A Market Segmentation Example

In the previous post, I laid out the principals of market segmentation, specifically differentiating it from classification.  I’d like to provide an example, building from work done in launching a new premium filler material into the thermal interface material (TIM) market.  These materials are used to extract heat from microprocessors and other electronic devices to maintain their optimal performance. We provided the thermally conductive materials that, when combined with a polymer, dictated the performance of these materials.

The cost of this new product necessitated a significantly higher selling price than our existing materials, and we knew that commercializing it successfully within our core business would be a challenge.  Thus, we performed a market segmentation process on the broader TIM universe to see if other segments existed and might be more attractive.  To do this, we spent a lot of time meeting with existing and potential TIM customers to try and answer such questions as:

• What are their decision making processes?
• What criteria do they use in selecting vendors/solutions?
• What are their growth strategies (product roadmap, key applications, etc.)
• Who are their customers, and what is expected of them as vendors (what is their value proposition)?
• How do they work with vendors (arms-length, etc.)?

Often, our past experiences with customers yielded insights into these questions as well.  We also engaged an external market research firm who had done work in the industry to understand which of our customers supplied which end users, which applications were likely to grow at above-market rates, etc.  We then analyzed our sales to each company in the market and assigned some “potential” size to each account, and finally worked through several iterations of grouping accounts based on answers to the above questions.

At the conclusion, we ended up with 5 segments:

Leading Edge:  These companies were driven by a desire to retain their position as the specified solution for advanced applications such as Intel or IBM microprocessors.  They often used very expensive filler material such as silver, and experimented with new materials constantly, often driving product development by filler vendors.  Their engineers were true experts in the industry, and purchasing took a back seat in vendor discussions.

Jump to Respond:  These companies were always developing new materials based on demands by high-volume key customers. They typically served “second tier” applications such as heat sink attachment or heat spreading in laptops.  Constantly under pressure to deliver to new customer demands, they liked to have a range of solutions to use to quickly design new products.  Engineers still drove the discussions with vendors.

Grease Monkeys:  These companies were similar to “Jump to Respond” in offering customer-specific solutions but tended to focus on lower volume niche applications.  They also relied more on general chemistry expertise and were broadly involved in advanced adhesive or related applications in a range of industries.  They tended to have more limited resources than the “Jump to Respond” players so needed additional application support from their vendors.

Wannabe but Can’t:  This was the most deceptive group as they had some characteristics of the “Leading Edge” (significant resources, driven to try and serve challenging applications), but at the end of the day they were too adverse to trying more expensive solutions and always wandered back to trying to maximize performance from low-cost filters. They had a small share of the market but grand visions, but it was clear that realizing those visions was always going to be a challenge.

Pump it Out: These companies provided high volumes of standardized materials, and while they used quite a bit of our product, they were more focused on operational expertise and trying to squeeze cost out of existing designs (negotiating prices, reducing filler usage, exploring cheaper fillers, etc.).  They were the highest volume accounts in the market so could not be ignored, but the solutions that worked for them were not the most advanced but the most mature ones.

Notice that the segmentation is based on customer values and behaviors, not on such details as their size, location, types of products, or other classifications.  Each segment contained a range of different sized companies, but these companies were similar in how they valued new fillers.  We could therefore plot them by the criteria that were most important to our new product launch: appetite for new technology and willingness to pay a price premium (see the graphic, plus page 4 of the attached presentation). We identified the segments which placed the most value in our product (Jump to Respond and Leading Edge) and tailored our messages and even our pricing to meet these segments needs price (more details in a later post on how pricing was set using value-equivalence lines).  It also instructed us to avoid spending time on unappealing segments (Wannabe but Can’t, Pump it Out) to focus our resources more specifically.

Our earliest success was with the “Jump to Respond” segment, launching the product at a higher-than-anticipated price. We found that we did not quite have the right product yet for the “Leading Edge” or “Grease Monkey” segments, but were able to identify derivatives of the new product for these segments with greater likelihood of success.  Without this exercise, we would have wasted significant effort trying to commercialize the product to our core “Pump it Out” segment without success; at best we would have missed significant opportunities to price the product at a premium for those customers to whom it provided the best value proposition.

I’m happy to hear your thoughts on how we could have done this better, or experiences you have had in market segmentation.

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