What is the single fundamental and sufficient condition for a business? Is it an idea, team, a product, investors or a business plan? Actually, it is a paying customer. The day a customer will pay you money for your product or service is the day you have a business, and not a day before. How you identify market segments is an important aspect of every organization.
So if you have a business when you have a paying customer, then the customer and who that customer is becomes the most significant question to launching a business. As much you have an idea to solve a problem that you’re passionate about, you need to solve a problem for some customers. You need to identify somebody that has pain and urgency, otherwise nobody is going to buy or gauge your solution. You really want to know if your idea is viable, sustainable, profitable and scalable before you spend any money.
You don’t start a business by building a website. You don’t start a business by hiring people, you don’t start a business by building a prototype, which are odd things that people do all the time. You don’t start a business by doing any of that; you start a business by trying to identify who is the customer that you will serve. When we talk about the pain and urgency that a customer goes through, they don’t want you to sell them something; they want you to solve something.
It’s ultimately about solving a problem. It’s not about starting a company to make money. It’s about solving a problem for specific customer segmentation. The real issue is; who are you going to solve that problem for?
In the beginning, when starting a business, you don’t know your customer very well and have really limited time and money. Most startups are constrained by time and money. You need to be very efficient and very effective in doing a startup. Remember, trial and error can be very expensive and very time-consuming.
You want to focus your activity, and most of the time you will miss the market. How do you identify market segments? Market segmentation is a constant process of research, learning and iterating the solution that you provide. You will iterate, and it will get better. That is the anti-fragile mindset that Carol Dweck talks about in her book mindset.
The China’s syndrome is this concept of I’ve got a baseball cap, I’m going to sell it for $10. If I can just get 1% of the Chinese market, I’m going to be a billionaire. And the reality is, you don’t sell anything, even a ball cap to a percent of the market. You sell it to an individual. We call that fun with spreadsheets or playing with numbers. Those things don’t work because you’re selling to an individual. You need to know who that customer is.
The biggest mistake you can make is an 80% solution. Because with an 80% solution, people will talk about your product or your service, but they won’t buy it. And so you need 100% solution to their pain and urgency, your ultimate goal is to create a very customized solution for a very specific market segment, customer.
We call it the holy grail of customer specificity
You need to:
- Start with all the potential industries that could be interested in your product, or our service, and then narrow that list down to the most probable industry.
- Select a Total Addressable Market or beachhead market within that industry,
- Define the serviceable Addressable Market and the serviceable Obtainable Market
- Define an end user and an end user profile, conduct primary market research, and also select a persona. That is the process that you should work through.
Segmenting Your Market
For example, when we want to start a business that sells agricultural equipment; we will look at six different potential industries:
o Manufacturing
o Business professional services
o Energy
o Agribusiness and Food Processing
o Laboratory services
o Transportation and Logistics
We pick one that has the highest potential to be our market. In this case, we pick agribusiness and food processing as the highest potential industry. Then we rate that industry for potential to be our chosen market. We rate this industry by doing a market assessment.
Market Assessment
How do you identify market segments? When doing a market assessment, we seek to answer and rate eight important market segmentation questions. We want to take each one of these questions, create a spreadsheet, look at your potential markets, and write them on a scale of one to ten.
1) Is the target customer well-funded? Or do they have access to the funding?
Because if they can’t pay for your product, who’s going to pay for it?
2) Is the customer readily accessible to your sales force?
3) Do they have a compelling reason to buy? Do they have a lot of pain and urgency?
4) Can you, with help, deliver the whole product solution? Because, ultimately, if you’re going to go to the mainstream market, they don’t want a piece of the solution. They want an end-to-end solution. So who can you work with as a key partner on a scale of one to ten? Rate that when you are looking for key partners to work with.
5) Is there little or no competition to block you from going into the market? Because if there’s a lot of competition, it’s going to be a problem.
6) The market does not need to be educated.
Because if you have to educate the market, it takes longer; your runway for survivability and cash flows will be longer.
7) Is it a strategic market that leads to other markets? It is important to understand how strategic the sector is. If you win this market segmentation, does it automatically lead to other markets? That is
A pretty big important question rated on a scale of one to ten.
8) And last, is this market consistent with the team’s passion and values and goals?
Does it align with the passion and mission that you have? The passion of solving a problem and the mission to serve somebody. Does this market segment or industry align with that on a scale of one to ten?
We take these eight questions, create a spreadsheet rank of one to ten, see which one shows up the highest and then start digging down to look for a beachhead/total addressable market. In this example, we end up picking micro greens as our market out of the pick agribusiness and food processing industry.
Summary
How do you identify market segments? The goal is to identify a paying customer. Every entrepreneur should make sure they identify the industry with the highest potential of return, then narrow down to the beachhead/total addressable market.