How do you describe your market?

When I ask people to describe their market, they often say something like, “Most of our customers are in their mid-20s, just out of college.” Or they might use titles: “Our customers are CIOs at healthcare companies.” And while these are reasonable answers, they lack the necessary insight to help focus the company on gaining more customers.

My next question: “How much of your market do you think you can get?”

Not surprisingly, the answer is usually some fraction, such as, “About 30%” or, “It’s a huge market–we’d be very happy with 2%.”

And that’s the problem. They’ve just described a demographic that might purchase their product or service, but they really haven’t described what motivates those people to purchase, or how they can influence that purchase decision.

Here is a simple but powerful way to segment and think about your market:

A market segment is a group of people all making the same decision based on the same criteria.

A market segment is a group of people all making the same decision based on the same criteria.

If you can identify the decisions people are making, which result in them either buying or not buying your product, then you can shape your product design, marketing, sales, and support efforts to identify, attract, and retain more customers.

And here’s the benefit: If you really understand the decisions your potential customers are making, and the criteria they are using to make those decisions, and you have constructed a winning product, marketing, and sales effort, then you should expect to win nearly 100% of that market segment.

Now that might initially seem unrealistic. But remember, we aren’t talking about a demographic; and this is not your “addressable market.” We’re talking about a segment; everyone in that segment is, by definition, making the same decision based on the same criteria. In that case, your only concerns are to make sure you are included when they are making their decisions, and that your offering is that customer’s best alternative.

Example

The trick is to break down your market according to the decisions they are making, rather than some demographic information.

So, for example, let’s say you are selling computers. Here are some possible criteria people might use in making a purchase decision:

  1. Performance
  2. Compatibility with work / school / friends
  3. Price
  4. Aesthetics
  5. Value (performance for the money)

Some of these criteria may involve tradeoffs, while others may be strict requirements. For example, one consumer may want aesthetics, but requires compatibility. Another consumer may not care about compatibility, but may be very price-conscious.

So we might break the market into groups:

  • Affluent Workers-at-home (requires compatibility, likes aesthetics)
  • Hard-core Gamers (requires performance, wants value)
  • Liberal Arts Students (Price)
  • Engineering Students (Value)
  • Small Business (requires compatibility, wants value)

and so on.

The Decision Basis

Now we have to look at their decisions. In decision analysis, we say that three elements are necessary for any decision:

  • Information – what you know or believe
  • Alternatives – your potential actions
  • Preferences – what you want

Without all three of these, there may be action, but there is no decision.

Understanding the Decision

So we need to know something about how our potential customers make their purchase decisions. Do they purchase in electronics retail stores? On the web? Through school? Do they have a budget? Where will they use it? What other machines will they be looking at, or likely to research, when they make their purchase decision? Each of these questions helps us understand what alternatives they are likely to be looking at, and what information they are likely to have. When we combine those factors with their preferences, we should have a pretty decent understanding of their decisions.

Now we can start defining some possible market segments. For example:

  • Affluent Workers-at-home who purchase through the office and must choose a pre-configured machine from Lenovo or Dell
  • Affluent Workers-at-home who purchase themselves, and need to be compatible with their office email and VPN, but can choose any machine that fits the bill and is under $1500
  • Retail Small Businesses who require a Point of Sale system
  • Service Small Businesses who do graphic design work

Each of these can be fleshed out with a few sentences describing the decision that customer is making–their preferences, alternatives, and information (which could include information about competitors, as well as compatibility and performance metrics). When you write out the decisions, if you realize that not everyone in the segment is facing an identical decision, then you break that segment down further until you have several uniform segments. With this example (computers) we could easily create thousands of market segments–some of which would be very close to each other, though not identical. In most cases, you don’t need that many.

Once you have these segments, you can group them together according to your marketing activities, and you will have a pretty good idea of where to focus your marketing efforts.

Bottom Line

This process takes work. It’s nowhere near as simple as a one-line demographic description. But in the end, it helps the company focus on reaching the right customers with the right message, and results in dramatically more intelligent marketing efforts. It also helps when you speak with investors and partners, as it clearly demonstrates an understanding of the market, and provides a clear path to reaching your customers.

 

 

6 Responses to “How to Get a Rock-Star Understanding of Your Market”

  1. Hey Rick,

    Thanks for your great insights. I agree that by breaking down your customers into segments, companies can know exactly how to reach and convert their customers. So in terms of a marketing/sales effort, it is extremely productive.

    One challenge that I see is actually identifying the size of the market segments, especially all of the segments added together. Companies with limited resources at most can capture market size info from big research companies (that hopefully published it somewhere for free), so the extra time it takes to gather the sizing of this market may be inefficient for a small company compared to using that for more execution. Based on that, I think it is not necessarily problematic when a company says, “Our market consists of soccer mom’s on the west coast, and we want to capture 5% of the market”. It’s really whether they dig down to actual actionable steps that make a difference between a growing company and a nice looking financial projection.

    • Startups definitely do have limited resources, and it can be challenging to size up the sub-markets. But I stand by it as a far better approach–most especially in pre-revenue startups with limited resources.

      Take your example: “Our market consists of soccer moms on the west coast, and we want to capture 5% of the market.” Why 5%? Where did that come from? Why not 10%? Or 15%? Or 1.5%? In my experience, those are pretty arbitrary numbers. And it can easily vary your financial expectations by an order of magnitude or more. Add to that the uncertainty in the underlying demographic size (do you really know how many “soccer moms” are on the west coast?), and you really have no clue how big the market is, or how to address it.

