The problem is that if the marketing approach doesn't change with the positioning message, the vendors will be in the same boat as before.

Understanding the Users

In order to provide meaningful and useful solutions, it is crucial to think in terms of the user. In order to understand the user, it is important to understand who they are, what they do, how they do it and what is important to them. Questions to answer include: What trends are affecting them? What are their business drivers? Where could an investment in technology be of benefit to them? Paul Wahl confirmed the importance of this when he was CEO of SAP America, Inc. He said, "We need to be much closer to the customer. We need to speak their language."

Types of Segmentation

There are different ways to segment the market. Each of the following ways can yield common groups of users:

  • Industry segment (automotive, CPG, technology, clothing/apparel)
  • Department (HR, finance, sales, marketing, IT, procurement, distribution)
  • Titles (product marketing manager, account executive)
  • Job function (order entry, fulfillment)
  • Uses

Usually more than one of the above segmentation criteria needs to be applied in order to be meaningful. Different departments and different job functions within those departments have different technology requirements.

Successful Segmentation Strategies

A successful segmentation strategy needs to group constituents in the market according to the following similarities:

  • Share a common problem
  • Affected by the same trends
  • Have the same strategic business issues
  • Talk to each other
  • Speak the same language
  • Respond to the same message due to similar motivations
  • Congregate on the same turf

Each department in a company uses technology differently and has different technology requirements and motivations. For example, whereas retail-merchandising buyers are crucial to the company's profitability, a buyer for a service-based business, such as a legal firm, is not as crucial to the company's profitability. The information they need to know is different. A merchandising buyer has to know trends and buying patterns. What they do is different and their technology requirements are different. The same message will not appeal to each. This is confirmed by Eric Herr, COO of AutoDesk, who said, "Successful segmentation is about gaining real insight into groups of people who respond similarly to a product offering and positioning."
Market segmentation works for established companies as well as companies with new technology. According to Peter Ohnemus, president and CEO of The Fantastic Corporation, "Segmentation and prioritizing allowed us to focus. We can't grow fast enough to take advantage of all the opportunities available. We focused in order to optimize our internal resources, both human and finance. It helped us align everybody in the company toward one goal."

This strategy worked for Siebel Systems, Inc. early on, as well. According to Pat House, co-founder and COO, Siebel Systems Inc., "We were intensely focused right away. Customers appreciate it when we understand the issues unique to their industry."

Selecting priority customer segments is a dilemma a lot of fast-growing companies face. But, focus and a better understanding of the market segments will make all the difference in increasing adoption of technology among users. According to Wahl, "Not all customers are created equal."

October's column will be about how to understand the market and its infrastructure in relationship to segmentation.

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