market-segmentation

What Is Market Segmentation And Why It Matters

Market segmentation is the process of dividing the market into sub-groups. Market segmentation can be based on characteristics such as age, behaviors, income levels, and more. This process helps to understand what your key customers want, where they are, and how to talk to them effectively.

Contents

Everything you need to know about market segmentation

As Peter Drucker pointed out in his book Drucker Management, “there will be always, one can assume, be a need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself.

In this guide, we’ll see how market segmentation is aiming at just that, allow marketers to know customers’ need and pain points so well as a sales enablement device and tactic.

What is market segmentation?

Market segmentation is a marketing practice that allows companies to divide their customers into groups, thus classify them based on specific characteristics.

Market segmentation isn’t new. In fact, it has been used since the 1920s when mass manufacturers needed to offer a more comprehensive product line that could fit broader groups of people.

Market segmentation at the time (up to the 1980s) was mainly based on demographic, socio-economic, and lifestyle factors. 

In fact, those were the main characteristics that could be figured out about a group of people that companies were targeting. 

As more and new data became available market segmentations took into account also so-called psychographic segments, organized according to activities, interest, and opinion. 

From the 1980s going forward, there was a shift in market segmentation that allowed companies to narrow the segments they were targeting to include more sophisticated features of those groups.

The ear os the so-called hyper-segmentation begun and in a way, we are still living it today. With new kinds of market segments that allow one-to-one and personalized experiences, thanks to the ease of data acquisition through digital devices.

google-ngram-viewer-market-segmentation

Graph from Google Ngram Viewer shows the mention of the term “market segmentation” in millions of books throughout the 1900s to 2000s

What are the bases of market segmentation?

It is important to point out that proper market segmentation is about starting with the customer in mind.

In short, the reason for segmenting a market is based on differentiating the otherwise undifferentiated offer to fit the customer needs based on their preferences.

Thus, market segmentation is justified when it provides customers with better products or services. 

Market segmentation is also critical to understand the distribution channels needed to grow your business.

In fact, with tools like the business model canvas or the lean startup canvas, one of the main aspects is understanding customers based on their needs and pain points are and what kind of unique value proposition you can bring with your product and service.

Therefore, there isn’t a fixed number of segments that can be created. In fact, there can be many examples of market segments based on the following characteristics:

Bases-of-Market-Segmentation

Those include market segments based on gender, age group, income, place, occupation, usage, lifestyle and more.

For the sake of keeping things simple, we’ll discuss the four main types of market segments. At the same time, we’ll also look at why, when, and how to create a market segment.

Why, when and how to create a market segment

For an ideal market segment, there are different criteria to take into account. In fact, the more you can divide up the market into small groups of people the more the marketing effort it will be easy to plan and execute.

It doesn’t always make sense to create segments unless you have available data about those segments.

In fact, as more data becomes available (think of the billions of queries that each day goes through Google or the social knowledge graph Facebook has at its disposal) so new segments become possible.

Therefore, segments must be measurable. At the same time market segmentation makes sense when it can generate enough profit from your marketing effort.

Imagine the case in which market segments might be comprised of a small group of people with low spending availability. Your marketing effort would be wasted.

Also, you need to make sure to target a group of people with characteristics that will last in time.

For instance, imagine the case in which you set up a market segment, and a marketing campaign based on that.

When the campaign is about to get rolled out. If that segment doesn’t exist anymore. It becomes a wasted marketing effort.

At the same time, that market segment needs to be reachable through several channels. Think of customers that can be reached through your website, social media accounts, events, and so forth.

Also, would you be able to persuade that market segment? If that is too hard or not possible, the market segment itself loses relevance.

The last element which is critical is about having enough data to support the creation of that market segment.

Those are the requirements for market segmentation. Let’s see them more in detail.

Requirements for market segmentation market-segmentation-factors-diagram

Measurable and identifiable

Can we measure those segments so that they can be identified?

Accessible

Can we reach those segments through communication and distribution?

Different

Do those segments respond differently to different marketing mixes? In short, do they have unique needs?

Substantial

Is this segment large enough to be profitable, thus justify the marketing effort required?

Durable

Are those identified segments stable enough to allow proper marketing campaigns?

The aim is to provide a better product, service or experience to customers. Which will, in turn, lead to an improved marketing effort rewarded by more sales.

Types of market segmentation

 
customer-segmentation
Customer segmentation is a marketing method that divides the customers in sub-groups, that share similar characteristics. Thus, product, marketing and engineering teams can center the strategy from go-to-market to product development and communication around each sub-group. Customer segments can be broken down is several ways, such as demographics, geography, psychographics and more.

