Carving Out Your Market
The most important decision you need to make before you cut, is where to cut.
Who is your target audience? The typical answer to this question is either a demographic group such as “millennials”, or an entire category such as “coffee drinkers”. Both are ambitious but not useful.
For a small company, trying to compete in a huge market can be a fatal mistake. This is why most startups need to lead in their niche before expanding into adjacent markets.
Targeting is ultimately a resource allocation problem. Which group of potential customers should you invest in attracting, given your business goals and time horizon?
On the spectrum between targeting an entire population vs. a single person, how do you find that sweet spot? One where the market is small enough so you can win, but big enough that it makes sense to win.
Segmentation is a useful marketing tool that can help with that. The word “segmenting” means dividing something into parts. Dividing a potential market it into smaller, manageable portions gives you clarity.
But how do you divide a market? Take “coffee drinkers” for example. You could segment based on:
- Demographics: lives in Singapore, in their mid-thirties, married with no kids
- Attitudes: likes lattes, prefers single-origin, believes third-wave coffee is better for the environment
- Behaviours: drinks 2 cups per day, spends $50 per month, occasionally buys beans for grinding at home
Let’s say you picked “age” and “marital status”. Do single adults consume coffee any differently than married couples? Does age play a role in coffee consumption? Can you imagine developing a strategy for young singles?
Great segments are homogenous: all members in the segment behave in predictably similar ways. They don’t have overlaps with other segments.
The best segments are those based on customer behaviours.
This is why “millenials” is terrible as a segment. Having been born in a certain time period does not tell us anything about how they behave (well, maybe except affinity for avocado on toast).
A great example of segmentation is Steve Job’s infamous four quadrant grid. He clearly divides the market using why people use computers and the form factor they prefer.
When you are segmenting your market, ask yourself these questions:
- Do these segments describe how customers behave?
- Are these segments homogenous within themselves?
- Are there overlap between segments?
- Do these segments sound natural?
- Can you recognise customers or competitors in each segment?
Segmentation is part of customer research. It is a useful tool to understand the market. It is an exercise to elevate your view and see the big picture, before you can make the decision on where to zoom in and focus.