Market Segmentation

Why Market Segmentation? Your Startup can’t do it all. Focus is critical!   “The single necessary and sufficient condition for a business is a paying customer. As such, we will now start the process not by focusing on our idea, but who will be the end user for our idea. Therefore, we will focus on the customer and build the company back from this point rather than trying to push out on the customer what we want. This step called market segmentation is the first of a series which will help you define, test and understand who your customer is.” The following plan to develop market segmentation with your startup team is from the insightful tech book, Disciplined Entrepreneurship by Bill Aulet In this Market Segmentation step, it is critical to do two things:

  • Start to see the world in the eyes of your customer, not from what you want (very likely inverting the mindset of how you started your company with the idea at the center and now it should be the customer).
  • Open up your mind and brainstorm all the potential customers who can use your idea or technology. Let a thousand flowers bloom at this point! But also be careful to make different discrete market segments that are homogeneous and not so broad as to be meaningless (e.g. bad—consumers, good—24–30 year old, online males making over $75K per year and living in an urban environment).
Single-sided or multi-sided market? Do you have only one type of “customer” which you are serving, or do you need to serve multiple customers in order to create value? (e.g., is the “end user customer” different from the “economic buyer customer” or do you need both a “buyer” and a “seller”, like eBay, to make your idea work). Don’t confuse type with segments—a customer type has a very specific need (e.g. hosting for their website), while a segment is a specific group of customers who have that need (e.g. bloggers, SMEs etc.):  Single-sided market (only one type of customer), Two-sided market (two complementary types of customers), and Multi-sided market (a more complex approach, involving three or even more types of customers) Market type?
  • B2B (business-to-business) serves other businesses in various industries.
  • B2C (business-to-consumer) create products or services which help individual consumers solve personal needs or problems.
  • Both-For multi-sided markets, focus on the primary (end user—i.e., the one who generates value) customer
Your Startup Team Market Segmentation Development Plan
  • Do primary market research by going out and talking to at least 50 people about your idea and the problem it solves.
  • Then sit down with your team and write down all the possible types of customers. Don’t forget to write down even the craziest ideas—they help open up the aperture and expand the boundary conditions and close to these boundary conditions maybe where some of the most interesting markets will be for you. Open the windows and let as much sunshine in as possible!
  • Get out of the building and talk to people.
  • Readdress market segment ideas based on industry, geographic location, income, user types, other criteria.
  • Write down at least 15 potential market segments.
  • Narrow down market opportunities.  Evaluate the following issues in order to narrow down to the most promising 6-12 segments—but you only need to answer these in general now to downsize your market segments. You will do much more research later.
  1. Evaluate purchasing power for each segment.
  2. Evaluate ease of direct access to customer, for each segment.
  3. Evaluate whether they have a compelling reason to buy, for each segment.
  4. Evaluate whether you can deliver a full product (with or without partners) for each segment.
  5. Evaluate whether there is entrenched competition, for each segment.
  6. Evaluate whether you can leverage success to expand, for each segment.
  7. Evaluate whether segment is compatible with values/passion and goals of funding team ( for each segment).
  8. Research in-depth your primary market
  • Dig for more data on each segment, and analyze the following:
  1. end users (who are they, specifically)?
  2. application (what will they be using your product for)?
  3. benefits (what actual value do they gain)?
  4. lead customers (the most influential)?
  5. market characteristics (what will ease or hinder adoption of the new technology)?
  6. partners/players (whom do you need to deliver value to the customer)?
  7. market size (how many customers is 100% of the market)?
  8. competition (who else tries to solve the same need or problem)?
  9. complementary assets required (what else does the customer need to get a full solution to his problems or needs)?
Market segmentation conclusion  At this point you should have brainstormed a number of potential market segments for your idea without choosing one. That will come later. In doing this exercise with your team, you will have started to get yourself and your team in the right mindset—building this company with the customer at the forefront of our minds. You will also have started the important process of doing primary market research. This will be a crucial skill as you go forward for your team and you should start to structure interviews and collect data. To conclude this step, write down a list of market segments which you will further pursue. Try to add enough detail for them to be meaningful (e.g.: Young professionals (25-35) in Western Europe, heavy smartphone users, who are unsatisfied with the conservative and limited features of traditional banks, and want instant, fast and flexible access to all their money, credit cards or investments). List all the segments in a similar manner. Simplistically speaking, Brant Cooper in, Why Do Market Segments Matter? states, “Your Startup becomes a scalable startup when you have learned how to acquire and convert a big (or multiple) market segments.  If you are raising money, part of your story should be detailing your target segment and how you will convert its members, as well as how winning this segment will lead to a scalable business. segments graphicAs in the diagram, you might find that your total addressable market (TAM) can be split into various segments.  The TAM includes all users who share a problem to some degree and who you believe will be receptive to your solution.  The level of pain might differ, however, between some identifiable groups of users.  The features required in the solution might also differ.  Further, who the buyer is, who they consider trustworthy references, and how they are acquired and converted (funnel) are likely not the same across all the groups.” Remember, you need to do market segmentation in ‘inquiry mode’ and not ‘advocacy mode’. We are not selling yet, we are investigating and learning what we should be doing. Don’t jump the gun. Online Resources for Market Segmentation ]]>