      By contrast, if you can model out their decisions, it’s reasonable to expect to capture a very large fraction of each segment (say 80% or more). And it gives the team focus and clarity–two critical elements in any startup. You may still not have a great idea of the overall market size, but at least you have real clarity on how to address one or more groups.

      Finally, I’ve found that breaking down the customers’ decisions proves enormously helpful in sizing up the market, every time. That’s a hard thing to explain in the abstract, but is very easy to demonstrate when we start talking about a specific product for real markets.

      • Thanks for the response Rick!

        I agree with your response, but I feel the two concepts are not mutually exclusive, but complementary. I feel like one step is after another.

        As entrepreneurs, we’ve learned to create an addressable market, as well as a niche market strategy. The addressable market is basically “if every customer who could pay for your product pays for your product, how much money you would make?” Unlike saying “The fashion industry is $X00 Billion, so if our fashion designer tool gets 1% of the market, we have $X Billion in revenue!”, the addressable market is “There are a million fashion designers out there, so if we capture all of them and everyone pays us at $100/mo, our addressable market is $100M.” All in all, from my understanding, the addressable market is merely to measure the “potential” of a startup.

        I feel like the niche marketing strategy comes after knowing the addressable market, and does not replace it. In this we learn to come up with a persona: “Mary is a soccer mom on the east coast. She tries to save money by clipping coupons, and she feels lonely so likes to connect with other people online via blogging and social networks…there are 300,000 people like Mary out there.” and then at that point, create a marketing campaign (and possibly fit your product) specifically for the Mary’s of the world, in plans to expand to the Lucy’s and Michelle’s too once the Mary’s are mostly captured (sounds like a kidnapper haha).

        What I do feel like is a very flawed concept is if anyone says, “We plan to capture 5% of the market.” Why put that limitation on yourself? As long as you know how big the market is, and what is your niche market strategy, just go at it with all your strength. Then you will see how much of the market you can capture, instead of pretending you actually know. That’s like taking a test and say, “I project to get a B- on this class” when you should just really strive for an A+. But again, for an investor, it’s useful to have an internal understanding of, “OK…they say their market is $1B. Now, it looks like they’re very smart, so with okay execution they should be able to get $20M of that based on the numbers they show me, which is 2% of the market…probably not interesting enough to be acquired by a big player. But according to their projections, if they execute brilliantly, they could get $200M out of that market, which is 20%, and I think for sure will a good acquisition or IPO target.”

        After much mumbling, all in all:

        1. Addressable market (without sectors): quick and useful for a startup and investors
        2. Niche Market Strategy: extremely useful for the startup in terms of execution (this is where I agree with your points, but with different terminology and maybe context)
        3. % of the market capture: less useful for the entrepreneur but probably useful for the investor

        • As an investor, I definitely want to know what the overall market size is, and how much potential the company has. The challenge is that, in my experience, those numbers are often pulled out of the air with no real basis. To use your analogy: they say they will get an A- (they’d never say B-) because someone else once did. But there’s no evidence they actually studied for the test.

          By contrast, when someone demonstrates a deeper understanding of the market participants, it gives me confidence that they actually will know how to execute and capture whatever market is available to them. In other words, I can see that they’ve studied.

          As an entrepreneur, I find the market size (or addressable market size) to be less useful than really understanding the various segments. You do both, but the first is a sanity check, while the second actually informs your strategy and execution.

        • I agree with that 🙂

          Again, thanks for sharing the very insightful article!

  2. Hello Rick,

    First, I don’t think this is BS at all. In fact, I think this is a much more intelligent way to think about market segmentation than mere demographics, which I’ve long felt is a superficial, if not potentially erroneously prejudicial, way of looking at a market. It seems to me that most of the dimensions that comprise demographic considerations are adventitious (e.g., gender, ethnicity, disability), contingent on other conditions (e.g., age depends on living one year more) or even decisions previously made (e.g., home ownership may depend on job choices, school quality), or even just incidental. Of course, even these can be coordinated by different interactions of chance and choice. Demographic market segmenting (if it stops there, especially) seems to represent a kind of laziness and disregard for what humans really are: self directed agents who have personal concerns based on preferences and goals versus simple organisms that merely respond to environmental conditions. As you point out, it leaves out an awareness of motivation, functionally assuming that people behave on the basis of easily observable characteristics. At best, we call this superstitious, and at worst we call it bigotry.

    Going even further, demographic segmentation also seems to represent a kind of egocentrism; that is, an inability to understand another person’s perspective as different from one’s own. We expect children to behave this way. The approach you describe, then, requires an level understanding that requires an intentional level of intimacy that is associated with mature, broadminded relationships. Thinking in this manner obviously provides a richer, more compelling communication effort to a target customer.

    Second, I must have been channeling you the other day as I was having a similar discussion with someone about this very issue. The difference is that I was suggesting that the person think about their market in terms of the goals and objectives their customers had in mind – their preferences. I think I was almost there.

    Third, I have to think that considering why people buy, with their decision focus or “jobs to be done” focus, it should be easier to generate market share estimates that are more rational. I’m not saying that it will be easy, just that generating a rational estimate would be easier. The reason I think this is that with a decision focus, you can estimate/model the net benefit associated with making a certain decision in a new way on the basis of the decision criteria. Demographic segmentation doesn’t reveal those decision criteria in an explicit way.