Tuesday, November 24, 2015

Effective Market Segmentation

The slide I see in many pitch decks is one where the CEO explains the market, how she understands its segmentation and whom the company is selling to. It is frequently some sort of grid where on one axis you find geography and on the other industries or maybe company size.

I would like you to consider two scenarios.

In the first scenario, the CEO proceeds to fill in the grid with full and partial check marks or similar to demonstrate the broad applicability of the product and how significant the opportunity is and how many customers they have in each segment (typically very few in each). She then explains how she plans to roll out the product to all these customers.

In the second scenario, the CEO explains that she has considered and tested various segments, but for now she is focusing just on a single segment. She then says that she thinks the next segment maybe a segment adjacent to the one she is tackling now, but that she isn't quite sure about it.

All things being equal, which CEO would you rather invest in?

When I hear the first scenario, I tend to lose interest. The second scenario excites me. Here is why.

When you pick just one segment, you:

  • Only need to build and maintain features for that segment;
  • Can iterate product development faster;
  • Only need to market and sell to one segment;
  • Can leverage existing customers and their references to sell to very similar customers;
  • And, maybe most importantly, you can reach the tipping point in that segment much more quickly.

That last point in particular deserves some special attention.

In a typical adoption curve, you have about 15% of customers who are early adopters. Once you cross 15%, the segment tips in your favour and you can close 50%+ relatively quickly. When you try to sell to a market with 100k customers in it (for example), then it will take 15k customers before you reach the tipping point.

Consider the alternative of picking a tiny market segment with only 50 customers in it. You only need to close 8, and the segment tips in your favour.

What this means is that the best market segmentation strategy is to initially experiment with different segments, pick the one that seems to work best and to laser focus on it. Nail it, then pick the next adjacent segment, rinse and repeat.

You will probably find that your company grows faster by focusing on a very small market segment initially, and not on a large one.



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