We can identify five main categories and types of market segments:

  • Demographic: sex, age, race, generation, occupation, etc.
  • Geographic: geographic regions such as a county, state, city, neighborhood.
  • Behavioral: knowledge of, attitude towards, usage rate, response.
  • Psychographic: activities, interests, and opinions (AIOs) of customers.

Types-of-Market-Segmentation

What is demographic segmentation?

Demographic segmentation is about classifying people based on characteristics such as age, gender, relationship status, education, workplace, and more.

This is among the most common market segmentation techniques. In fact, it was also the first market segmentation used which comprises factors like age, life cycle stage, gender, income, religion, race, nationality and more.

A demographic segmentation might be useful to companies also to create several product lines.

What is geographic segmentation?

This market segmentation is based on reaching people in areas that are closer to the final customer.

For instance, take McDonald’s, the chain has restaurants all over the world, yet the strategy will be localized, as much as possible:

macdonalds-geographic-segmentation

In this picture, you can see how McDonald’s uses a famous Italian-American chef as a testimonial for a selected menu. In a country like Italy where high-end food is critical, McDonald’s associated its brand image with quality food. 

 

What is behavioral segmentation?

This market segmentation strategy is base on customers based on benefits sought, occasion, usage rate, brand loyalty, user status, buyer readiness status.

In short, it looks at purchasing behaviors, device usage, and other activities.

What is psychographic segmentation?

Psychographics started as an attempt to go beyond demographics. As computational power grew more data became available, this gave a chance for marketers to better segment potential customers.

As recounted on archive.ama.org when Emanuel H. Demby, one of the founding fathers of psychographics when he was asked “What do you call what you’re attempting to do?” he said “Psychographics!” which was meant as a combination of psychology and demographics.

birth-of-psychographics

Sourcearchive.ama.org

Another founding father of psychographics was Paul Lazerfeld and his associates during the 1950s at Columbia University’s Bureau of Applied Statistics.

As pointed out by Emanuel H. Demby, Paul Lazerfeld taught that any market research that wanted to understand consumer behavior had to “involve an interplay among three sets of variables; predisposition, influences, and product attributes.

Therefore, psychographics is an attempt to move away from just demographics and give meaning to numbers by focusing more on individuals with feelings and tendencies.

Give meaning to numbers is the primary aim of a marketer. Imagine those two scenarios, Mr. X earns $40K per year. With the other situation, Mr. X earns $40K, after getting a 10% rise compared to the previous three years’ salary. 

Without going too far we can put ourselves in the shoes of Mr. X, how accomplished he feels, and the purchasing tendencies he might have after such a raise.

Maybe he wants to buy a new car or a new TV set. Keep in mind that marketers’ focus is to increase sales. And there is no better salesperson who has insights and personalized information about her target customer.

While in the past it was tough to get valuable psychographic data, that isn’t the case anymore.

For instance, at the time of this writing, tools like Google Ads and Facebook Ads allow marketers to go quite in-depth with psychographics definition of their audience:

google-adwords-in-market-audiences

Source: searchengineland.com

Above an example of how Google Ads enables marketers to target specific interests and psychographic traits of a group of people. This allows a segmentation that can be laser targeted.

The four-level of market segmentation

As Philip Kotler suggests in “from mass marketing to mass customization” to reiterate, the four steps of market segmentation which are: probing, partitioning, prioritizing, and positioning. This is an ongoing feedback loop.

He also divides the market segmentation into four levels:

  • Mass market.
  • Segmented markets.
  • micro-markets (distinct from segmented markets).
  • And individual markets.

Mass marketing and the shotgun approach

As Philip Kotler recounted in “from mass marketing to mass customization” it all started in Japan where he noticed market researchers going to one household as a sample for a product launch.

Philip Kotler noted, “how can you generalize from the sample of one?” and as the story goes, the Japanese market researches replied “We Japanese are homogeneous. We’re all alike. If this family likes the product, everyone will like the product.

This kind of “market segmentation” can be referred to as a shotgun approach.

In short, just like a shotgun is used to aim at moving targets in the air, so the shotgun approach tries to reach a wider audience, with no specific focus. 

In short, mass marketing runs along with mass production, mass distribution, and mass promotion. In this scenario, Mass media has played a crucial role.

This kind of approach favors such large audiences that can be reached with mass marketing media, like radio and television.

While this kind of approach might have had a sense in the 1980s, it has become obsolete now. Large corporations, like Coca-Cola, still spend a significant amount of money as a branding effort to feature TV spot shown to millions of people.

For large corporations that want to keep a strong brand and be on “top-of-mind” for their consumers, this strategy is still robust. For small businesses or startups using a similar approach might lead to bankruptcy.

That is also why the startup has made of the scientific method and measurable results more and more their credo, with disciplines like growth marketing and growth hacking.

