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, now leading the pack) and there-branded CBS This Morning in (last place for many years, but gaining steam). 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 time. In particular, there are some strong parallels between the software business and the morning shows with respect to the product being “soft enough” to make relatively easy product changes as part of a new segmentation strategy.
Changes in strategy on the TV morning shows
The Today Show had been the “10,000 lb Gorilla” of the morning shows since the beginning of the category. They’ve had a large lead over their competitors across multiple changes in on-air personnel and even societal cultural changes over the years. The Today Show’s format has been aimed at a “horizontal” audience–a little bit of something for everyone. They start 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, with 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 over the last few years, ABC and more recently CBS changed their strategy, utilizing a much sharper segmentation than at any point previously. ABC essentially went “younger and lighter” overtime. The show has the least serious tone and is the most “fun” of the three, focusing a lot of time on pop culture and other topics skewed toward younger viewers. It’s paid off. Good Morning America has taken a clear lead over the Today Show due primarily to this new segmentation and to a lesser extent some personnel missteps at NBC.
After many 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. It’s too early to say how successful this will be in the longer run for CBS, but they have won over this writer and have picked up some market share overall-I’m watching consistently CBS in the morning for the first time. The Today Show has been struggling to remix it formula and regain its lead, looking much like a complacent large company that has grown fat, dumb and happy as a result of years of unchallenged success.
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 very large, horizontal market–a mass B2B software market, if you will. Just about every company in the world needs some type of ERP software to run its business. This business is highly segmented from an entry-level, basic accounting application like Intuit’s Quickbooks all the way up to very expensive, complex enterprise suites such as 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 segments with their premier offerings. But the ERP market is so large that over time it has also 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 industrial 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 very 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 it’s own sub-market segment of competitors, with applications that speak that particular medical practice’s lingo and strictly models its particular business processes.
I also have a more personal segmentation example from earlier in my career that illustrates how important marketing segmentation can be as part of a software company’s overall strategy. I took over as 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 otherwise was positioned 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, a notoriously tough and expensive channel to both 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 and we lacked the resources to compete and win horizontally head-to-head with the larger market leaders of that time.
So we quickly came up with a segmentation strategy that proved quite helpful. Initially we took out some features from our flagship product and 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, and distribute it through both the consumer/gaming software stores of the time as well as mass market retailers such as drug and grocery stores. The mainstream mapping software players had almost no presence in these mass channels due to their higher price points. This entry level product, created with minimal development costs, allowed us to generate cash flow to fund our longer term segmentation strategy which was to target the B2B market with a new, higher end product. The mainstream mapping products were fairly generic and used by business people as well as consumers, but really designed for any consumer with no specific business-oriented features to speak of. We were able to create a premium, business-focused version of our product which we positioned as THE mapping products for mobile workers/road warriors such as sales reps and service technicians. We included important business-specific features, such as integration with the popular CRM systems of the day, which weren’t found in any of the other mainstream mapping products at that time.
Important considerations in software market segmentation strategy
Hopefully we’ve established that segmentation of your software market can be a very powerful tool to compete with and outflank strong competitors, and ultimately 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 currently is and how vertical you think you need to be 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 likely it will be important to segment smartly and start by attacking a specific vertical niche. Notice I don’t mean “industry” necessarily, although that is a common way to segment. Of course this, 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 successfully use a horizontal approach, 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, as they are effectively changing the ground rules of the market. But again, I’ve witnessed many companies very confident in their technical advantage that 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 optimally segment the market for your products up front, then it is to wait until you are FORCED to do so. But just like a morning TV show, on of the beautiful things about the software business is that it’s relatively easy–at least compared to other technology categories such as computer hardware or semiconductors– and almost never too late to modify your target segmentation strategy.
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 the PJM Consulting Quarterly Newsletter. To ask a question or discuss a consulting or interim engagement, contact Phil directly at [email protected]
If you liked this post please share it with your colleagues using the “share” buttons below: