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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.