"If I go after every type of customer, I'll have a higher chance of success"
Everyone is not a customer!
Although it might seem like a good idea, this assumption can lead to startups losing $10,000’s in terms of both hard cash and time.
In this article we’ll look at market segmentation examples to bust this myth and show you how to execute this to help your startup get:
Table of Contents
What is Market Segmentation?
It is the strategy by which you take a large group of customers with differing needs (heterogeneous group) and break it down into subgroups of customers with similar interests, desires and needs (homogenous group).
Not only must these subgroups include people with similar interests but they must also respond similarly to marketing stimuli that they receive.
For a startup:
The aim is to extract the highest opportunity segment out of your full market, for returns or growth potential with the product you’re offering.
Considering that as a startup your resources are most likely limited, focusing your efforts on a single target group has a higher chance of a positive outcome for 2 reasons:
Customer segmentation is Step 1 when completing your Lean Model Canvas for starting your business.
Why is it so critical?
The Importance of Market Segmentation [Examples Included]
Market segmentation helps you personalize your marketing message to attract and convert the customers that are most interested in your product.
It’s so important that Montate found:
“79% of organizations that exceeded revenue goals have a documented personalization strategy.”
But the goodness doesn’t stop there.
It’ll also help you create:
Entrepreneurship is about discipline.
It is just as much about selecting the right customer as it is about selecting who not to focus on.
Market segmentation helps laser focus your marketing strategy and customer acquisition efforts.
But, at its core:
This study conducted by the American Marketing Association in the Journal of Marketing explains that in reality, it is a management strategy focused on the behavior of groups, not individual persons.
Check this example out.
Mint.com as a Market Segmentation Example
When Mint started they had many possible market segments that could use the product:
Parents, business owners, students, fresh graduates, managers etc
From the outside it might seem like "Great I’ll get all these guys to use my product for a potential market size over $1billion!"
But Mint realised that it would be almost impossible to market to all these people without diluting the value proposition for their product and saying something general like:
“The personal finance software for everyone!”
What they did was carve out a segment of the full market.
The ideal segment they started with was 22 - 35 year olds.
With that in mind, compare the first statement with something like:
“The finance software that manages your spending to move you towards starting your millionaire journey in your 20's!”
Night and day right?
See how getting super specific with your market segmentation will help you sell your product or service more effectively?
So question is:
How do you start to group customers together i.e. segment them?
Bases For Market Segmentation
You could use any characteristic or variable you like to segment customers into a group.
But the important thing is to create a character set that fits with your product and allows you to find actionable data that drives your business forward.
In other words, you'll want a suitable “base” characteristic of the group.
This base characteristic minimizes the difference between members within a single customer group and increase the differences between separate customer groups.
The criteria for the base characteristic is that it should be:
Take a look at Plus Size Womens Fashion Startup, Dia&Co.
They raised $70 million to tackle the lack of readily available trendy fashion for plus size women.
In their case, the most suitable base segmentation variable is dress size. They only cater to women of dress size 14 and above.
With this base segmentation, they can then dive into other audience segmentation variables such as income, shopping frequency etc to get even more precise with their target customer and market analysis.
The 4 most Common Types of Market Segmentation
1. Psychographic And Lifestyle Segmentation
This provides qualitative customer audience data.
It provides insights into why customers do what they do.
The best way to gather psychographic data is to meet customers in person and learn what they want.
But you could also use social analytics tools, website analytics, market research firms among other options.
Psychographic segmentation includes finding out customers:
Psychographic Market Segmentation Examples
Let’s take Walmart as an example.
Who does Walmart target?
Middle income, money savvy individuals and families.
Their values and beliefs on finances revolve around saving money.
As a result:
Walmart uses slogans such as “Unbeatable Prices” and “Special Discounted Online Offers”.
2. Demographic Segmentation
This is based on variables such as age, gender, income, education, marital status, family size, occupation, religion and ethnicity.
Generally, this form of segmentation uses a combination of demographic variables.
Some commonly used combinations are:
Demographic Market Segmentation Examples
Which demographic did Tinder choose for their market segmentation?
When they began they targeted a very specific age group.
That was where they centered all their energy and focus until they got mainstream adoption.
Today Tinder has 50+ million users (not all university students) and a valuation of $10 Billion.
3. Behavioral Segmentation
As the name suggests, groups customers based on observable behaviors.
This includes things like:
Behavioral Market Segmentation Examples
Going back to the Mint.com example we mentioned earlier.
Remember they targeted 22 - 35 year olds right?
But did you notice how they added a behavioral variable to their market segmentation?
They cleverly understood that not all customers in this group have the same habits.
So they also targeted customers that already use online banking to narrow down their ideal target market and get even more specific.
4. Geographic Segmentation
No surprises here!
Customers are classified into groups based on their location.
So this includes things like:
Geographic Market Segmentation Examples
True Temper is a company that produces snow shoveling equipment.
