Santa Claus is no fool – he has a clear segmentation strategy. First he has the world broken into “time zones” so he can deliver on time. Next he segments by “boys and girls” then finally “naughty and nice”. It’s simple but it works. Documentum took four years to learn this lesson
Documentum was a small Xerox spin off company producing two million in revenue in the 1990’s. The company had developed a method for managing large documents coming from many different sources.
Documentum’s product had applications in numerous industries but wasn’t able to establish itself anywhere. The company was stuck. The product that was trying to be everything to everybody was in fact delivering not much, to nearly no body.
Tired of floundering, a group of executives, at the end of 1993 reviewed a list of 80 potential target customers. They asked several key questions and ranked the candidates on five criteria:
1. Is the target customer well funded and accessible to the sales force?
2. Do they have a compelling reason to buy?
3. Can we today (with the help of partners) deliver a whole product to fulfill their compelling reason to buy?
4. Is there entrenched competition that could prevent us from getting a fair shot at the business?
5. If we win this segment can we leverage it to enter additional segments?
In ranking the various industry candidates the pharmaceutical industry stuck out as the most probable candidate.
The industry is obviously well funded and Documentum’s sales force was able to access the key decision makers. Drug manufacturers have a very compelling reason to buy. A typical drug has average revenues of $400 million per year. Patents typically run 17 years and start from the date of patent approval (it can take 5 – 7 years before the drug is approved for sale). Every day lost between patent approval and regulatory approval can potentially cost $1 million (that figure rises to $10 million a day for a blockbuster drug).
Documentum felt they could deliver the whole product (faster drug approval) with the help of partners. Drug approval documents typically are 250 – 500 thousand pages coming from numerous sources. To pull all this data together Documentum partnered with Sun and Oracle.
There were competitors playing in this market but none of them were stepping up to the challenge of faster computer aided drug approvals. Finally, Documentum felt they could leverage their experience in the pharmaceutical market to enter other industries that require government approval.
The result was that Documentum executives got the go ahead to execute their strategy in Q1 of 1994. By Q4 of 1994 Documentum had captured 30 of their top 40 targeted customers. Today Documentum is clearly the market leader and continues to grow as it moves into other industries.*
When doing your customer segmentation ask these same questions:
1. Are you customers well funded? Some customers are better left to your competition.
2. Can your sales force access the customer? Is your sales force accessing your customers at the decision making levels of their organization? (It’s surprising how often this is not the case).
3. What is your customer’s compelling reason to buy and do we satisfy it? Often the compelling reason to buy goes well beyond just your product or service (and is often not fully understood by management nor the sales force).
4. Can we deliver the whole product (with the help of partners)? The customer wants a problem solved. It is your job to understand that problem (and its economic impact) and pull all the resources together to solve it.
5. Is there entrenched competition? If so, look for opportunities like shifts in technology, changes in the buying processes and changes in key personnel as entry points into a new account.
6. Can we leverage our success to enter other segments? Use the success in one segment to convince others to buy. (This must be planned for – it rarely happens on its own).
Using subjective ranking criteria like Documentum’s can assist a team to focus its resources on the key customer segments. Remember strategy is about focusing resources in areas where they can have the most impact. Let the competition fight over the rest.
* For the full story see Geoffrey Moore “Inside the Tornado” Harper Collins 1995 pp 23 – 25