The problem with Segmentation, Targeting, and Positioning

In yesterday's post, I described how Bounty had been effective in applying the principles of Segmentation, Targeting, and Positioning. In a perfectly competitive market, goods are indistinguishable from each other, so one company is not able to easily charge a premium or gain a dominant market share over others. However, in the paper towel market, Bounty has, through marketing, gained a dominant position 40% share of the market.

Stories such as Bounty's create awe and wonderment. It fuels MBAs to apply Segmentation, Targeting, and Positioning (STP) to every problem - including those related to startups. Yet, in the world of startups, STP is often the wrong tool for the job. We can see this by looking at a recent post from Ben Horowitz:

Most people thought only scientists and researchers would use the Internet. The Internet was thought to be too arcane, insecure and slow to meet real business needs. Even after the team introduced Mosaic, the world’s first browser, almost nobody thought the Internet would be significant beyond the scientific community­—least of all the most important technology industry leaders who were busy building proprietary alternatives.

If you followed the STP methodology at the dawn of the Internet, you would have quickly calculated that the market for online commerce, payments, search and other services was restricted to at most a maximum number of users (market size) - of a few million across the world: i.e. the scientists and researchers. The world quickly changed and those who were visionary enough or accidental enough to see that the segments, and market, was bigger capitalized on the opportunity. This is perhaps perfectly captured by the story of Yahoo:

The two founders of Yahoo!, David Filo and Jerry Yang, Ph.D. candidates in Electrical Engineering at Stanford University, started their guide in a campus trailer in February 1994 as a way to keep track of their personal interests on the Internet. Before long they were spending more time on their home-brewed lists of favorite links than on their doctoral dissertations. Eventually, Jerry and David's lists became too long and unwieldy, and they broke them out into categories. When the categories became too full, they developed subcategories ... and the core concept behind Yahoo! was born.
...
Jerry and David soon found they were not alone in wanting a single place to find useful Web sites. Before long, hundreds of people were accessing their guide from well beyond the Stanford trailer. Word spread from friends to what quickly became a significant, loyal audience throughout the closely-knit Internet community. Yahoo! celebrated its first million-hit day in the fall of 1994, translating to almost 100 thousand unique visitors.

While STP has its uses, in the world of startups, it can be perilous to think you know exactly who your market is, and how big the opportunity is.