Segmented markets

When a market gets segmented based on several characteristics (like demographics: sex, geographic, behavioral, and psychographic), this is where marketing and communication campaigns can be customized to the need of the still large group of people, yet in a way, those are differentiated.

Thus, we move from an undifferentiated approach of mass marketing to a differentiated approach to segmentation.

Niche marketing and micromarketing

To give you a visual representation of niche marketing, think of it as being a big fish in a small pond.

Niche marketing is about becoming an authority for a small community of people of which you know their main characteristics.

As Peter Thiel, co-founder of PayPal, pointed out successful companies target at monopolizing markets instead of going where competition is.

In his book Zero to One, there are four steps to take to dominate a market:

  • Start small to monopolize
  • Scale-up
  • Stop with the BS of disruption
  • Be like a chess player, think about the endgame

While niches are mainly based on interests, when we move toward micromarketing this might become more localized. Therefore, where niche marketing focuses more on behaviors, benefits, features, lifestyles, and so on.

Micromarketing focuses on small localized groups. The niche and micro-marketing approach are more suited for a small business or startup as it allows them to have a way higher and measurable ROI on their marketing effort.

Also, in small segments, it might be easier to create a feedback loop that allows small business to learn and grow faster!

One-to-one marketing

One-to-one marketing is the approach that starts with creating personalized interactions with potential customers and personal relationships with customers.

In an article dated 1999, HBR asked “Is Your Company Ready for One-to-One Marketing?” defined as “being willing and able to change your behavior toward an individual customer based on what the customer tells you and what else you know about that customer.

The main aim of one-to-one marketing is to establish a “learning relationship” with your potential customers and customers.

In short, for any interaction, there will be a learning experience, a better understanding of that customer’s needs.

Most companies opted for the mass marketing approach. It consisted of reaching the highest number possible of people with a message that needed to be simplified.

One-To-One marketing starts from the opposite assumption, and it is based on two types of one-to-one marketing:

Personalized: Think of Amazon personalized experience:

brought-together-amazon

Customized:  Think of Converse where they give you a basic shoe, and you can customize it with your own creativity:

customize-conver-shoe

In the era of large tech companies like Netflix, Amazon, and Spotify which have built their success on subscription business models (Amazon Prime is still a small part of Amazon revenue, but it is very promising) the one-to-one marketing has become the norm.

In fact, the reason why many people stick with those services is due to the degree of personalization.

Netflix algorithm knows your TV series preferences better than your best friends, while Spotify knows the kind of music you like better than yourself.

This is possible thanks to algorithms based on behavioral patterns create predictive models based on customer data.

As data becomes critical for one-to-one marketing, the essential asset for those companies become the so-called User ID, which contains the whole history and interactions of customers with those personalized platforms.

The most powerful online tools for the marketer

In this section, I want to show you some practical tools today marketers have at their disposal to segment customers, users, and grow a business with the power of data.

Google Analytics: from behavioral to psychographics advertising

As defined on neilpatel.com:

Behavioral advertising is a technique used by online advertisers to present targeted ads to consumers by collecting information about their browsing behavior.

What kind of data does behavioral advertising aim at? Once again Neil Patel helps to define the sort of data it targets:

  • The pages browsed on a website
  • The time spent on the site
  • The clicks made
  • The recency of the visit
  • The overall interaction with the site

google-analytics-market-segmentation

With Google Analytics you can quickly get any data that goes from demographics to psychographics:

psychographics-data

As a user navigates between web pages, Google Analytics uses cookies to store and remember valuable pieces of information. 

In short, Google creates a so-called Client ID used to identify users and their activities on the site (anonymously). 

Retargeting and the art of repeating the message 

Retargeting starts from the assumption that message repetition brings to conversion.

In fact, traditional sales funnel (an imagined path a person goes through before becoming a customer) looks something like this:

pirate-metrics

This path seems linear. However, in the real world the path a user takes before it becomes a customer is very unpredictable.

Retargeting might help in making the path of a user more predictable by repeating the message.

For instance, have you noticed that after you visit an e-commerce store, when you land on an unrelated website through Google, you find that same store as a banner ad? That is retargeting in action.

Google’s in-market audiences

With Google in-market audiences you can target a wide number of variables:

  • Apparel and Accessories
  • Autos & Vehicles
  • Baby & Children’s Products
  • Beauty Products & Services*
  • Business Services*
  • Computers & Peripherals
  • Consumer Electronics
  • Consumer Software
  • Dating Services*
  • Education
  • Employment
  • Financial Services
  • Gifts & Occasions
  • Home & Garden
  • Real Estate
  • Sports & Fitness*
  • Telecom
  • Travel

Google knows a lot about you based on the data it collects. For instance, if you go to adssettings.google.com/u/0/authenticated you can see how Google has profiled you just like it profiled me:

How your ads are personalised

What about Facebook?

Facebook audience insights

For years users have been giving Facebook a growing amount of critical data about themselves.

Facebook has built a business on that data. In fact, marketers can select their audience with a laser target:

facebook-audiences

Source: facebook.com
What does Facebook know about you?
You can check how Facebook profiled and segmented you here: facebook.com/ads/preferences, to see the information that best describes you (according to the Facebook algorithm), click your Information > your Categories:
facebook-advertising-preferences

As specified in the ad preferences “the categories in this section help advertisers reach people who are most likely to be interested in their products, services, and causes. We’ve added you to these categories based on the information you’ve provided on Facebook and other activity.

Even though I seldom use Facebook the algorithm knows quite a few things about me and those are passed on to marketers that use Facebook Ads.

In fact, those marketers get access to Facebook audience insights:

facebook-audience-insights

Sourcefacebook.com

With this suite, marketers can gain insights into demographics, page likes (thus interests), location and language, Facebook usage, purchase activity and more. 

With this kind of tool, you can build smaller and smaller segments but also more qualified.  

market-segmentation-facebook

Sourceblog.hubspot.com

It is important to notice that targeting a narrow audience will make the marketing campaign way more expensive yet that same campaign will get better results in terms of ROI.

B2B market segmentation

When segmenting an audience it is very important to understand whether we’re trying to communicate to a consumer, or whether we’re trying to talk to a professional within an organization.

While they are both individuals, and as such, we can use the same psychological levers. On the other hand, they have different motivations. When trying to reach an audience made of professionals within companies, as your key customer.

This kind of segmentation is called B2B and it requires the message to be framed in a slightly different way. That’s because a B2B audience will have different motivations compared to a consumer.

Thus, a B2B product marketing strategy has to be able to capture the attention, motivation, and interests of such groups. For that matter, two platforms can help in segmenting this kind of audience: Quora and LinkedIn.

Segmenting your B2B audience with Quora

The interesting part of Quora is that you can pick up three ways of targeting:

  • Behavioral targeting.
  • Contextual targeting.
  • And custom audiences and list match.

Within the contextual targeting, it is possible to select your audience purely based on the context of a user by targeting boards, topics, questions, and keywords. You can sharpen your target at the point of also picking up the questions you want your content to be featured.

This can be a powerful strategy to kick off your B2B offering.

Segmenting your B2B audience with LinkedIn

While in general, a LinkedIn ads campaign has a very high CPC compared to other platforms. The LinkedIn Campaign Manager can be used to identify how many people there are in a certain B2B target, based on their interests, position, company, geography, and more.

This is a great exercise to kick off your marketing strategy.

Where to start? Segmentation, Targeting, And Positioning Framework

If you follow me along this journey you will be able to define your market, where to start to look for your customers, how to structure your organization so that you can reach those key customers as quickly as possible. And what kind of marketing and distribution activities you need.

Let’s divide our framework to attack the market in a few key steps which will vary according to the market types.

And the kind of customer we want to target (as we’ll see in some cases a customer might not exist yet in certain marketing conditions).

It is important to ask five questions:

Where am I?

Assessing the context and market type where your product or service is about to be launched is critical to avoid deadly pitfalls, which might make your company run out of cash and go bust. Understanding the market type is also critical to draft the structure and design of an effective organization.

Depending on the market type you will also be able to move to the next question and find your key customers. And as you go along this journey you will understand how to build your organization. How long it will take to acquire each customer. How much it will cost to acquire them. Thus, what marketing activities you need to prioritize. Understanding the market.

Who is my key customer? 

Understanding who’s going to pay the bill for your product and service is a key element to allocate the resources within the organization. Thus, at this stage, we want to have a good understanding of our key customer (defining your key customer is an iterative process that might take some time).

Depending on the kind of business model you will be running you might want to understand now only who is the key paying customer, but also what’s, for instance, the key user if you’re running a platform business model) which makes the platform valuable. When you do align with your key customer that is when your business is ready to take off.

Why my product matters to my key customer? 

Defining the problem, building a valuable product that your key customer might want, need and desire is another critical element. At this stage it’s not just about what customers or potential customers want, it’s also about how to offer an experience which is 10x better than existing alternatives.

What content is my customer consuming and where? 

As we understand the territory. We know who’s the key customer and what product matters to them we can start looking at the distribution and marketing channels we can tap into to reach them.

How do I reach my key customer, quickly?

After finding the channels where the key customer is hanging out. It’s time to prioritize on the primary channel that can make you reach her, quickly. It’s important to find that key channel as you might find out things about your key customer you didn’t know before. Thus, you might need to iterate and refine the process.

