Market Segmentation

If you are working for an enterprise software company, you might have noticed that your company targets its offerings to a certain segment of the potential customer base. Most traditional segmentation depends on the total revenue of the potential customers. The definition and the boundary of these segments vary from company to company. For example boundaries based on the revenue could be: >$1B as high end, $100M-$1B as mid-market, and <$100M as low end. But are these boundaries real?


Having worked for enterprise software companies for most of my career, I observed that the needs of all the customers are same irrespective of the segment they belong to. For example, in retail industry, various business processes like store operations, warehouse operations, replenishment, and merchandising etc. are same or similar whether you are high-end retailer or mid-market retailer. The only difference is the scale of those operations and needs. For most of the high-end customers, the need for the software products arises when they have to optimize their operations or increase productivity; whereas for mid-market companies, the need arises from the desire to leverage technology to get to next level.

Almost all of the enterprise software companies follow license + yearly maintenance model. Even though the software as service (Saas) model is gaining popularity, there are very few enterprise software companies that offer this model at this time. Normally, the license is based on number of users or shops or warehouses and goes up as the customers grow their business and add more of those entities. Hence license is not big issue for selling into different market segments. The issue is the time and money it takes to implement an enterprise software solution. Hence most of the customers embark on a big project like enterprise software implementation only when they have enough resources. Resources here include both money and human resources.

For example, a $300M mid-market retail company that is making 10% margins is as much willing to implement enterprise software solution as a $5B high end retail company that is making 1% margin provided there are no other big projects that are going on and using up all the valuable human resources.

Keeping aside the sales challenge a software company faces when trying to sell into different market segments (this comes mostly from the psychology of sales force, which I will cover in another post), you see that the customers in all segments need the same product. Still companies, going by the traditional segmentation, tend to focus on one segment and ignore the opportunities present to them in the other segments. It might then be prudent for enterprise software companies to segment their customers into resource rich, resource constrained, and resource poor to address the needs of broader spectrum of customer base.