How to choose a market segment for your Startup
Updated: Nov 28, 2022
Chose a problem to be solved by your Startup, but not sure where to start? Not sure whether to segment the market and, if so, what criteria to consider? This post will solve these doubts.
Once you've found a team of co-founders and defined a business idea for your company, the next step is to further study which market segments the solution can serve. The only factor needed to build a business is the existence of someone who pays for the solution, so it is essential to be clear about the potential customers.
It's quite tempting to think that an idea can serve multiple markets and believe that this will increase the chances of success. According to Bill Aulet, writer of the book Disciplined Entrepreneurship and director of entrepreneurship at MIT, the reality is quite different. Bill comments that one of the biggest mistakes startups make is trying to sell to everyone and believing that the product or service will be able to meet the needs of all customers.
Although people from different segments can have similar problems, they inevitably have different preferences and some greater pains than others, which makes it very difficult to adapt the solution to all of them early on in the company. For example, a company that sells Management Software, the management theme is extremely broad and applies to all segments, but the most important processes and metrics to be monitored can be totally different. What might be relevant for running a SaaS company with 500 employees may be irrelevant for a college with 50 employees and vice versa.
When we talk about customers, we can have both those who are paying and use the solution, as well as different people for each of these types. For example, a company that sells toys has parents as paying customers and children as end users. There are companies that can have two end users, different agents needed for the business to happen, as in the case of Ebay, which needs as much people to promote their products as people to buy. In this situation, the ideal is that market segments are thought of for both, but it will probably be noticed throughout the research that one is more critical for the business than the other; it is on this user that the greatest focus should be given.
The process of defining market segments can be divided into three parts:
1. Brainstoming: Survey of several possible end users of the solution from different sectors;
2. Prioritization: Choose from 6 to 12 raised segments (with 6 being better than 12). The intention here is to select the segments that are most likely to have the greatest potential for the business and to be explored in greater detail in the market research stage. Some criteria are similar to those that will be covered in the research step, so part of the information collected will be used in the next step. Some criteria that can be taken into account are:
Financial Resources: Do paying customers have enough financial resources to pay the likely price of the solution? If you don't have enough money, the market doesn't become attractive.
Direct contact: Can users be directly serviced by sales or do you need the support of a third party for this? Having direct contact with the customer from the beginning is essential to receive feedback and quickly improve the solution.
Reasons to buy: Does the user have a clear reason to buy? Would he switch to some similar solution? Does he really need the solution?
Complete delivery: Can you deliver a complete solution to the user even if you need the help of partners? For example, people don't want to buy a car engine and install it (even if it's better), they want a ready-made car. In this case, a partnership with automakers would be necessary.
Competition: How strong is the competition in this segment to the point of hindering its growth?
Growth: If you reach most sales for this segment, is it possible to easily evolve to others? If a very specific segment is chosen, then very large changes to the solution may be needed to accommodate others.
Expectation: Does this segment meet the expectations of the founders? If the intention of the founders is to grow quickly, reach a certain value and sell the company, it is important to assess whether the segment can provide this.
3. Initial market research: This is when you start talking directly to your prospects to get to know them. Points suggested by Bill Aulet to be used in this research are:
End User: Clearly specify who the end user of the solution is, who will actually use it. When talking to people, it is possible for the customer to be even more specific than previously thought.
Application: For which process or activity will this end user use the product or service?
Gains: What are the main gains (results) that the user will have using the solution. Cost reduction? Increased Revenue? Time reduction?
Leading Customers: Which customers who adopt your solution can directly influence the behavior of others? If your solution has entertainment as a segment, potential leading customers could be Disney or Dreamworks, for example.
Market Characteristics: What characteristics can help or hinder the sale to this market?
Partners: What partners are needed to be able to deliver the proposed value?
Market Size: How many people are part of the segment?
Competition: What are the main competitors? Are they making similar or identical products?
Complementary resources: Is integration with other systems necessary so that the solution can be used more easily by the user?
These criteria are just suggestions and must be adapted according to the reality of each business. The idea is that, for each of the segments prioritized in step 2, these points are detailed.
From this research we have good information to prioritize a single segment. It will be the first segment to be explored and, as soon as most people become customers, the other segments will be explored. The name given to this first segment by Bill Aulet is Beachhead Market. It is a reference to the strategy used in wars to invade territories with access only through water, the troops use the beach of enemy territory as a base and to receive resources.
It is possible that the Beachhead Market could be further targeted. As defined by Geoffrey Moore, writer of Inside the Tornado, there are three factors that need to be met to define a market:
People buy similar products and services;
People are very similar in how they perceive the added value of the solution, that is, they have very similar pain points;
People talk to each other. They can be people from the same company or region for example. This is important because word-of-mouth marketing can be the main growth aid in a company's start-up.
If any of these three criteria are not met, it is recommended that the segment you want to start be revalidated.