Key Questions
- What should I be looking for in my customer segment?
- Do I need to choose just one segment?
- How do I test the attractiveness of a given customer segment?
- How do I know I’ve found a good enough customer segment?
- How large does my initial market need to be?
- Do I need a clear story towards a billion dollar market?
- How should I respond if my chosen segment is no longer working?
Worksheet
- Ideal Customer Profile (PDF)
Start Here
Peter Thiel: The Importance of Starting With a Small Market
(4 min video.) Thiel discusses the strategic advantage of starting with small markets in the early stages of a business. He illustrates this concept using examples like Amazon, eBay, PayPal, and Facebook, which all began with narrowly defined markets and expanded over time. Thiel argues that targeting small markets initially allows a company to dominate a specific niche with less competition, creating a strong brand and customer loyalty. This approach, he suggests, is contrary to the common impulse to target large markets, which often leads to fierce competition and dilutes potential success. Thiel emphasizes that significant businesses often grow from small, unnoticed market segments into large monopolies.
Steve Blank: Your Job Is Not to Make Every Customer Happy
(6 min read.) Through the experience of a former student turned entrepreneur, Steve examines the intricacies of customer development and common mistakes startup founders make when pursuing customers. While he acknowledges the importance of going out and talking to potential customers, Steve notes that founders often miss the key point: Their job is not to make every possible customer happy. He explains that a critical part of customer development is figuring out which customer segments and pricing tactics drive a company’s business model.
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Tomasz Tunguz: Your Customer’s Profitability Is Your Startup’s Future Health
(2 min read.) In this article, Tunguz discusses the significance of choosing profitable market segments for startups, especially during economic downturns. He highlights the difference in profitability across various industries by comparing grocery stores, restaurants, and software companies. The data provided shows software companies with the highest EBITDA margin at 33%, indicating a greater capacity for reinvestment compared to grocery stores and restaurants, which have margins of 6% and 14% respectively. Tunguz argues that targeting industries with higher profitability can enhance a startup’s pricing power and financial health. He also emphasizes that customer size affects pricing elasticity, with larger enterprises being less sensitive to price changes compared to smaller companies. Tunguz concludes by citing Warren Buffett and Hermann Simon, underscoring that a company’s ability to adjust prices reflects its underlying business strength.
Geoffrey Moore: How to Cross the Chasm: Creating and Owning Your Own Market
(14 min video.) Moore, in this video, discusses his influential concept of “Crossing the Chasm”. This concept is central to achieving global success in the SaaS industry and is based on the Technology Adoption Life Cycle, which outlines how different market personas respond to new technologies. Moore emphasizes the importance of starting in niche markets and securing early adopters before attempting to win over the more cautious majority. His strategy focuses on understanding and exploiting the critical transition or “chasm” that businesses must bridge to move from early adopters to a broader mainstream audience, highlighting the need for targeted solutions and strategic market entry.
Geoffrey Moore: Coping With the Chasm
(2 min read.) Moore, in this article, explores strategies for startups navigating the “chasm” phase. This phase occurs post-initial excitement and before mass adoption, where potential customers are aware but not yet investing. Moore emphasizes the importance of nurturing early adopters and maintaining a lean go-to-market approach, focusing on discovery rather than aggressive selling. He advocates for engaging R&D in direct customer interaction to identify and solve specific market problems, suggesting that understanding and solving these key problems can help pull a startup out of the chasm.
Ran Matoki: The Impact of Customer Selection on Fundability
(2 min read.) In his article, Matoki, an expert in Series A and B round funding, discusses the critical role customer selection plays in a startup’s ability to secure funding. Using a case study from his consultancy, he describes a decision-making process between two potential customers for a client’s enterprise software solution: a prominent European airline and a mid-sized UK food and beverage company. After thorough analysis, the startup chose the UK company over the more prestigious airline, prioritizing easier implementation, lower support needs, and better expansion potential within its conglomerate structure. This strategic choice led to significant growth, highlighting the importance of wise customer selection in enhancing fundability and scaling effectively.
Marcus Ryu: How to Know When You Need to Fire Your Customer
(2 min read.) Ryu articulates the painful yet crucial decision of firing a customer to maintain strategic coherence within a startup. Drawing from his experience at Guidewire, Ryu recounts how the company initially expanded its customer base beyond its core market of property-casualty insurers to include self-insured enterprises and third-party administrators. This diversification initially seemed promising but soon led to significant challenges. The new customer segments required fundamental changes to the product that threatened to complicate its development and dilute its focus. Ryu talks about how the effort to accommodate these customers strained resources across the company, from development to legal compliance. Eventually, recognizing the misalignment with their strategic objectives, Guidewire made the difficult decision to terminate these relationships and refund the customers, refocusing solely on its core market. According to Ryu, this move underscored the importance of strategic alignment and the sometimes necessary action of firing customers to preserve a startup’s long-term viability and focus.
Tommaso DI Bartolo: How Market Segmentation Simplifies Growth Hack
(8 min read.) Tommaso discusses the challenges startups face in growth hacking due to a lack of market segmentation and targeted go-to-market strategies. He stresses that startups often falter not from product deficiencies but from inadequate market entry strategies. Specifically, he criticizes the common startup error of aiming to become a platform too early, suggesting instead that startups should start as a tool focused on a single market segment to simplify their message and operations. This focus allows for clearer communication and easier market penetration, addressing one specific customer need at a time. He exemplifies this with a hypothetical startup, “startupINC,” which initially targets small businesses broadly with its mobile app creation tool but struggles with high customer acquisition costs and competition. By shifting to a segmented approach, focusing on specific industries like beauty services or automotive shops, “startupINC” could tailor its marketing messages to the unique needs of these segments, thereby enhancing conversion rates and reducing competition. This strategy, Tommaso argues, not only simplifies the growth process but also significantly boosts the probability of a startup’s success by making its value proposition more relevant and compelling to its chosen market segments.