Then it’s all about rinse and repeat until you gain traction for your business.

Market types: Understand the territory

market-types

It’s not easy to classify complex things. Thus, in this guide, I’ll use a framework used by Steve Blank to highlight four main types of markets:

Existing markets

existing-market

Usually well-defined with existing customers and well-known competitors. This is straightforward, and in this kind of market, there isn’t necessarily a dominant player or monopoly.

In this sort of scenario, you might be able to start a business successfully by niching down substantially, to identify the smallest audience for which you can build a valuable product and service. 

Re-segmented markets

resegmented market

When a market, for instance, is taken over by one or a few companies (monopoly or duopoly), re-segmentation is the way to go. Thus you enter by addressing a need that other dominating businesses can’t tackle. In this way, you can distinguish your brand (think of the case in which you target a specific niche of that existing market).

We discussed several times how DuckDuckGo entered the search engine market quite late, and when Google was already a monopoly by targeting a specific niche, users’ who cared about privacy.

Clone markets

clone-market

This is about copying existing business models to transpose them either in other markets (think of how Baidu built its fortune in China due to the impossibility for Google to take off). Or taking a successful business model in a market and transpose it into an adjacent one. Think of the “uberization” of several industries.

New markets

new-market

In this scenario, your solution is such a novelty that is very hard to identify a potential customer or competitor.

This is not perfect, and it might have a few drawbacks (for instance, you might be both operating in a clone market, which is also a new market within a Geographic area).

One reason we want to do this exercise is to identify what might be the most effective “attack strategy.”

Attack strategy for each market type

One reason we want to understand the territory is to assess what’s our most effective way to enter a market. Also here, I want to highlight that is not a given fact. Markets are often ambiguous and one of the most difficult parts is understanding the territory.

However, if we’re launching a business we want to keep things simple and be able to execute at a high tempo. Defining an attack strategy might give you the level of deliberation to move fast.

Each market type will have its own demand

innovation-strategy

Depending on the market type, demand for each market might shift from very well defined to not defined at all.

In short, imagine the case of the launch of a product in a new market. Where customers don’t have an idea they can solve a problem by using your product and service. And you might not be yet at the stage where your product is at least 10x better than existing alternatives.

That means you won’t create enough incentives for your potential customers to switch to your solution. Existing and established brands are on top of the mind for the existing customer base.

And a market shift is required before you can successfully help your potential customers solve a key problem 10x better than what’s out there.

In that case, it doesn’t matter how much you will push, and whether you will be able to successfully distribute your product. That might not work!

Organizational design

marketing-vs-sales

Another reason for understanding the market type is to understand what kind of organization to build. Do you need more engineers, marketing people, salespeople and how do you strike a balance between those?

As we’ll see each market type might require a different organizational structure.

Time to market: avoid to run out of cash

Another reason not to underestimate the importance of market types is about avoiding to run out of cash in the short term, thus making your business go bust. Not because the idea wasn’t sounding, and there will be no market for your product in the next future, but because you went all-in with the wrong type of organizational structure.

Business model design: in search of a business model

design-thinking
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.

Another aspect that makes market types extremely important is about finding a business model that fits the market. In a new market, you’ll barely be able to find patterns you can borrow from to make your business model viable, soon.

Instead, a lot of experimentation will be required before traction will be found. On the contrary, in an existing, well-defined market you won’t need to create a whole new business model.

Instead, copying the existing ones and improving by 2x the product and service compared to existing alternatives might work.

In a re-segmented market instead, you might want to find a whole new business model, together with a 10x product. Because if you were trying to build a business based on what the few companies controlling the market are doing, you might be doomed to failure.

Existing market: niche positioning

minimum-viable-audience
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.

Ideally, on an existing market, which has already proved commercially viable, and where many players exist, also customers are well defined and demand is well defined.

In this context the environment might look as it follows:

  • Established customer base with clear desires, needs, and problems.
  • Established brands that equally control the market.
  • Commoditized products and services skewed toward building good products for average customers, ignoring the need for specific niches.

In that context, you want to make sure to tap into niches that cannot satisfy their needs through existing alternatives by:

  • Copying existing business models but improving on them
  • Improving at least 2x compared to existing alternatives
  • Make sure to identify your key customers sub-segments

Indeed, a common mistake in this kind of market is the illusion of a large, available customer base, which makes it seem easy to reach it.

In reality, a lack of clear value proposition of a niche within that existing customer base might result in a massive failure.

Adding the most value to those niches means offering solutions that enable those key niche customers to gain a higher level of satisfaction compared to what they get from existing solutions.

