Occasionally something good can result from something really bad. Take computer hacking. Besides the malicious damage that Internet hackers have caused – totaling millions, if not billions, of dollars – they have also been responsible for spawning a lucrative but legitimate business: producing products to protect against hacking attacks. One of the most successful companies in combating hacker damage is Lexington, Massachusetts-based Arbor Networks.

Arbor develops network integrity systems that protect organizations from such demonstrated security threats as distributed denial of service attacks (DDoS) and self-replicating worms. The company capitalized on its founders’ expertise in Internet infrastructure scalability and security to launch two market-leading products: one targeted at service providers, the other at enterprises. 

Today, only four years after its launch, Arbor is in the enviable position of having nearly 100 customers, including some of the world’s largest Internet service providers, government agencies, and Fortune 500 companies. 

But its success was no accident. Penetrating the ISP market involved applying a disciplined process of segmentation and needs analysis – one the company was later able to replicate in the enterprise arena and yet again with public sector agencies. Here is how effective market segmentation played a role in setting and implementing Arbor’s product strategy.

Segmentation and needs analysis

Market segmentation is the systematic identification of groups of potential customers who would be most receptive to buying a product. Of all the tools in a product strategists’ bag of tricks, market segmentation is the most important, according to Paul Morville, director of product management for Arbor Networks. 

“Almost everything we do in marketing – product design, pricing, promotion, go-to-market strategy, competitive analysis, forecasting and financial modeling – stems from having an informed and specific understanding of who is buying, what they’re buying, why they’re buying, and how they’re buying,” Morville said. 

While large companies may have legions of MBAs and high-priced consultants available to help them, small companies and startups often rely on leaner resources. Among smaller firms, discipline, intuition, and willingness to listen often play a larger part in the process of effectively segmenting customers. 

Small technology producers need differentiated marketing 

Many mass market businesses practice undifferentiated marketing: that is, they focus on commonalities – rather than the differences -- in the needs of customers. Success for these companies typically requires extensive advertising and sales resources, and is more likely when the competition is limited and the product has mass appeal. It’s a nice opportunity if a product strategist can find it, but the vast majority of small companies and start-ups practice differentiated marketing. 

Differentiated marketing considers unique customer needs and wants. In dividing the larger market into segments based on distinctive needs and preferences, the goal is to gain market position and deliver the right product at the right price in the right way to meet that specific segment’s needs. Doing so ensures that the marketer doesn’t waste scarce resources on product development, marketing, or sales.

Effective segmentation is critical

Not all segmentation efforts are created equal. For startups, one of the things venture capitalists look for in a business plan is the rationale for market segmentation. The vast majority of plans have no segmentation. Those that do frequently break the market into giant chunks: Fortune 500 companies, large enterprises, small-to-medium businesses (SMBs), etc. “Unfortunately,” said Morville, “there are 1.5 million SMBs in the United States alone. Unless you’re selling water, they’re probably not all going to want the same thing from your product.”

A better approach is to segment by clustering customers according to the benefits they hope to gain. For example, is the customer hoping to reap cost savings? To realize revenue growth? To create differentiation in their own product or service?

As a network security company, Arbor segmented primarily on customer pain points. The company looked at the customer’s specific security problems and whether those problems drove its buying behavior. Arbor’s core technology is broadly applicable to almost anyone who operates a network. However, different types of customers want the company’s technology to solve different types of problems.

Segmentation by customer pain points drives product strategy

Arbor’s first product, Peakflow SP, was targeted at large telecom providers, ISPs and cable companies. As organizations who carry the world’s Internet traffic, they were struggling with what Arbor calls “infrastructure security,” that is, protecting the network from large infrastructure-level hacker attacks. 

Arbor entered the market just as the Internet bubble was bursting. “In 2001, it was somewhat controversial to be targeting service providers. Many of them were in Chapter 11. However, we had an innovative, cost-effective solution that fit the service providers’ specific needs and had a demonstrable ROI. It meant that we were able to take a leadership position in a short time,” Morville recalled.

When Arbor decided to extend its business into the enterprise market, the company discovered a different set of pain points. Enterprises were struggling with so-called “internal security” problems and needed help protecting their networks from worms that had infiltrated their infrastructures and from internal attacks by misbehaving employees. 

“Rather than trying to force the service provider technology onto enterprise customers, we built a completely new product to meet the enterprise customers’ needs,” explained Morville. The new product, Peakflow X, was well-positioned to attract early adopters, including government agencies and financial organizations. Since that time, it has penetrated other vertical industry segments as well.

Extending the segmentation dynamic

In marketing Arbor’s products, Morville considered other factors driving customer acceptance: price, cost of ownership, convenience, and quality. Different segments have very different views on the importance of these and other criteria.

Take ISPs, for example. “A single link in a service provider’s network can carry voice and data traffic for tens of thousands of customers. Because of the potential disruption they could cause, providers are intolerant of solutions that sit in the direct path of network traffic,” Morville noted. “Arbor devised a clever mechanism to deploy its product passively and cost-effectively. This feature is critical to our success with providers.”

“In contrast, enterprises are generally more tolerant of non-passive solutions and, in many cases, prefer them,” he explained . “That’s another reason we branched the product line.”

Segmenting by use

It’s also a good idea to think about market segments in terms of the intensity of their usage. Will the segmented market be a heavy, medium, or light user of the product? Heavy users might represent a small percentage of the market, but account for a huge share of its sales volume. On the other hand, small users might have a relatively low average sales price, but may account for an enormous portion of the total addressable market, according to Morville.

To develop an effective segmentation, Morville suggests the following:

• Segments should be accessible to the business. For example, if you can’t afford the sales or marketing overhead to reach that segment, it’s probably not for you.
  
• Each segmented group must be large enough to provide a solid revenue base. Marketing and development resources are scarce at small technology producers– it’s unlikely you can afford to chase a large number of segments at once, so choose carefully.
  
• If you’ve found a strong market segment, use it throughout the organization. Each segmented group requires specific treatment in your marketing and sales plans. A key reason for segmenting is to allow your marketing/sales program to focus on the subset of prospects that are most likely to purchase your offering. Different buyers go to different tradeshows, read different publications, buy through different channels, etc. Make sure your whole company is marching to the same drumbeat. Meet with your marketing communications and sales organizations; provide specific positioning messages for each group and arm them with the knowledge they need to bring the message to the marketplace. Done properly, this will help to insure the highest return on your marketing expenditure.

Morville, who has worked for Arbor Networks since 2001 and for other Boston-area startups before that, has helped take the company’s products from alpha-stage to award-winning, industry-leading solutions. He points to the results of restructuring the company’s sales and marketing around key market segments. 

“Arbor has a separate marketing plan for each segment and dedicated enterprise and service provider sales teams. Our ability to successfully understand and segment our customers by their needs and buying preferences is a key to our success as a startup,” said Morville.

ABOUT THE AUTHOR: