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Market Analysis for Startups

Market Analysis for Startups


Customer Segments

Henry Ford famously claimed that half of the money that he put into marketing was well spent. The problem was that he didn’t know which half.  As marketing has evolved we’ve realised that if we target very specific groups of people we are able to improve the return on investment that we make. In other words, we make more dollars in sales for each dollar that we spend on marketing.

What is a Segment?

A market segment is a portion of the population who you believe will be keen buyers of your product or service. Normally they will be homogenous. That is they will have a set of common characteristics that make it easy for you to identify and target them.

Here are some examples:

  • Electricity companies target home owners
  • Make up companies target young women
  • Nappy manufacturers target new mothers
  • Sports car manufacturers target wealthy businessmen and celebrities
  • Tractor manufacturers target farmers and agricultural businesses
  • Dentists target people with tooth pain
  • Tank manufacturers target defence ministries
  • Advertising agencies target companies who need new customers

Those are almost the simplest segments that you can come up with. A segment that targets “women” isn’t a segment. It’s laziness. “Which women?” is the next question. Most “women” won’t care about your product or service. Some of them will. It’s important therefore to start narrowing down as precisely as you can.

In the examples above you should drill down to ask exactly which sub group is important to you? Which group has the problem that your solution really solves.

Why is Segmentation Important?

Segmentation is important because it means that you spend less money and effort getting customers. Imagine that you have a thousand match sticks. One hundred of them are red. I am going mix them all up in a big heap and then blindfold you. Every time you pick a stick I will charge you $5. Every time you get a red stick I will give you $20.

On average if you pick 10 sticks you will pay me $50 and I will give you $20 in return. You’ll have lost $30. That’s what marketing is like if you don’t segment the market correct. You end up talking to a lot of people who don’t care, and you waste your time and money.

Let go back and look at the matchsticks more closely. When we put them under the microscope we discover that a lot of the match sticks have a little pink dot on them. None of those are red. Aha! Let’s take all the pink dot matchsticks out of the pile. We take 700 away. Now when we pick ten matchsticks we still pay $50. On average you’ll have picked 3 red matchsticks and got $60. You’ll have made a profit of $10.

Ideal Customers

What segmentation does is to give us a set of rules about who is and who is not an ideal customer. In many industries you should be able to look at a crowd of people and point out the people who will buy from you. You should also be able to point out the people who never buy from you. The ones that you are totally sure about are your ideal customers.

In your business it’s no good if you as the CEO are the only one who knows who the ideal customers are. All your staff should know. That way they too can focus their efforts on the people who matter – the people who pay. What we do is we make lists of all the ways that ideal customers are like each other and different to other people.

There are lots of ways of creating these lists. Demographics, Psychographics and Jobs to Be Done are three approaches to making a picture of an ideal customer. The simples though is to take photos. These can be photos of real customers, or pictures from the internet or magazines. Having a strong visual image of your perfect customer can transform your marketing and sales.

In this article I covered the basics of customer segmentation. We’ve looked at

  • What a segment is
  • Why it is important, and
  • What an ideal customer is.

The more you focus on targeting your ideal customer and defining the customer segments that you want to sell to the better the return on investment you will see from your marketing and the more profitable your business will be 

Customer Demographics

Demographics are one of the key ways of segmenting consumer markets. Demographers look at large populations of people and based on the characteristics of the group, or how it is changing use it to help segment markets. This helps improve the effectiveness of their marketing

What are Demographics

So, what are demographics? At it’s simplest demographics is the study of information about the people in a country or a geographical location to find useful insights about them. These insights are then used to market and sell goods more effectively.

An example is if we look at the population of a country by age. In this case we will look at Russia.

By Rickky1409 - Rosstat preliminary data visualised, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=67950372

If we look at this we can see that there are very few teenagers and young adults compared to the rest of the population. This is because the birth rate dropped significantly after the fall of the Soviet Union. However, we can see that the birth-ratehas increased in the last 10 years. Using this information, we may decide to open a children’s clothing store, rather than one focusing on teenagers.

Some of the ways that we segment a population using demographics include:

  • Age
  • Gender
  • Race
  • Ethnicity
  • Income
  • Education
  • Occupation
  • Family Size
  • Family Life Cycle
  • Religion
  • Social Class

Looking down this list and thinking about your ideal customer what can you say about them under each heading?

