- Quick summary of this guide
- A brief history of advertising
- The end of mass marketing and the beginning of niche targeting
- Everything you need to know about market segmentation
- What is market segmentation?
- What are the bases of market segmentation?
- Why, when and how to create a market segment
- Requirements for market segmentation
- Types of market segmentation
- The four-level of market segmentation
- The most powerful online tools for the marketer
- B2B market segmentation
- Where to start? Segmentation, Targeting, And Positioning Framework
- Where am I? Market types: Understand the territory
- Attack strategy for each market type
- Each market type will have its own demand
- Organizational design
- Time to market: avoid to run out of cash
- Business model design: in search of a business model
- Who is your key customer?
- Why my products matter? Defining the problem, and whether you need a 2x, 5x or 10x and more
- What content is my key customer consuming and where?
- How do I reach my key customer, quickly? Marketing prioritization and high-tempo testing
- Key takeaway
- What is a Market Segmentation?
- What are the 4 types of market segmentation?
- What is meant by marketing segmentation?
Quick summary of this guide
This is a guide about market segmentation, the technologies that allowed marketers to create more and better-segmented audiences and how the way of communicating changed from mass marketing to one-to-one marketing starting the 1920s until today.
The guide is divided into three main sections:
- A brief history of advertising
- Everything you need to know about market segmentation
- The most powerful online tools for marketers
- A framework to understand and enter any kind of market
Each of those sections will give you an understanding of three main concepts. First, how marketing evolves with new technologies and how new technologies are used by marketers.
Second, you’ll learn all the aspects of market segmentation. From how, why and when to create market segments. To the requirement necessary for creating market segments and the types of market segmentation.
Third, you’ll learn what tools today marketers can leverage to create audiences and small segments with the utmost details.
A brief history of advertising
Marketing has evolved through the technological devices that allowed marketers to convey the same message to millions of people a the time, like mass media.
To technologies that instead allowed marketers to speak to millions of people with customized messages, like social media and SEM.
Let’s dive a bit into the story of marketing associated with the technological devices that made it possible for marketers to develop new ways of reaching an audience.
I argue that as new technologies at the beginning of the 1900s became available for marketers, those allowed to speak to vast audiences.
That also meant crafting a message that could be understood by the masses. It was the rise of pop culture.
As technology has evolved, it allowed marketers to have accurate data about users. Thus, the marketer could finally craft a personalized message for each user.
It is interesting to notice also the change in terminology. From masses to users. From television viewership to the user experience.
That is also why marketing is now back to building communities, tribes, and personal relations. This is the story of how we went from mass markets to one-to-one conversations.
The rise of Radio and Mass media
As reported in the book The A to Z of Old Time Radio Frank Conrad, an electric engineer who worked for Westinghouse held more than 200 radio-related patents he started off with his own radio transmitter.
Initially, radio broadcasts consisted just of transmitting the location and equipment used. Yet Mr. Conrad was soon to be bored by this kind of set up.
That is why in 1920 he started a new format called The Radio Amateur News. During the show, Frank Conrad took his phonograph and began to transmit it. At the time 400 people listened to that show.
When another executive at Westinghouse noticed the potential for advertising, he understood they should test the same concept with a broader audience and more structured programming.
The chance to test that came with the Election Day:
When KDKA became the radio’s first commercial programmer, it started by asking “Will anyone hearing this broadcast, please communicate with us, as we are anxious to know how far the broadcast is reaching and how it is being received?”
On that occasion, more than a thousand listeners were reached.
Technology and marketing walk hand in hand. In the 1920s, radio had become the primary medium of communication.
Across the U.S. and Europe, broadcasting stations such as KDKA and British Broadcasting Company (BBC) began to rise.
The power and potential of mass media were still hard to foresee at the time. Experimentation allowed those first marketers to understand its potential.
In fact, disciplines like growth hacking claim to have brought the scientific methodology into the marketing world. In reality, good marketing has always been about experimentation.
Also, Frank Conrad was an electrical engineer, and for what we know he might have been the first mass media marketer. Even though he reached just a few hundred people, he changed the rules of the game.
Yet as this story shows broadcasts made it possible for companies to send advertising messages to large, undifferentiated audiences at once, giving birth to the mass market concept and the first mass marketing techniques.
Then television came, and mass markets became even more prominent.
Television and mass marketing
The Brooklyn Dodgers are playing the Philadelphia Phillies. It is July 1, 1941. Suddenly, before the game begins a 10-second advertisement from a watch company – called Bulova – gets broadcasted:
This ten-second spot was the first TV commercial US people saw. Imagine the effect of it – if any. From there a multi-billion industry was born. A bunch of commercials became part of the pop culture:
TV dominated the advertising together with other media outlets dominated the advertising industry:
Until 2017 came:
One of the things for which 2017 might be remembered is the take over of the advertising spending by digital over TV.
The end of mass marketing and the beginning of niche targeting
As we’ve seen so far, back in the days, marketing budgets would be spent primarily on mass media channels. This enabled companies to channel the message toward the largest number of people possible.
Which in turn made it possible to create mass cultures, and manufacture mass consumer behaviors which spurred growth and profitability for these companies in years to come. Those brands which mastered demand generation managed to be on top of their game for decades.
Until the web reshuffled the rules of the game. Finally what used to be an odd person or a nerd who could not recognize herself in the mass culture. With the web became a person who belonged to a small community spread across the world.
Thus anyone no matter how weird she felt during the mass culture age; could find other people like her around the world, through the Internet.
That opened up new ways of communication and marketing.
Before becoming a tech giant Amazon was a niche player
When we become grown-up it’s hard to remember when we were kids. That seems to be the case for tech giants.
