(I originally wrote this article back in 2000 when I was Entrepreneur in Residence at the Carleton University Tech Venture program)
One of the hardest choices an entrepreneur will ever face is the decision to narrow focus to a market segment at the exclusion of others. I know because I have been faced with this decision before. It seems like a contradiction that reducing the number of buyers you market to will ultimately help you generate more wealth, however, my experience and that of many other entrepreneurs, is that focusing ensures you concentrate all of your resources on dominating a market and, in most cases, builds a foundation for entrepreneurial success.
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I often speak to entrepreneurs who have invented a technology that has, they tell me with great passion, limitless opportunities to be sold. They see every person or organization that could possibly apply the product to problem solving as a source of revenue. And because the start-up stage of a company is largely a learning exercise, the entrepreneur spends many hours attempting to sell to any and every buyer they happen to come across.
After a short while a pattern begins for most entrepreneurs who pursue this. While they are sometimes able to close a few sales, they are often unable to generate much momentum and each sale seems to take a lot of effort. The large orders never materialize and they are always up against new and better-financed competitors. The growth predicted as result of the revolutionary new technology never seems to meet the early expectations.
Why? Because trying to be everything to everyone means you will likely end up being inconsequential to anyone.
Let me demonstrate what I mean by way of a fictitious market for cyber pens. The two major suppliers in this field are called InsurancePens Inc. and the other is called e-Pens Inc. Both companies have developed a pen that will record all the letters that the pen writes. InsurancePens targets only insurance companies and their cyber pen is designed specifically for insurance adjusters who fill out numerous reports. e-Pens targets all business market segments as well as the consumer market and offers a pen that is slightly less expensive than InsurancePens’.
Lets assume that a purchasing manager at an insurance company is researching the purchase of office supplies for the adjustor team. She searches the Internet and discovers the Web sites of the cyber pen suppliers and notices that the opening page of e-Pens reads, “we produce a pen that will electronically record everything it writes.” InsurancePens’ web site opened with the statement, “we sell a pen for insurance adjusters that makes them more productive and saves insurance companies money by automatically recording what the pen has written.” Both companies may be completely capable of delivering cyber pens to the purchaser, but one company is surely more likely to catch the purchaser’s attention.
The buyer at the insurance company is courteous enough to contact both companies for price quotes, and learns that not only does InsurancePens seem to better understand her company’s needs, but also that InsurancePens has business partners that enhance the offering. Because InsurancePens has focused on the insurance market segment, the company understands the importance of making the product compatible with insurance case tracking systems. This will save InsurancePens’ users additional time in not having to manually import captured text from the cyber pen to other systems that they use. To make sure that InsurancePens customers properly deploy the product, the company has also partnered with a large computer training company that works in the insurance industry. e-Pens did not consider securing any partnerships because they weren’t really relevant to the consumer sector of its very broad target market.
The e-Pens salesperson that fields this unsolicited call highlights the price advantage of his product upon learning that InsurancePens is also being considered for the purchase. The purchasing manager takes note of the comment.
In the end, the purchaser decides to buy from InsurancePens in spite of the small price premium, because the company met all of the needs of the buyer and more clearly articulated a potential return on investment in productivity gains and cost savings.
While e-Pens may be able to secure sales across different sectors, they may find it difficult to build momentum in any one. This could occur for many reasons, but it is likely that momentum is difficult to build because e-Pens’ marketing message does not effectively communicate a value proposition to any specific buyer. Buyers in different market segments have different buying motivators. For instance a consumer might be interested in status associated with the cyber pen or its “cool” factor, whereas a business buyer may only be interested in cost savings associated with using the pen. The e-Pen marketing message attempts to appeal to a very broad market and the result is a diluted message that does not speak to either a buyer in the business or a consumer segments. It would make matters worse, if a consumer looking for a pen stumbles across the Web site of a third cyber pen supplier, CoolPens Inc., that offers “the coolest, most colorful electronic pen that you can use to instantly send messages to your friends.”
Momentum builds on itself. When InsurancePens pursues sales opportunities it is able to leverage references from its numerous insurance customers. It will be perceived as an expert in supplying cyber pens to the insurance industry, because of its track record and focus in this market. Word will get around amongst purchasers in the insurance business that InsurancePens is the best source of cyber pens and unsolicited business orders will flow to the company. This will not only result in new sales, but the cost of selling will be lower for InsurancePens than for its competitors that must constantly chase prospects for business rather than receive calls for orders.
InsurancePens will also develop unique market insight. Because InsurancePens is focused only on one segment of the market, it is better positioned to see shifts in needs amongst its target customers than e-Pens that must try follow trends across more segments of the market. Perhaps InsurancePens would see the need for high security systems in some organizations or the emergence of new technologies that can be combined to make a more versatile product. InsurancePens would, over time, offer new products to customers based on its unique knowledge of industry trends and customer needs and create barriers to competition that would be hard to circumvent.
In time, other companies such as e-Pens, will avoid pursuing insurance business as the likelihood of losing the business to InsurancePens will be so high that it would not be worth the effort for e-Pens. As a result, InsurancePens would be faced with less competition, and would over time, face less price competition and be able to increase its margins.
If InsurancePens is particularly aggressive, it may decide that to set up a second division to focus on another market segment, such as the construction industry, and create new marketing messages and products unique to that market. The product may be based on the same core technology, so InsurancePens can now leverage manufacturing economies of scale and offer price discounts to its customers over competitors in that new market segment – InsurancePens will have expanded into a second market segment from a position of strength and will be successful as long as it keeps its business lines separate.
This may be a simplistic example, but it serves to make an important point about focus. There are many large and successful companies in the world that began by focusing on solving one problem in one segment. The business world is also littered with companies that failed to focus and suffered the discomfort of following the leader in all the markets they served. My personal experience supports the notion that it pays to focus.
In the early nineties I was a co-founder of a web development company, called GlobalX. At the company’s inception, the market for web development services had just emerged. It was sufficient to be a generalist company, but quickly we needed to specialize as new competitors entered the market. We elected to focus on companies with large web sites that needed highly sophisticated solutions: a horizontal approach but specialized nonetheless. This succeeded for a number of years, until we found that competitors were focusing on industry verticals and we could no longer offer a compelling buying proposition. Our final strategy was to develop a product that encapsulated our service delivery knowledge and although we had only moderate success in marketing the product (we entered the market late), our company received several acquisition offers in 1999 and was acquired in fall of that year. I do not believe we would have been sought after to the same degree, had we not excelled in a particular segment of the market.
One of the most frequently quoted books amongst marketers and entrepreneurs is Jeffrey Moore’s “Crossing the Chasm”. It is a “must read” if you are interested in learning more about the concepts of market segmentation and targeting.