Why are Demographics Important?

Demographics are useful and important because like it or not whilst we are wonderfully unique as individuals en masse we behave in very similar ways. These common behaviours can be used to group us into categories which are then easy to market to.

Let me give an example of how this works. Most young men enjoy risky behaviour and attention seeking. They also enjoy reading about other men doing rock climbing, martial arts and free diving. They read magazines and blogs about them. Marketers then target these 16 – 25-year-old men through the magazines that they read.

If you take an older slice of men you discover that their risky and attention seeking behaviour has declined. This is because they have got married and now need a stable income to feed and house their young family. Their behaviour changes and thus they stop being interested in sky diving and instead learn DIY.

How to use Demographics

To use demographics effectively the best approach is to take a list like the one I used above. Then for each of your segments write down what you think about each category. The first time you do this it is always a bit vague. That is ok. A single step towards your goal is better than no step.

Do this for every segment that you are targeting and pretty quickly you will have a sketch of your customer segments. One way of using this immediately is to plug it into Facebook advertising. Facebook allows you to target customers based on their demographics (amongst other characteristics). If you have a hypothesis about several segments you can test them against other in a simple experiment and see which performs best.

 As you segment with demographics you tend to get increasingly strong insights into your customers. For example, you may think initially that your customers will be 16 – 25. As you test this segmentation you realise that it is 18 – 23-year olds that you need to be targeting. This allows you to increase your focus on what really matters to your customers.

In this article I covered the basics of using customer demographics in a start-up to improve your marketing.

We looked at:

  • What customer demographics are
  • Why customer demographics are important, and
  • How to use customer demographics to increase improve your marketing and increase your sales.

It is always very clear to be focused in your targeting of the ideal customer. Targeting someone who is never going to buy, or who is expensive to acquire as a customer, is not a good use of your money

Customer Psychographics

Customer psychographics is another way of helping you to segment customers into a meaningful group. There are a number of times when demographics don’t help a great deal. A good example is when they don’t allow you to differentiate your offering. For example, consider a developer creating iPhone games. They may have their demographics very accurate, but they are not effective in the marketplace. This is because every competitor is targeting the same demographic. You need to dig deeper and this is called psychographics

Customer Personalities

The first approach to psychographics is to think about customers’ personalities and what they like. The theory behind this is fairly simple. If you know what customers like then it is easier to position your product with the things they like, or in the same frame.

An example of this would be if you are marketing to small children and you investigate their personalities and what they like. You discover that small boys like play fighting, but small girls like playing with dolls. You can then segment the market into boys and girls. In this case you still have sex/gender underlying the segmentation, but the primary aspect of it is liking play fighting or not.

Now let’s imagine that some of these small boys like playing fighting and they like playing with dolls. We’ve now moved away from demographic segmentation to one based on personalities. Hasbro’s Action Man dolls very successfully catered to this segment of the market in the 70’s and 80’s. They sold what were effectively Barbie dolls with green uniforms and guns to a segment that really hated playing with dolls.

Customer Motives

Another approach is to consider customer motives. These are very different to personalities. Why do people want to do something? What do they want to achieve? Often motives are associated with the big goals that people have in their lives. These can be to do with jobs, relationships, shelter and children. A great example is if we look at a segment of people who want to get married.

Their motive is to get married, or fall in love. How can we segment them? As people get older they tend to want to move out of the dating stage of their life and settle down with a single person. As they do so their motivations tend to change. No longer is their behaviour focused on attracting attention from the opposite sex. Instead they they are focused on retaining that attention and deepening the relationship.

DeBeers, the diamond company, and Tiffanys, the jeweller, both segment customers by motive by looking at young men who choose to signal that their motives are pure and permanent by buying an expensive and worthless gift for their partner. The diamond jewellery has no function in running a home or partnership, by using money that could have been used for a home, it signals that the man is confident that he can provide for his partner. All this is driven by his motives and his desire for long lasting love and and romance.

Customer Lifestyle

The third approach is to segment by customer lifestyle. Here we look at consumers lives in a more holistic way. Can we describe the commonalities in a large group of people’s lives and see how we can sell something to them based on those similarities? As it happens there are lots of ways of doing that and it is a very effective way of selling to people.

