Over the past decade, technology providers have been facing three daunting and relentless trends:

  • Commoditization of technology capabilities (as seen in TSIA’s Technology & Service 50 index)
  • The shift to subscription-based offers
  • The unprofitable and unscalable nature of many subscription offers (as seen in TSIA’s Cloud 40 index)

As the stewards of growth and profitability for their companies, Product Management can and must effectively counter these trends.

Why Vertical Market Segmentation Makes Sense

In 2018, the number of inquiries TSIA received on the topic of “connecting business value to offers” doubled from the previous year. Vendors are realizing that the “one size fits all” solutions are less and less desirable to customers. These same customers are taking the attitude of “you need to understand my business and help me achieve a business outcome”.

TSIA research has validated the strong correlation between vertical market segmentation and profitability. The improved profit performance of vertical solutions is a result of higher offer-market fit, which delivers on a focused, highly differentiated value proposition for a group of customers. It’s about a product that’s tailored for a given group of customers all exhibiting shared characteristics, that is, a vertical market segment.

How to Identify Your Vertical Segments

Of course, few would argue that designing successful products and services and pricing those offers should be based on a deep understanding of customer use cases, their operating environment, what they value, their behavioral characteristics, and their ability to achieve their desired outcome.  

Research has found that designing with deep understanding of this problem space, over simply categorizing companies based on firmographics like size or geographic location, is more likely to result in the optimal offer-market fit. As an aside, I use the term “offer” intentionally in preference to “product.” “Product” is most strongly associated with the technology itself. “Offer” implies a more holistic concept of technology and may also include services.

In order to achieve a thorough understanding of customer use cases, technology providers must start with effective market segmentation, and the first step is identifying and understanding the problem space.

anything as a service offer market fit  

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Offer-market fit.

That said, enterprise technology companies historically built products that are relevant to almost every vertical industry segment. The segment-specific expertise rested with the customer, who applied that expertise to customize the technology to suit their needs. To make their horizontal technology more differentiated for a vertical industry segment, technology providers often documented compelling segment specific use cases.

thin vertical veneer  

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The thin vertical veneer.

We call this “the thin vertical veneer” where the Marketing department does some research and publishes a vertical case study on the website. However, there is little specialization in Sales and Services, let alone use case specialization in the product itself.

Elements of an Effective Customer Segmentation Strategy

Enter XaaS (anything-as-a-service), where everything changes for enterprise technology providers.  Customers are more likely to be business users with expectations that their suppliers deeply understand their business’ use cases and have purpose-built solutions that deliver value on short timelines.

To achieve a thorough understanding of the customer use cases, Product Managers of technology providers must conduct effective market segmentation exercises and make it an integral part of establishing their optimal offer-market fit.

vertical segmentation for anything as a service offers  

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Segmentation for offer-market fit in XaaS (anything-as-a-service).

Again, few would argue this assertion, but belief does not always equate to action. TSIA research continues to validate the weakness of market segmentation capabilities within technology companies. Where effective segmentation is performed, the focus is typically on broad industry verticals, company size, and geolocation, with just 21% of companies performing behavioral segmentation, according to TSIA’s 2018 XaaS Offer Design and Pricing Survey. This is an artifact of horizontal go-to-market motions that have historically served most technology providers well. But no more.

An effective segmentation strategy helps to build a relationship trust chain with the customer. Let’s explain: A company delivering a tailored solution for a target segment tends to build expertise in a given industry such as its trends, terminology, use cases, workflows, and regulations. Customers come to rely on the vendor’s knowledge of the industry, which in turn leads to a trusted advisory relationship providing key insights, ultimately becoming an integral component of their business.

With the increased value delivery to the customer through specialized products, services, and consultative advice, a market segment supplier is in a stronger position to command higher price points. Over time, customers within a specific market segment often consolidate to a single solution provider to meet their long-term needs. This is great news for technology suppliers who are not in a position of strength to maximize the Customer Lifetime Value (CLV). Further, these same suppliers are thus less susceptible to competitive forces given their inherent high offer-market fit. This competitive insulation is often referred to as a high economic moat.

segmentation relationship in anything as a service  

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Segmentation relationship trust chain.

If You’re Not Already Thinking About Segmentation, It’s Time to Start

In conclusion, the role of market segmentation in XaaS is essential to drive a tight offer-market fit for technology providers. The stakes are much higher than in traditional perpetual/asset-based licensing models. Companies seeking to maximize customer value, scale and profits in their XaaS business models are advised to embrace the practice of segmentation and operationalize across Product, Marketing, Sales, and Services.

cross-organizational segmentation alignment  

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Cross-organizational segmentation alignment.

For more on effective segmentation, be sure to download my paper, “The Role of Market Segmentation in XaaS”.

For further insights, successful case studies, frameworks and workshops on effective segmentation strategies reach out to TSIA to learn how the XaaS Product Management research practice can help to accelerate your timeline to XaaS business success.

 
 
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Laura Fay

About Author Laura Fay

Laura Fay  is the vice president of XaaS product management research for TSIA. She is a technology industry veteran with over 30 years' experience driving business growth in the enterprise software industry via leadership roles in product management, general management, product development, and customer success.

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