Redefining Market Segmentation – Maximizing Blue Oceans and Long Tails

Red Ocean Segmentation

As has previously discussed traditional segmentation looks at existing industries, with existing industry boundaries, competitors, channels and rules. Given this there are two common schools of thought that I have observed when defining segments for open source companies:

• Avoid that Customer Space -  "Enterprise Software Companies Own that Customer Space"
• Attack that Customer Space - "Target the big, greedy, lazy incumbent enterprise software vendor and offer a lower priced alternative"

In our experience both segmentation approaches are either incorrect or can be improved upon.

Firstly, software companies don't "own" their customers. We live in a heterogeneous world where most major customers have minimally what is referred to as MISO - Microsoft, IBM, SAP and Oracle (and many other vendors). In the case of Enterprise Content Management any company will already use and own more than one system such as Documentum, Filenet, OpenText, Interwoven, Vignette. The reality is that there is only a 5% to 10% penetration of this software and 90% of users are "non-customers". 

A simplistic view of open source strategy is to target a big, greedy, lazy incumbent enterprise software vendor and offer a lower-priced alternative. This means the market is a zero-sum game and you are dependent on swapping out the large incumbent vendor. If that was the case, low-priced enterprise vendors, that the Moore system categorizes as “monkeys” vs. “Chimps” and “Gorillas,” would have been successful decades ago. Swapping out is often slow and painful and you are fighting in the home stadium of a bigger, company with more resource and a deep relationship with the customer.

Blue Oceans and the Best of Both Segmentation

To be successful you need to focus on what Kim and Maubrogne call a “Blue Ocean” or “Non-Customer segment.” These users tend to break down into the following segments:

• (BO 1) Those that are already looking for an alternative
• (BO 2) Those that that have either tried and rejected the software in question. It has either been too expensive or too complex to use or rollout (or both)
• (BO 3) Those that have been rejected by the software vendor because the cost of sale is too high to make a profit on this segment

This "Blue Ocean" is the sweet spot for open source. Two examples are MySQL and Alfresco:

MySQL didn't attack the heartland of databases in the enterprise owned by Oracle. They targeted the untapped space of web developers who needed a database for their php program - LAMP - Linux, Apache, MySQL and Python has now become synonymous with the web. MySQL is used by major sites such as Google, Digg ... and became so strategic it was bought by Sun (and subsequently Oracle for $1bn).

Alfresco, (the company I work for) did not target traditional high value/high compliance Enterprise Content Management applications where Documentum, OpenText and Filenet are strong. Instead it targeted the non-customer, the 90% of people who don't use ECM but work with a shared drive and email.

Often great Blue Ocean segments portray what Zagula and Tong call a "Best-of-Both" world that can be thought of like a sandwich as follows:

• Top Level - High End, High Functionality, Scalable, but High-Priced, often Proprietary, Complex Software
• Middle Level - The Best of Both market of non-customers
• Bottom Level - Low-End, Low Functionality, Low Scalability but Low Cost, Easy-to-Use Software

What most customers want is the "Best-Of-Both" - Low Cost, Easy-to-Use, Scalable/Robust, Open Software. Most software companies want a "Sandwich with thin bread and a big filling" - a big middle level. Not all Blue Oceans have this. In some the bottom level is good enough, In some the top level has  dominant market share. In some the middle level is small.  It is important to choose a segmentation with a large undefended middle level that is a true "Best-of-Both" and can be marketed to the max.

We call this the "Blue Ocean Sandwich Ratio" Middle Level / Top Level and Middle Level / Bottom Level

Some open source markets do not have favourable "Blue Ocean Sandwich Ratios". For example, in the Office Market you have Microsoft Office on the Top Level and Google Docs on the Bottom Level.

Successful execution in a Blue Ocean requires an equal focus on both value and innovation to align innovation with utility, price and cost positions. In short, a low cost product is delivered and the innovation occurs in two distinct areas

• Customer - Simplifying the product to lower the barriers to adoption and the cost of rollout
• Company - Simplifying development, marketing and distribution model so that a low cost product can be delivered that is still profitable

In summary the Blue Ocean Segmentation requires a focus shift

Red Ocean to Blue Ocean

1. Complete in an Existing Market to Create a New Market
2. Beat the Competition to Be an Alternative
3. Traditional Buyers to Non-Customers Segments
4. Value Based Pricing to Break the Value/Cost Tradeoff
5. Focus on breadth to Focus on Ease of Use and Rollout

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