Triathlon is a sport where athletes have to swim, then cycle and then run. The races are difficult because you have to put a lot of time into them to become fit enough, you have to spend more time to achieve technical mastery and you have to buy expensive equipment such as bicycles. Most people find all this pretty challenging and as a result most triathletes tend to identify closely together in the triathlete lifestyle. That is based around lots of training, a healthy diet, and getting up early to do their training.

Thinking about the lifestyle that I’ve described what can you sell to them? Healthy diet and nutrition plans? Scheduling software or time management coaching? Physiotherapist and injury prevention equipment?All these and the sports equipment? You bet! As you understand a customer’s lifestyle you are increasingly able to understand him and identify what he really needs to make it a success.

In this article I’ve talked about three different ways of looking at customer psychographics. These included:

  • Customer personalities – understanding who they are
  • Customer motives – understanding what they want
  • Customer lifestyles  - understanding how they live

Know these about your customers helps you to design and sell products and services that they really want, and in doing so grow your sales.

Jobs To Be Done

In this article I’ll talk about a concept called Jobs to Be Done and how it can help you get deep insights about what your customer wants and design better better products and services. It will also give you understanding of what you need to be talking about when you design your marketing campaigns.

In a nutshell when you think about Jobs to be Done you are going back to the deep underlying problems that customers need to be solved. Understanding these gives you a huge advantage in designing killer products

What are they hiring you to do

The basic idea is this. Look at any product and ask “What am I hiring this to do?”I have a can of Diet Coke in front of my as I write this article in a café. What am I hiring it to do? I’m not really thirsty so I haven’t hired it to quench my thirst. I am quite awake and alert so I’m not hiring it for the caffeine jolt that will wake me up. I am thinking quite deeply and every time I pause to think I take a drag on my coke. Sorry. I take a sip of my coke. As you can tell I am an ex-smoker. That gives us the truth of why I hired the coke. I hire the coke to replace my smoking habit whilst thinking.

That’s pretty weird isn’t it. The original insight here came from when McDonalds was trying to figure out why it sold lots of milkshakes in the morning to people who didn’t buy breakfast. In the afternoon it sold lots of milkshakes, but then the people who bought them nought several instead of just one. Each group was demographically identically but the buying behaviour was quite different.What was happening?

In the morning commuters were buying milkshakes on their commute.They could have bought lots of things, including coffee. What they bought was a milkshake because it lasted a long time. The commuters were hiring the milkshake because it made their drive far less boring. In the afternoon they were on the way home and were excited and not bored. The job that they were hiring the milkshake to do was to provide a guilt free way of saying yes to their kids. Same product, same demographic, totally different jobs.

Why is this different

As you can see,“Jobs to Be Done” delves a lot more deeply into the customer’s psyche. In many of these cases the customer was not aware of the reason why they bought the product. Compared to looking at customer demographics or psychographics it’s a lot harder to get information. It’s not available from the census or other survey information. It has to be discovered through talking to the customer.

That might sound like it’s a focus group. It’s not. A focus group is all about understanding what a customer thinks about a subject. When we look at “Jobs to be Done”, we are trying to understand the process that a customer takes on his buying journey. A typical focus group would start talking to customers about the milkshake and the McDonalds purchasing experience.

In contrast when we take a jobs to be done approach we’d start with understanding the customer’s morning routine. Where do they sleep. How do they wake up. How does their morning proceed.Why does the morning have the shape it does. As you understand the process and the rhythm of their life really deep insights start to emerge. Walmart used this process to double the sale of mattresses. It thought customers were impulse shopping for mattresses. What was actually happening was that customers were initiated by the high intensity sales of traditional mattress shops and after thinking about buying a mattress for 6 months and putting it off….they impulse bought exactly what they wanted when they saw it in Walmart.

What insights can you get

The insights that you get from “Jobs to Be Done” are often unique. They aren’t easily accessible to competitors. That means that unlike other sources of information about customers you can use them to develop sources of competitive advantage in your product or service. Essentially you are taking an idea or a concept that your competitors know nothing about and building it into your sales and marketing process. It’s often not immediately apparent to the competitor. They know that you have changed something, but the insight is only really visible to the customer. That’s powerful juju

The difficulty is that you have to have deep conversations with customers to identify these insights. The insights are normally qualitative. Unlike demographic data you can’t say x% of people are like this and therefore will act like this. Instead, jobs to be done data slowly appear out of the interviews and discussions as enlightenment. Depending on the marketing department’s methodology that may not be defensible. “I’ve got a feeling…” doesn’t always win friends.

