Bear with me on this one, as the title may leave you feeling a bit confused. But trust me, I will show you the connection! I like to check out one of the morning TV shows on one of the major US-based networks for a few minutes, as I’m eating my breakfast cereal. There are 3 major programs on at the start of the day: NBC’s Today Show (for a long time the traditional market leader), ABC’s Good Morning America (the perennial runner-up, until recently leading the pack for several years), and CBS Mornings in (last place for many years). So what the heck does this have to do with software market segmentation, you ask?
I’ve been struck by how much the morning show race reminded me of how the software industry has become more vertical over a long time period. In particular, there are some strong parallels between the software business and the morning shows. I state this about “the product” being “soft enough” to make relatively easy product changes as part of a new segmentation strategy.
Changes in strategy on TV morning shows
The Today Show had been the “10,000 lb Gorilla” of the morning shows for a long time since the beginning of the category. They’ve had a large lead over their competitors across multiple changes in on-air personnel, as well as societal cultural changes over the years. The Today Show’s format was aimed at a “horizontal” audience; meaning a little bit of something for everyone. They started with hard news at the beginning of the show and it gradually becomes “lighter”, transitioning to Pop culture, celebrities, and gossip as the show progresses through its marathon 4-hour time slot.
The other two major shows took a real beating at the hands of NBC in the ratings over the years. There were many tweaks to their formats and even more turnover in personnel over those many years. Fundamentally they have tried to compete by “building a better Today Show”, essentially competing head-on with the market leader in a horizontal fashion. But about a dozen years ago, ABC and then more recently CBS changed their strategy.
Market Segmentation was the Key
They both started utilizing a much sharper segmentation than at any point previously. ABC essentially went “younger and lighter” over time. The show has the least serious tone and is the most “fun” of the three. They focused much time on pop culture and other topics skewed toward younger viewers. That paid off. Good Morning America took a clear lead over the Today Show due primarily to this new segmentation, and some personnel missteps at NBC to a lesser extent.
After years in last place, CBS segmented sharply in the other direction. With a shorter 2-hour program focused almost entirely on hard news and staffed by serious, credible news people. They won over this writer and have picked up some market share overall. I consistently watched CBS mornings for the first time after this strategy adjustment. The Today Show for a long time struggled to remix its formula and regain its lead. They looked much like a complacent large company that had grown fat, dumb, and happy from years of unchallenged success. I must mention that they have regained the lead from ABC for the last few weeks. We’ll see if that’s a temporary bump due to special circumstances, or if it continues.
Software Market Equivalents
Ok, enough about TV morning shows! How does this relate to segmentation in the software market? A very similar situation, albeit in a B2B rather than B2C market, is the ERP software market. The ERP market is also a large, horizontal market. A mass B2B software market, if you will. Every company in the world needs some version of ERP software to run its business. This software market is highly segmented. Start with an entry-level, basic accounting application like Intuit’s Quickbooks. This market extends up to expensive, complex enterprise suites such as those offered by Oracle, Microsoft, SAP, and Sage.
This of course is one form of verticalization. Segmentation by target customer size and sophistication. Intuit and Oracle don’t target the same sub-segments with their premier offerings. However, the ERP market is so large that over time it has also been segmented by vertical industry. In addition to the industry giants just mentioned, nearly every industry group of any significance now has ERP software vendors with specialized applications aimed at their more narrow industry segment.
Another similar example is Medical Practice Management Software. The last time I looked, there were well over ONE THOUSAND software vendors with products targeting this large market. You would think the software requirements of most medical practices would be pretty standard across the board. But because the market is so large and lucrative, nearly every market segment (Surgeons, Gynecologists, Dentists, Chiropractors, etc.) has its sub-market segment of competitors. Each application category speaks to that particular medical practice’s lingo and strictly models its unique business processes.