In this case, your product doesn’t have to be a 10x, a 2-3x might do. That’s because those niches are craving so much for a product that moves away from the average that something that offers a 2x improvement will be welcomed with great enthusiasm.

Improving on existing business models might also work out a formula to reach that niche. As those existing customers are already used to that business model, thus reducing the friction for them to adopt your solution.

Remember, they are craving so much about your offering that you won’t need to be necessarily a disruptor.

One of the most effective ways to reach those customers can range from direct sales to more generic marketing activities.

Re-segmented market: microniche positioning

microniche
A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.

In a re-segmented market existing giants dominating it are able to add a lot of value for most customers. This kind of market might look something like that:

  • Large customer base with clear desires, needs, and problems mostly served by a few key players.
  • A few brands controlling the whole market.
  • Products and services able to satisfy a large part of customers’ needs.

Thus, in that scenario, it will become critical to go a level down, drill-down the market to find a microniche. Which space might – initially – be so small that it will not be interesting to large players dominating the market.

The microniche will serve as a perfect stage for experimenting with your business model as you might need to innovate quite substantially to make your service loved.

And as your business model will run on a different premise than the existing players controlling the market.

I’d call this strategy (in the short-term) “low-key” where you add value to a very small number of people, but as you conquer that microniche, you create options to scale further. And as you take wider pieces of the pie, existing giants might awaken too late.

Or they might be not aligned to act.

That is how you might be able to carve your space.

Clone market: go wide with allocated capital to scale

In a clone market, you’re leveraging on the fact that the idea has already proved commercially viable, by companies that spent millions or billions (depending on the industry) to prove it.

Investors might be interested in your idea, as they know a market opportunity exists, and your business plan will appear extremely sound.

Think of the case of the Chinese Uber (Didi Chuxing), which leveraged on the business model built by Uber and launched it in China.

Or think of how Baidu launched a search engine in China, where Google could not enter. Or how Alibaba launched the most successful e-commerce in China where Amazon could not locally enter.

If you want to enter a clone market, you can easily tap into venture capital and scale quickly. Indeed, in the example, above we saw existing players that could not enter locally a market like China.

In the case in which the company dominating a market, will enter it in the future, speed for the new entrant is critical to make a business model gain enough traction to compete with the established player once it will enter the cloned market!

New market: start small but go after the whole market

A new market might look something like that:

  • Nonexistent demand, hard to define a problem and hard to identify the customer base.
  • There is an unexplored territory with high potential but extremely risky.
  • It’s hard to understand what kind of needs the product and service might offer.

This means it might take years for you before you see the first paying customers. In that scenario, you better search for other ways to finance the new market opportunities by tapping into existing revenue streams.

Or you might want to look for investors ready to accept the challenge of a risky but huge opportunity.

You will need to start very small in terms of customer base, yet you know that in the long run, the whole market is up for grab.

In short, as you need to prove the commercial viability of the market, you will also need to define a use case that you can prove it’s working commercially.

In that scenario, often a new market starts by providing value to large enterprise customers and slowly moving to a wider customer base on the lower end of the market. However, initially to gram the most of the potential customer base a very experienced salesforce might be needed.

As you might be able to count on the fingers of your hand the existing available customers, you might need to use a high-touch approach, with experienced salespeople able to understand complex and conflicting needs of the customer base.

And if you do succeed in proving the commercial viability of the new market, you better make sure to capture a good chunk of the market demand, to create a lasting advantage.

Otherwise, the risk is to create a space, just to see it grabbed by other players, faster, more focused on new customer needs and execution.

Who is your key customer?

As we saw in the previous chapter, based on the different market types you will see a wide customer base to a very narrow.

Another key principle to understand is that your key customer might not be the one paying. And you can appreciate that distinction by looking at two primary types of business models.

In the book Modern Monopolies, two primary types of business models are broken down in linear and platform business models. There are many classification systems we can use for business models.

For the sake of this guide, I want to focus on this key distinction to understand why your key customer is not all you get.

Linear business model

linear-vs-platform-business-models
Linear business models create value by selling products down the supply chain. Platform business models create value by enabling exchanges among consumers.

In a linear business model, the way the product is distributed is usually linear. Think of a more traditional business where you move the product down the supply chain to reach your customers.

In that scenario, your key customer is that which might be paying the bill. You have other key partners that make the business successful (suppliers, distributors and so on). But your key customer is well defined.

In a platform business model, things might get more complex.

Platform business model

platform-company
A platform company generates value by enabling interactions, transactions or relationships. A platform company leverages network effects (direct/same side or indirect). Platform companies are also known as platform business models, given their intrinsic way to create value for users.

In a platform business model, it won’t be unusual to have non paying customers as the most valuable asset for the company. If you think about attention-based business models, like Google and Facebook.