As a result,
They segment their target customers according to regions where snow is a regular occurence since customers will find no use for the product in warmer temperatures.
We know what market segmentation is, we know that we need a base characteristic to identify our ideal market segment, and we know the different types of segmentation we can use to get the job done.
Let's talk about how to actually run your market segmentation and choose the right one for your startup.
How To Do Market Segmentation Effectively For Your Startup
Have you heard of design thinking for innovation and brainstorming?
This is a process used by companies like IDEO (the guys that brought us awesome designs like the Apple mouse).
It involves the use of the “diverge and converge” method and we’re going to use the same approach.
The process begins by coming up with as many different market segments (groups of customers) that could get value out of your product or idea.
Think far, wide and wild.
Nothing is off limits.
Jot down as many potential customer segments as you can. The more the merrier and if you can get other people involved you’ll be able to come up with even more ideas.
Let’s assume you have an idea:
“To create a tech product that helps teachers structure and deliver more engaging classes”
Starting with this type of idea you could end up creating “tunnel vision” and lead you down a path where you can’t create a sustainable business.
Because it’s too restrictive to start with.
Ask yourself what you would really like to work on. Where would you like to focus?
If what you are passionate about is “creating more engaging learning environments” rather than specifically a "solution for teachers"
This would open up a bunch of other possible industries and market segments you may not have considered:
But yes there is a flip side:
What if you already have a product or a technology?
And you've already set it up specifically for teachers because that is who you want to help?
In this case, expand all the different types of segments within that market.
So within the teacher market we could segment them into:
Just like that we now have come up with 30+ market segments of potential end users.
With a little more effort you could definitely come up with loads more because a lot of those segments can be further sub-divided by subject, profession, location, etc.
And sure, if it makes sense to do so and where customers are similar in terms of how they act, they can be combined into one market segment.
For example: combine junior school teachers regardless of subject. (You’ll see how to confirm that in step 3 which we’ll discuss shortly.)
Now that you have a huge list of potential segments, how will you decide which segments have more potential than others?
This is the converge stage.
The aim is to filter your huge list of segments down to 6 - 10 customer segments.
In the book, Disciplined Entrepreneurship, Bill Aulet suggests to filter your potential segments by considering these 7 questions:
The market segments that score the highest on these criteria will be the ones that have higher potential for success.
With your new found shortlist, it’s time to select the market segment that you will pursue.
But you can no longer rely on assumptions or third party data.
You’ll need verification from the customers themselves.
That’s where step 3 comes in.
Direct customer research.
This is where you’ll develop deeper insights about the pain point you want to solve, get clarity on the customers perspective of the problem, their unmet needs and how you can solve it for them.
You’ll be able to make an informed decision about which market segment makes most sense to attack.
Why is this important?
Because even if you have a product, a business model, the right pricing, team, funding and more - none of it matters if you do not have a paying customer.
In the end, the one who understands the customers best is the one that will win the market.
As a result, analyzing the 6 or so high potential market segments with customers is critical for selecting the most promising one.
Aka your "beachhead market".
Analyzing your customer segments involves:
You can learn exactly how to do that here.
Is Your Beachhead Market Targeted Enough?
According to Geoffery Moore from Inside the Tornado, there are 3 conditions for what defines a market:
Bill Aulet also suggests to keep segmenting until you reach a beachhead Total Addressable Market (TAM) size of between $20 - 100M per year.
TAM is the total financial value if you were to acquire 100% of the market.
If your target market TAM is greater than $100M, it’s probably not defined enough for starting out.
Any less than $20M and it might not be worth pursuing (depending on your goals).
Remember, we’re only talking about TAM for your beachhead market here. Markets outside of your beachhead represent follow on opportunities to tackle once you've dominated with this one.
Here's how to calculate TAM:
Research the total number of existing customers. Search online, use consensuses, industry reports and so on to find this data.
Next, calculate the total revenue you expect to generate per customer per year.
Multiply the two values and you have your TAM per year.
This shouldn’t take long to put together but it is essential.
First, it’ll prove to you if the market segment is worth pursuing based on whether it has the potential to meet your financial goals.
Second, it gives investors (if you decide to go down that route) a quick overview of the opportunity available.
Not focusing on a specific market segment ends up wasting valuable capital resources and time. It's part of your management strategy that helps create focused marketing messages, increased competitiveness and faster market penetration.
Start with a brainstorming divergent approach then filter down to the highest potential customer segments.
Select the segment that makes the most sense for you based on customer responses and TAM.
Don’t worry about the other segments that you could serve.
They’re not going anywhere.
The point is to get traction for your startup asap and start generating revenue.
Once you have a stronghold on your beachhead market you can always grow from there.
So niche down and find out who would be best to target.
Your marketing and sales will thank you.
And your customers will think you’re a mind reader.