Verticalisation or market segments?

Is there an issue?

I’ve recently had several conversations where the subject of vertical markets and market segmentation have been common themes. The reason is that many companies organise their sales force, and sometimes their marketing, around ‘vertical markets’. They often do this to align sales peoples’ knowledge to a market, rather than it being a developed strategy. They’ve had success in some specific sectors, for example Finance and Government. They then seek to expand into other areas, and so form a group to address ‘Enterprise’, for example. Is there a problem with this approach? Should they be targeting market segments? Yes and no…. 

 Definitions

Let’s just check the definitions. According to Wikipedia, a Vertical Market  is:

“… a market in which vendors offer goods and services specific to an industry, trade, profession, or other group of customers with specialized needs. It is distinguished from a horizontal market, in which vendors offer a broad range of goods and services to a large group of customers with a wide range of needs, such as businesses as a whole, men, women, households, or, in the broadest horizontal market, everyone.”

An explanation at Investopedia  sheds a little more light:

A company that manufactures automobile parts would belong to a vertical market. It would have a limited market of – auto manufacturers and mechanics – for its products. A furniture manufacturer, on the other hand, would belong to a horizontal market because its customer base could include homeowners, apartment dwellers, offices, hotels, restaurants and more.”

Marketing segmentation on the other hand is defined in Wikipedia as:

“… a marketing strategy that involves dividing a broad target market into subsets of consumers who have common needs, and then designing and implementing strategies to target their needs and desires using media channels and other touch-points that best allow companies to reach them. Market segments allow companies to create product differentiation strategies to target them.”

So vertical markets are a categorisation and market segmentation is a strategy. This is an important difference. Although dividing the sales force into vertical market groups helps to concentrate knowledge, it doesn’t shed light on how to develop the product/service, differentiate it against the competition and sell it effectively. Groupings such as ‘Finance’ may include say retail banks, insurance companies and venture capitalists – organisations that, for most products or services beyond the mundane, will have very different needs.

The value of segmentation

By digging down beyond the category of a ‘vertical’, companies can identify distinctive needs, which they can seek to satisfy, either by developing specific products or services, or by tailoring their messaging, communications channels and sales support materials.

Segmentation might also uncover parts of the market where a company’s existing products and service don’t meet the need; that can be helpful for future planning, and in the short term to save on wasted sales and marketing expenditure.

Segmentation doesn’t have to be particularly scientific, but it does need to be objective. The key is to understand the target’s needs, not whether they might buy the product type. For example, many residential customers have Wi-Fi, but their needs are very different to an enterprise requiring a Wi-Fi network in terms of capacity, security, quality of service and mobility.

How?

Many companies appear to avoid doing segmentation because it’s difficult to take an external, objective perspective, and the exercise might reveal some hard truths. But it’s not that difficult, and really comes under the category of ‘planning to succeed’.

The approach used by Expertek, and which has been found to be highly effective, is to first to:

  1. Identify as many well-defined needs as possible, relative to the product/service under consideration.
  2. Create a first cut segmentation.
  3. If this produces too many segments (in the sense than the following steps are too costly or time consuming), then either:
    1. Consolidate similar segments, acknowledging and accepting that this will result in some loss of effectiveness
    2. Select the most attractive segments.

The latter can be done by:

  • Evaluating the potential revenues, margins or ROI from addressing additional segments
  • Excluding those where you don’t currently have a competitive solution
  • Including those that are ‘strategic’.

Inclusion of the third category is open to debate. This last step is like ‘pulling teeth’ – it’s a very important decision, but nobody wants to exclude ‘potential markets’, even if you are never going to successfully sell into them!

The second step of the Expertek approach is to document the need, the proposition and the messaging for each segment. This takes time and judgement, and requires precision. But taking this step can highlight how you can differentiate your proposition from the competition, and make your product or service easier to sell.

The final step is to align all the marketing communications to the segments. Of course, much of this may be common, but nuancing the detail for a specific market segment enables you to speak directly with the customer, in their language. And that’s much more likely to win a sale than talking at them in your language.

Conclusions

Marketing Segmentation has been around for 50 years or more, but it’s an approach that is rarely used effectively. Verticalisation is a useful first step, but delivers no insight, and can lead to the sales force targeting the wrong customers.

As Theodore Levitt said in his 1983 book Marketing Imagination: “If you’re not thinking segments, you are not thinking”.