Free users are indeed what makes those companies valuable. Thus, even though the paying customers are the marketers and businesses paying for advertising on the platform. There is another currency, the attention of users, which is the juice of the business.

That is why the number of paying customers will highly depend on the number and quality of non-paying users on the platform,

In other non-attention based models things change slightly. For instance, in a freemium model, where only a fraction of the users become paying customers. Those free users are critical to amplify the brand thus make the company known to potential customers.

Sales, marketing and engineering

Understanding the market types and the kind of business model you have might help in structuring your organization.

For instance, in a linear business operating in a new market, you will need an experienced salesforce to tackle those few key customers available. You will also need massive engineering capability to customize the enterprise product as much as possible for those few key customers.

In an existing market, you will need to be able to communicate your story and value proposition in a way that differentiates your product. Thus, a great marketing team might be the key to success.

In a re-segmented market, you need to balance sales, marketing, and engineering to find those marketing channels that are cheap enough for you to reach your key customers. As you’re competing with giants with millions, if not billions of budget, you need to be smart in the way you distribute your product.

Why my products matter? Defining the problem, and whether you need a 2x, 5x or 10x and more

In defining the problem for your customer base, the kind of market will influence also how much you need to improve on existing alternatives.

In an existing market with a high degree of commoditization, a 2x better way to solve a problem might help you build a successful business.

In a re-segemented market, you might need a 10x to minimize the risk of your potential key customers to switch from established brands.

In a cloned market, providing the same value as an existing solution might work out for key potential customers expecting that service to come to that market.

In a new market instead, you need to create the need itself. Think of when smartphones didn’t exist, just to become attached to people’s bodies. In that context manufacturing the desire and need might require high distribution capacity.

What content is my key customer consuming and where?

Finding the key customer based on the right frame of mind is critical.

While you can reach the same person across several marketing channels, the channel you pick might actually change the frame of the message, thus diluting or amplifying the effectiveness of your distribution strategy.

Context matters and people behave accordingly. For instance, a platform like Facebook might incentive people to act differently compared to a platform like LinkedIn.

In this scenario, you need to find those ones or two key channels that give traction to your brand. While in the long run, it might make sense to reach your customers across several channels.

If you didn’t master at least one or two of them don’t bother going multichannel.

How do I reach my key customer, quickly? Marketing prioritization and high-tempo testing 

growth-marketing
Growth marketing is a process of rapid experimentation, which in a way has to be “scientific” by keeping in mind that it is used by startups to grow, quickly. Thus, the “scientific” here is not meant in the academic sense. Growth marketing is expected to unlock growth, quickly and with an often limited budget.

Unless you need to build a business based on a specialized salesforce. In all the other cases you will need a way to amplify your brand through several marketing channels.

I’ve discussed several frameworks for that.

For instance, you can use a process like growth hacking, or a framework like a bullseye framework.

bullseye-framework
The bullseye framework is a simple method that enables you to prioritize over the marketing channels that will make your company gain traction.

In this scenario is extremely important to experiment quickly!

Digital distribution channels to analyze and reach your preferred audience 

digital-marketing-channels
A digital channel is a marketing channel, part of a distribution strategy, helping an organization to reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.
 

Digital distribution channels become extremely important to the whole concept of market segmentation. Indeed, once identified the right target, it will be possible to reach it through the digital channels that have the highest potential.

One way to allocate the effort per channel is by looking at the matrix below:

distribution-strategy
Distribution is one of the key elements to build a viable business model. Indeed, Distribution enables a product to be available to a potential customer base; it can be direct or indirect, and it can leverage on several channels for growth. Finding the right distribution mix also means balancing between owned and non-owned channels.

Once identified the target, and allocated it according to the efforts worth undertaking the remaining part is about business experimentation to gain traction. 

business-experimentation
Business experiments help entrepreneurs test their hypotheses. Rather than define the problem by making too many hypotheses, a digital entrepreneur can formulate a few assumptions, design experiments, and check them against the actions of potential customers. Once measured, the impact, the entrepreneur, will be closer to define the problem.

There are several ways to gain traction, we can distinguish across three main engines for growth: 

engines-of-growth
In the Lean Startup, Eric Ries defined the engine of growth as “the mechanism that startups use to achieve sustainable growth.” He described sustainable growth as following a simple rule, “new customers come from the actions of past customers.” The three engines of growth are the sticky engine, the viral engine, and the paid engine. Each of those can be measured and tracked by a few key metrics.

An engine of growth will be more or less interesting depending on the stage of the company. While in the framework above, you see three core engines:

  • Paid: built through paid marketing and advertising. 
  • Viral: enabled with viral campaigns (like social, or word of mouth).
  • And Sticky: built-into the product features.

