Get Market Segmentation Right

Market segmentation is oftentimes the key contributor to success or failure. Here is how to get it right. 

Apple

At Apple in 1983, after demonstrating sufficient product management and marketing skills in bringing the first hard disk drive to market for a personal computer, the Personal Computer Systems Division asked me to take over as the Apple III Group Product Manager. I replaced some pretty good product managers: Trip Hawkins who started Electronic Arts, Rob Campbell who founded the company that invented PowerPoint and FileMaker, and the original product manager for the Apple III-Steve Jobs.

At the time, corporate marketing had segmented the market into home and business with nothing in between. The concept of small office/home office (SOHO) had not yet emerged.

I studied how the Apple III was being used. It had a larger spreadsheet (Super VisiCalc) than any other PC, solid word processing from Quark, a real keyboard to fall in love with, and other advanced features. The product was perfect for the yet to be defined SOHO market. PC market penetration was just 4 percent.

We spent our entire marketing budget going after our definition for SOHO, resulting in the sales of twenty-three thousand Apple IIIs for a gross revenue of $60 million, thus making the installed base of about seventy-five thousand the third largest of any mini/microcomputers just after the Apple II and the DEC PDP 11.

Lesson: Do your own market segmentation and then focus your product marketing on that segmentation.

Digital F/X

In 1990, Digital F/X invented the first desktop video editing system that enabled a Macintosh computer to control tape decks for editing along with a video switcher and character generator. They thought the market for it was people who knew how to use a computer but had never made videos before. They expected to sell thousands per month just like the Truevision video card (a leading third-party video card at the time).

When I took over as the second product manager, I talked to customers and found that our product was being purchased by video professionals because it cut the cost of a video editing suite from $150,000 to about $70,000. As a result, the total available market was only about twelve thousand. But due to poor market segmentation, the company had already spent about $20 million in manufacturing thousands of units, assuming that the market was much larger. They also spent $250,000 on a user’s guide, explaining in vivid detail all the things video professionals already knew how to do—except how to use a computer.

Result: This VC backed company went out of business, in part because management refused to understand their customer and segment the market correctly.

Large File Transfer SaaS (Software-as-a-Service) Company

The company introduced a product with the name “corporate” in it and then wondered why the product was not selling as well as it was forecasted to sell. Multiple sales people and sales management came in and were fired because they weren’t making their sales quota selling to “enterprises.”

Later, they learned two-fifths of their market was government and education who, upon looking at a product’s name, said, “We are not corpo- rate, so a corporate product won’t work for us.” In addition, the product that was built lacked the features/functions required by corporate enterprise customers.

Lesson: Align the product with the market segments using common sense, not what you wish. Monitor sales wins and losses. Talk to real customers to check the assumptions. Be willing to change.

So How Do You Accurately Segment Your Market?

Look at the market. Talk to the prospective customers. Find groupings that match common needs, characteristics, and behavior.

List them out. Work and rework. Brainstorm with others. Conduct face-to-face interviews, surveys, polls, and focus groups. Look at how your competitors segment the market. If your market is in the United States, consider using the NAICS database for industry and labor classifications to get your arms around the total market. Step back from your draft seg- mentation. Ask if this makes sense. Is it clear? Easily understood? Does it map into the real world?