As we see them today as trillion empires, spanning across geographies it’s hard to remember that once a company like Amazon was simple e-commerce sold books on the web. Amazon, like any other tech giant, picked a niche, dominated it. Expanded to adjacent, larger niches, until it dominated an entire industry.
That applies also to Facebook. Started as a social network for top universities (it was open to just a few initially), it then rolled out only when there was massive demand from new colleges.
The Facebook timeline between 2004-2006 according to its S1
As you can see, while Facebook grew pretty quickly. It opened the registration to workplaces only in 2006. Interesting fact, Facebook rolled out the News Feed in the same year.
No doubt a feature like the news feed was a key element to enable Facebook to broaden its reach.
In other words, the rise of the web and the enablement of digital business models created a need to start from specific niches.
Below we’ll see the case of two companies, in particular, who have changed the way to segment the market: Google (with AdWords, now Google Ads) and Facebook (with its Facebook Ads Platform).
The internet, Google, and its AdWords
Mountain View, California – October 23, 2000, Google makes the following announcement:
Google Inc., developer of the award-winning Google search engine, today announced the immediate availability of AdWords(TM), a new program that enables any advertiser to purchase individualized and affordable keyword advertising that appears instantly on the google.com search results page. The AdWords program is an extension of Google’s premium sponsorship program announced in August. The expanded service is available on Google’s homepage or at the AdWords link atadwords.google.com, where users will find all the necessary design and reporting tools to get an online advertising campaign started.
The beta debut saw the involvement of 350 businesses and advertising agencies worldwide. However, Google AdWords would be rolled out broadly in 2002:
In 2003 Google reported over $790 million in turnover!
Google’s advertising revenues have grown exponentially to monopolize the digital advertising market together with Facebook.
In 2017 Google‘s revenues from its properties came primarily from AdWords. Revenues reached almost eighty billion in 2017!
On Jun 27, 2018, Google announced Google Ads:
The new Google Ads brand represents the full range of advertising capabilities we offer today—on Google.com and across our other properties, partner sites and apps—to help marketers connect with the billions of people finding answers on Search, watching videos on YouTube, exploring new places on Google Maps, discovering apps on Google Play, browsing content across the web, and more.
Social networks, Facebook, and its advertising network
Facebook announced Facebook Ads:
“Facebook Ads represent a completely new way of advertising online,” Zuckerberg told an audience of more than 250 marketing and advertising executives in New York. “For the last hundred years media has been pushed out to people, but now marketers are going to be a part of the conversation. And they’re going to do this by using the social graph in the same way our users do.”
If you want to know where the advertising money is, just follow the eyeballs
New technologies influence human behaviors for better or worse. Companies or people operating in the business world use those technological advancements to understand how to alter the responses of people to specific stimuli.
Technologies like Radio and TV allowed companies to speak to a broad audience. They also created a monologue between corporations and the public.
This also incentivized companies and marketers to use a sort of “universal language” that could be understood by anyone. It was the era of pop culture.
This kind of advertising model made sense because companies knew little about who they had on the other side.
Thus, they either used mass marketing campaigns that were undifferentiated, or they used invented customer groups based on what they thought were their ideal customer.
When tech giants like Google and Facebook entered the advertising industry, it all changed. Advertising was no longer something “magical.”
Those companies founded and run by engineers looked at advertising and tried to make it accountable, and measurable.
So that any business paying for advertising could stop focusing on metrics used in TV advertising like gross rating points (audience reached by the frequency of its exposure to the message during a given period); and focus more and more on conversion targets with PPC (pay-per-click) also known in the business as CPC (cost-per-click).
The reason why in the history of modern advertising I included mainly Google and Facebook is that those two companies combined took over the advertising industry. In fact, as Statista points out:
Over the past two decades, advertisers have gradually shifted their budgets away from traditional media (e.g. TV, newspapers and magazines) towards online ads. The rise of the smartphone has only accelerated this shift, as smartphones have fundamentally changed the way that people consume content. Ad dollars have always followed eyeballs and thus it doesn’t come as a surprise that mobile ad spending is currently growing at a breathtaking rate.
As reported by Statista 25% of global ad spend goes to Google or Facebook.
Part of this process has been driven by the change in behaviors of users driven by new technologies. In fact, as mobile devices are becoming less and less expensive, most of the consumption of content and information is connected to those devices. That is why ad spending has followed.
This short history of advertising could have well been called the “history of eyeballs.”
In this landscape, we’ll see also how advertising has changed and how it has evolved from mass marketing, with the so-called shotgun approaches, to hyper-personalized approaches.
In other words, market segmentation moved from undifferentiated to highly personalized.
Those changes were driven by a word that today represents the most important asset any company is willing to fight for: data!
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 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.
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:
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
Measurable and identifiable
Can we measure those segments so that they can be identified?
Can we reach those segments through communication and distribution?
Do those segments respond differently to different marketing mixes? In short, do they have unique needs?
Is this segment large enough to be profitable, thus justify the marketing effort required?
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
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.
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.
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?
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.
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:
Above an example of how Google Ads enable 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.
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
- 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, feature, lifestyle 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 is the approach that starts with creating personalized interactions with a potential customer 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:
Customized: Think of Converse where they give you a basic shoe, and you can customize it with your own creativity:
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
With Google Analytics you can quickly get any data that goes from demographics to psychographics:
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:
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*
- Financial Services
- Gifts & Occasions
- Home & Garden
- Real Estate
- Sports & Fitness*
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:
What about Facebook?
Facebook audience insights
For years users have been giving to 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:
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.“
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.
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.
Where am I? Market types: Understand the territory
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: 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.
- Re-segmented markets: 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: 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: 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
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!
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.
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
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
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.
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
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.
Platform business model
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.
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
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.
In this scenario is extremely important to experiment quickly!
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?
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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.