Another level of differentiation is between organic and paid. 

Organic growth is achieved when channels that aren’t directly paid for are used. For instance, SEO is an organic channel because it leverages on the creations of assets (content, tools, websites) that attract a natural demand on the web (through keywords’ rankings). 

So how to allocate each of those? 

Go-to-market stage

go-to-market-strategy
A go-to-market strategy represents how companies market their new products to reach target customers in a scalable and repeatable way. It starts with how new products/services get developed to how these organizations target potential customers (via sales and marketing models) to enable their value proposition to be delivered to create a competitive advantage.

In the go-to-market stage, the key goal is to reach a good chunk of our desired audience. At the same time, for a company that is launching a new product, there is also a degree of product validation that needs to be achieved.

That means, before you open the product to everyone, you will follow an MVP approach.

minimum-viable-product
As pointed out by Eric Ries, a minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort through a cycle of build, measure, learn; that is the foundation of the lean startup methodology.

I propose also a leaner approach to MVP:

leaner-mvp
A leaner MVP is the evolution of the MPV approach. Where the market risk is validated before anything else.

Therefore, as an example, if your identified audience is made of a thousand people, you will start by reaching out directly to the first ten people, to demo them the product and see they want to buy it.

At this stage, a very targeted approach will work in terms of distribution (how to reach your potential customers).

Once you validated a subset of the market, it’s time to plan for growth!

technology-adoption-curve
In his book, Crossing the Chasm, Geoffrey A. Moore shows a model that dissects and represents the stages of adoption of high-tech products. The model goes through five stages based on the psychographic features of customers at each stage: innovators, early adopters, early majority, late majority, and laggard.

Growth stage

marketing-vs-sales
The more you move from consumers to enterprise clients, the more you’ll need a sales force able to manage complex sales. As a rule of thumb, a more expensive product, in B2B or Enterprise, will require an organizational structure around sales. An inexpensive product to be offered to consumers will leverage on marketing.

In a growth stage, if your product has been validated, you need to gain initial traction. For that, the way you tackle market growth will highly depend on the customer type. 

As we’ve seen above, in a new market, or an existing market, a product that can be sold at enterprise level, will use a direct sales approach, where a commercial team is built to be able to acquire complex organisations as clients. 

Instead, with a scalable product, easily accessible, and with a convenient pricing model, you will use marketing tactics to grow. In this scenario, a mixture of paid and organic will work out well. 

Scale up stage

communication-strategies
An effective communication strategy starts with a clear brand identity, by defining clear boundaries and compromises your brand will not take in the marketplace. Based on that, understanding, whether context, formats, and scale are in line with your business message to prevent a loss of identity.

In a scale up stage, where the company goes through exponential steps, the whole marketing and distribution strategy might change. What worked in the previous stage, it might not work in the next. 

And while the current marketing and sales channels set up will work as a foundation. To reach the next level a whole new system will need to be built. For instance, Google went from a million to a billion-dollar company by leveraging primarily on its product engineering and sales force. 

Yet, when it needed to scale to multi-billion, it had to create (or acquire) the platforms that made it scale to the next stage (at the time AdWords, and AdSense). 

When the company switched on those platforms, it scaled, and it also changed as an organisation. 

Maturation stage

In a stage, in which the company matured, it will primarily leverage on its distribution and branding power to keep its position as long as possible. Marketing at that level is multi-channel, and primarily skewed toward branding (large advertising campaigns) and distribution (large deals to keep a solid distribution pipeline). 

Key takeaway

In this guide, you got an in-depth understanding of the advertising world through market segmentation, its evolution, and its tools. It is easy to lose sight of what marketing is for. Too many times it becomes an end in itself.

Instead, I’d like to repeat Peter Drucker’s statement “there will be always, one can assume, be need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself.

Will the day come when marketing will have reached its final mission, make selling superfluous?

Business resources:

What is a Market Segmentation?

Market segmentation is the process of dividing the market into sub-groups. Market segmentation can be based on characteristics such as age, behaviors, income levels, and more. This process helps to understand what your key customers want, where they are, and how to talk to them effectively.

What are the 4 types of market segmentation?

The four main types of market segmentation are demographic segmentation, geographic segmentation, behavioral segmentation, and psychographic segmentation. That helps identify, understand, and target the right customers for communication and sales campaigns, which help companies scale their bottom-line and grow their business. A successful marketing strategy must be driven by proper market segmentation.

What is meant by marketing segmentation?

Market segmentation is the process of breaking down the market in potential segments that have specific features and characteristics. Those segments help to drive sales and marketing activities, business experimentation, grow the distribution channels of a business, and build successful marketing strategies that help build strong brands in the marketplace.

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here

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