Why You Must Use Market Segmentation – Part 1

I give a lot of advice. Sometimes people ask me for it and sometimes I just can’t help myself. 🙂 However, the single most common piece of advice I give is, “Choose a market segment!”. This has everything to do with pricing and everything to do with business.

Let’s start with pricing.  Say you already have a product and want to figure out how to price it. To use Value-Based Pricing, you “simply” charge what the buyer is willing to pay. You go out and listen to your buyers and customers. You learn what they value and how much they value it. And then you start to understand their willingness to pay for your product.

 

However, let’s say you’re LinkedIn. As you go listen to your market, you discover people tend to use your product for very different purposes. Some people use it to help find a job, some to help sell their product and others use it to recruit new hires. Many people use it in very different ways. How do you price this? How do you even come close to determining the value or willingness to pay?

 

Segmentation

The only way to get your arms around this problem is through segmentation. LinkedIn has segmented its markets into Sales, Recruiters, Job seekers, and Professionals. That last category is the catch-all for everyone who doesn’t fit in one of the first three. Oh, and don’t forget advertisers as a market segment. Today, LinkedIn has 4 clear end-user segments, but they didn’t start that way. They started with a focus on recruiters. Once they made progress in that segment they moved to others.

 

Knowing they were going after recruiters helped LinkedIn understand their buyers much better. Of course this helps set optimal pricing, but even more importantly, it guided their product, marketing, and sales strategies.

 

Strategies

Product: They could focus on building enhancements that mattered to recruiters. They could create even more value to that target segment.

 

Marketing: They could invest their resources targeting recruiters. They could focus their messages clearly to recruiters, talking about the value recruiters should expect to receive from their products.

 

Sales: They could spend their time talking to companies with large recruiting needs. They had clear messages and stories. They could learn new stories from one buyer and share with the next buyer.

 

Note that all of these would be different if they hadn’t focused on recruiters (or one market segment).

Once you choose a segment, you can focus your product development, marketing, sales, and pricing at that one segment.

Here is your problem (probably). You are afraid to say no to other market segments. You think that if you focus on only one segment you are missing out on opportunities because you are ignoring other segments. Sure, you might miss some opportunities, but when you chase many segments, you forego the opportunity to truly understand and penetrate any segment. Most companies try to focus on too many segments, not a segment that is too narrow. Once you choose a segment, you can focus your product development, marketing, sales, and pricing at that one segment. Then … if someone from another segment asks to buy your product, you are allowed to say yes. You just don’t focus there.

 

Once you see success in your chosen segment, then you can add another… and another. You have a limited amount of money, people, and time. Begin by focusing on one market segment. You will have the highest probability of success.

 

**NOTE: Mark Stiving has an active LinkedIn community, where he participates in conversations and answers questions. Each week, he creates a blog post for the top question. If you have a question, head over to LinkedIn to communicate directly with Mark.

 

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