A More Personal Software Market Segmentation Example
I also have a more personal segmentation example from earlier in my career. One that illustrates how important marketing segmentation can be as part of a software company’s overall strategy. I became CEO of an early-stage mapping software company with excellent technology but an unsophisticated business and marketing strategy. While the company had a neat technical advantage over its larger competitors, the product was positioned horizontally. And directly against the market leaders in that space.
The primary distribution channel for the mainstream mapping products of the time was computer and electronics retailers. This was a notoriously tough and expensive channel to enter and do business with. I was able to make some headway in penetrating this channel. But even with our technical feature advantage, it was already too late in the game. As a startup, we lacked the resources to compete and win horizontally head-to-head with the larger market leaders of that time.
Necessity is the Mother of Invention
So we quickly came up with a segmentation strategy that proved quite helpful. Initially, we removed some features from our flagship product. With fewer features, we created a second, entry-level product priced far below the mainstream mapping products. This allowed us to occupy the price leader position targeting the most price-sensitive consumers. This enabled us to distribute this lower-priced product through both the consumer/gaming software stores back then. We obtained shelf space at mass market retailers, such as drug and grocery stores. The mainstream mapping software leaders had almost no presence in these mass channels, because of their higher price points.
This entry-level product, created with minimal development costs, generated cash flow to fund our longer-term segmentation strategy. This was to target the B2B market with a new, higher-end product. The mainstream mapping products were fairly generic and used by both business people and consumers. However, they were designed for any consumer, with no specific business-oriented features. We created a premium, business-focused version of our product which we positioned as THE mapping products for mobile workers/road warriors. Examples of these road warriors would be sales reps and service technicians. We included important business-specific features, such as integration with the popular CRM systems of the day. These integrations weren’t found in any of the other mainstream mapping products at that time.
Important considerations in software market segmentation strategy
Hopefully, I’ve established that segmentation of your software market can be a powerful tool to compete with and outflank strong competitors. With the ultimate goal to maximize the value of your business. So what are the important things to consider in formulating your segmentation strategy? Let’s look at a few:
Horizontal vs. Vertical
The first thing to consider is how horizontal your segment is and how vertical you need to go to compete effectively. There is a fine line here. The more horizontal you can remain (targeting multiple segments with the same product), the higher your product’s ultimate profit potential. But you must be realistic about your market position. Go as “vertical” as you need to win, or your profit potential is likely zero!
Market Maturity
The more mature the market is when you enter, the more important it will likely be to segment smartly by attacking a specific vertical niche. Notice I don’t mean “industry” necessarily, although that is a common way to segment. Of course, market maturity, or any other single factor, shouldn’t be used in a vacuum to create a business strategy. Many factors need to be considered in your segmentation decision.
Market Size
The larger the market size, the more likely it is that it’s ALREADY segmented and will likely force you to do the same. There are several prominent potential exceptions here, listed in the bullet points below.
Market experience of the company
Do you know the market well, and just as important, are you known by the market? In cases where you’re known and understand your market well, it raises your odds of success even entering with a more horizontal approach or into a larger or more mature market.
Levels of funding
Big companies with massive resources or heavily funded startups may be able to use a horizontal approach successfully. Although many confident late entrants of this type have failed in a variety of software market categories.
IP/Technology & other strategic advantages
A true innovator, with market-changing IP, may also be able to attack and win in an established market using a horizontal approach. That’s because they are effectively changing the ground rules of the market. But again, I’ve witnessed many companies very confident in their technical advantage. Many of those have ended up with their hats handed to them when competing head-on with entrenched competitors in an established market.
Important upfront decision–but never too late to change
Like any important business consideration, it’s far better to segment the market for your products upfront, than it is to wait until you are FORCED to do so. But just like a morning TV show, one of the beautiful things about the software business is that it’s relatively easy and almost never too late to modify your target segmentation strategy. At least compared to other technology categories such as computer hardware or semiconductors.
What’s your feeling on how best to approach segmentation in the software business? Post a comment so we can all benefit from your experiences.
Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or Subscribe to the Morettini on Management Newsletter hosted by LinkedIn. Contact Phil directly at info@pjmconsult.com
Leave a Reply