This makes it appear a great deal more risky than traditional methods of segmenting customers. The reality is that by understanding them more deeply it is far easier to give customers what they want. The risk is in not having numerical data to fit existing mindsets, not in misunderstanding customers requirements. “Jobs to be done” is the most innovative approach to segmenting customers, potentially the most powerful and certainly the least used.

In this article I’ve looked at jobs to be done theory as a third approach to customer segmentation. It relies on deep questioning of customers and understanding why they hire particular products to do the jobs that are important to them. The jobs that products are hired for is not immediately obvious and may differ widely from conventional expectations. “Jobs to be done” theory is an innovative approach to customer segmentation.

Value Propositions

A value proposition is the promise that you make to your customer. ‘I promise you that this is what I will deliver when you buy from me’. Proposition is another word for promise or offer. When we talk about value propositions what we are really talking about is a collection of products features and benefits that solve the customer’s problem.

Some are fairly straight forward, but the companies that are often the most successful develop innovative offers that meet customer requirements in ways that delight and astound them. It is this innovation that constantly raises the bar for competitors.

Features and benefits

One of the biggest mistakes that I see entrepreneurs making is focusing on product features.  A feature is a description of what the product is. A benefit is a description of how the product is useful to the customer. Which do you think is more useful to the customer?

One of my cars is described as having a ‘common rail diesel’.  That is a feature. It totally mystifies me. I really don’t care about what the engine size is, what type of engine it has or the number of cylinders. What I care about is whether it is going to get me up the 30km dirt road to my friends’ cottage deep in the jungle. Can you see the features and benefits? Features describe the car and leave the customer dying to jump the gap between them ad the benefit that they really want.

So when you start designing your product it is important to be clear what the benefits are. Will it help the customer look more beautiful, make more deals, be happier or weigh less? Those are benefits. The more beneficial your product seems in relation to other products then the better it will sell. Features are important though. When you have similar products the customer will want to compare them. The customer will often use features to do direct comparison because they are more precise and concrete than benefits.

Gains and gain creators

When we do value proposition design what we do is start looking at the gains that a customer wants to achieve. This afternoon I came into Starbucks to write this article.  What gains was I looking for? I wanted somewhere with WiFi (so I could post the article on the blog), A comfy chair (so that I could focus on writing) and a peaceful environment (so I could get work done). The hot chocolate that I bought was really a cost that I paid to get access to the first three gains.

Starbucks understands that there are lots of customers like me. One of its customer segments is a group of people who need somewhere to work in relative peace and quiet for a few hours. So it designs its value proposition to deliver that. It does that be identifying things that create gains.

In this case it provides WiFi so I keep sitting here and working (and spending money on lattes). It also provides a range of different types of seat. From where I sit I can see five different styles of seat each of which fits a slightly different set of needs. It also has high prices – to keep noisy school kids out (unlike McDonalds) and classical music that makes people feel that it is a tranquil working environment.  These gain creators help create a service where the customer can achieve his goals.

Pains and pain killers

There is another side of the picture though. As a customer I have a variety of pains that I am trying to overcome. These are things that irritate or discomfort me as I try to achieve my goals. Just as you need to look at what a customer wants to gain and find gain creators you also need to look at the customer pains and build pain killers into the value proposition.

One of my pains is that as I am working in my iPad I need to charge it. Another is that after drinking lots of cups of coffee I want to be able go to a nice clean toilet. A final one is that as it is very hot outside (I’m in the tropical Philippines) I don’t want to stay sweltering in my sweat. These are three fairly typical pains that I have when I am away from home and needing to do some work.

Starbucks solves the first by providing a variety of charging sockets. At least they usually do. In this Starbucks I can’t find anywhere to charge and so my pain is still there. That’s a big fail on the value proposition as it means I can only work here for a limited time. The toilets are handy and clean, and the baristas even keep an eye on my Bagus I use them. Finally the air con is delish and it makes me hesitate to venture outside again. Maybe I will have another hot chocolate.

In this article I’ve looked at three different aspects of your value proposition. Features and benefits are what customers often see in your marketing material. As you develop that you need to consider what the customer’s pains and gains are. Your success then comes from being able to effectively solve those pains and give him the gains that he craves. The better the value proposition the more remarkable your business is.

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