In the same way that small companies are not just smaller versions of large companies, startup incubators are very different from corporate incubators. Even though they share many of the same goals, such as shaking up markets and introducing original business models to inefficient industries, these two pathways to business growth require different toolsets.
Although that sounds like a very elemental concept, the fact is that billions in market value have been lost and years have been wasted by intelligent, motivated innovators who applied the wrong strategy and lost their way.
You and your team of innovators don’t have to go down that road. The wise learn from their own mistakes but the wiser learn from the mistakes of others.
Today, you will begin a great journey with the first step in transforming an inspiration into a practical business model hypothesis. Although these will rely heavily on concepts from marketing throughout this process, your task right now is to think like a designer.
Design thinking draws on elements of engineering and art to integrate three major forces:
- Common stressors on buyers
- The frontiers of technology
- The Aggregate talents of your team
Consider the implications of that formula for a moment. You could be looking at the world’s best value proposition but it’s 10 years too early and their isn’t enough cluster technology to support it. That’s exactly what happened when Blackberry tried to launch smartphones in 2003, five years before the app ecosphere that allowed iPhone kick off the mobile revolution.
Alternately, you may understand the stressors completely and have sufficient cluster technology behind you, but your team consists of the wrong people to deliver it. That’s what happened with Google Wallet. Online payments is where everything is headed, but Paypal and Apple Wallet are already years ahead, while Google faces resistance from phone manufacturers and near-field communication (NFC) suppliers. Their experiment has cost them $300 million so far.
In reality, it is very likely too early at this stage to make the call about your timing and your team. You can and you should learn as much as you can about the stressors and pain points that your idea is meant to solve.
Many project teams enter this phase with no idea at all – just a business imperative from the C-suite to innovate their way into new markets. Although it may seem backwards to go looking for buyers before you have anything to sell, that’s exactly what your first innovation tool will help you discover.
Why Market Segmentation?
Bill Aulet, Managing Director of the Martin Trust Center for Entrepreneurship at MIT, has been developing guidelines on repeatable innovation for a quarter of a century. He and his colleagues at MIT assist in the generation of 900 startups every year. These startups employ more than 3 million people with annual revenues over € 1.75 trillion. If the startups of MIT were a country, their GDP would place them as the world’s 8th largest economy, just after India.
Our methodology agrees with MIT’s recommendation that you should look at Market Segmentation as early as possible in the ideation phase. The point is to move in the most direct path toward the only “necessary and sufficient” condition of a business: at least one paying customer. Everything else must take a back seat.
For the vast majority of startups, it is not cost-effective to try to break into an existing market dominated by successful businesses. This will typically take more time and resources than are available to innovative projects. A wiser investment of time/effort/money is to define a new, unserved market segment and dominate there as long as possible.
Be deliberate and careful at this stage. The target customer group you select will constrain your next steps. You can review and refine earlier steps in your market segmentation data if you need to as you move through this development chain. Keep in mind that each decision you make renders others either impossible or impractical.
There are two related mistakes that innovators often make at this early stage: either trying to sell to everyone or trying to capture a tiny percentage of a very large market. Although these plans sound appealing, if entrepreneurship was that easy, failure rates wouldn’t be as high as they are.
There’s no way to determine exactly how many fail for this reasons like these because many that follow these pathways never even able to register as a viable business. Of those that do, only 22.4 have lasted more than 4 years, according the 2016 European Startup Monitor.
In fact, most startups fail because they never really understood what their customers wanted to begin with. The successful ones tend to target customers narrowly, understand them well, create their own market and then expand.
Depending on your concept, your market segmentation plan may have to consider two special cases. The first is most common in the world of B2B, where end users are normally not the same as the economic buyer. For example, that’s true when a customer (the business) buys software to provide for their workers. This is also true for innovations that offer a free service to the end user that’s paid for by advertisers. Remember to think all the way through the end of the business model in when you are filling out your market segmentation data.
The second special case involves a split customer segmentation, which is what happens when your innovation is an exchange platform that exists to connect up two audiences, like sellers with buyers. In that case, you have will have to serve two customers and your market value will need to be developed for both concurrently.
The Criteria for Market Segmentation
You will very likely have a several market segments that you will have to evaluate. Choose the best fit for your team based on the following criteria:
- Size of the Market: Roughly, how many potential end users will you serve if you could achieve 100 percent market penetration?
- Value of market: Average Yearly Revenue * Size of The Market. The segment value of the ideal market would be between $20 million and $100 million.
- Money: Is the target customer adequately funded to buy your product?
- Sales Access: Is the target customer directly accessible to your sales force? Is sales cycle short? Will you require salespeople in the street?
- Reason to buy: Does the target customer have a compelling reason to buy your product?
- Delivery Capabilities: Can you today, with the help of partners, deliver a whole product?
- Competition: Is this a less competitive market, that you can enter relatively easily and win customers over from your competitors?
- Growth: If you win this market, can you leverage it to enter additional markets?
- Passion: Is this market consistent with the values, passions, and goals of the founding team?
In markets generally, members buy similar products, have similar sales cycles and expect the product to provide value in similar ways, which often results in inside virality.
If you are concentrating on a Consumer Market, then you can segment them by additional criteria like:
- Geographic (Region, climate, population density, and population growth rate)
- Demographic (Age, gender, ethnicity, nationality, education, occupation, religion, income, and family status)
- Psychographic (Values, attitudes, opinions, interests, activities, and lifestyles)
- Behavioral (Usage rate and patterns, price sensitivity, brand loyalty, and pursuit of benefits)
For a Business Market, segment by:
- Geographic (Location, customer concentration, regional industrial growth rate, and international macroeconomic factors)
- Customer type (Size of the organization, industry, position in the value chain)
- Buyer behavior (Loyalty to suppliers, usage patterns, and order size)
In the next blog, you will begin working your way deeper into the mechanics of your Competitive Position. These tools can serve as your engine of co-creation, helping you examine your identified problems more critically and see all of the potential markets from a range of perspectives. This process will be instrumental in discovering new pathways to innovation and strengthening your company’s current offerings. Although innovation is inherently risky, you can reduce that uncertainty to a minimum. There is a consistent methodology and a proven execution framework to follow in assuring that your innovative startup the best chance at changing the world.