Entrepreneurship and
Innovation Project
Prof Michael Rovatsos
School of Informatics
Week 2
Step 1: Market
Segmentation
What?
Identify how your solution
can serve a variety of
potential users. Then fill out a
matrix with primary market
research on them.
Why?
It is crucial to start process
with the customer and work
everything else back from
there.
Image credit: B. Aulet, Disciplined Entrepreneurship, Wiley, 2013
The importance of the customer
• The single necessary and sufficient condition for a business is a
paying customer (for a good business you need many of those)
• Instead of starting with sales for a yet unproven product, build the
business around finding an unmet need
• Target market segment (not too big or too small) involves
1. Customers that buy the same product
2. They buy it in the same way (same use case, channel, etc)
3. They influence each other (word of mouth)
• Finding the right one involves first brainstorming and then primary
market research (PMR) that provides first-hand evidence
What does “paying customer” mean?
• Avoiding ‘fun with spreadsheets’ and ‘overly helpful customers’ –
generic, abstract notion of customer is not useful
• Primary customer (end user) initially more important secondary
customer (economic buyer) – look at decision-making unit later
• Markets can be two-sided or multi-sided - in this case we need to
look at each side separately
Can you think of good examples of these concepts from products you
know?
Market Segmentation 1: Brainstorming
• Purpose: sharpen your sense of the market
• Think of all potential end users, including unusual ones
• Do not focus on viability of the solution but on breadth of ideas
• Helpful to improvise, say ‘yes’ to every idea, ‘go crazy’
• Socialise the process with others – no need to be in ‘stealth’ mode
Exercise: Make a table with rows for Industry/Community, End Users,
and What they would use it for for each of your ideas
Market Segmentation 2: Narrow
• Now we have a very broad range of potential customers, we need to
narrow them down
• Personal filters: Is this market segment an exciting one? Will we be
proud of serving it?
• Analytical filters: How big is the market? How strong is the
competition? How strong is the value proposition? Can the customer
pay? How long will it take, what resources are needed?
• External filters: How much capital will be needed? What partners are
needed? Who else would need to be on the team?
Market Segmentation 2: Narrow
Useful questions:
1. Is the target customer well-funded?
2. Are they accessible to your sales force?
3. Do they have a compelling reason to buy?
4. Can we deliver the product?
5. Could competitors block us?
6. Can winning this segment help win others?
7. Is the market consistent with our values?
8. How quickly can we win the market?
We have to answer these once for each segment, so should not spend too
much time on each of them. Go!
Market Segmentation 3: Building a Matrix
You can use DE Workbook Step 1 Market Segmentation Worksheet (also contains guidance)
Primary Market Research (PMR)
• PMR is direct interaction with customers to understand their
situation (closely related to ’customer discovery’/’ethnography’)
• Can be qualitative (open-ended, exploratory) or quantitive (data and
systematic testing of hypotheses) – the latter easier in later stages
• Ethnographic research is about understanding behaviour by embedding
oneself in the ‘culture’ of those studies
• Secondary research relies on material indirectly gathered (good to
start with a bit of this, but not too much)
• Objective: Understand the customer in all their dimensions – rational,
emotional, economic, social, cultural, behavioural etc
PMR - Methods
• Customer interviews – most common yet time-intensive
• Observational research – watch how customers do their work
• Immersion – try to do what the customer does (with them)
• User Tests – more relevant when you have a prototype
• Focus groups – expensive and potentially biased
• User-Driven Innovation – ask users to find solutions
• Outcome-Driven Innovation - look at jobs-to-be-done
Exercise: Plan engaging with 10 real potential customers for one market
segment until next week and execute using DE Workbook Step 1a PMR
PMR - Caveats
• It is not the customer’s role to design your product – they are experts of
the problem, you are experts of the solution
• People are bad at self-reporting – much better to observe behaviours than
rely on what they say about themselves
• Important to be aware of confirmation, selection, and social acceptability
biases
• Don’t hone in too early on people to ask – look across ‘watering holes’,
industry groups, online platforms, ask people for their contacts
• Avoid ‘sales pitch’ – focus ib how you could help them, and use the inquiry
mode of a journalist (attentive, inquisitive, critical)
• Avoid biases in conducting interactions and analysing results by having
more than one of you in the room
Step 2: Choose Your
Beachhead Market
What?
Select one market segment
where you feel you have the
highest odds of success and it
has strategic value.
Why?
You have limited resources
and focus is essential.
Image credit: B. Aulet, Disciplined Entrepreneurship, Wiley, 2013
Choosing a beachhead market
• More options are not helpful in initial stages of building a business –
keeping them open gets in the way of establishing strong position
• ‘Beachhead’ concept derived from military (yikes) operations –
successfully ‘landing’ in one place allows you to expand to others
• Using answers from previous market segmentation, one needs to find
one just big enough to prove value proposition and build critical mass
• Remember three criteria on what makes a market? Tighter
segmentation will be based on applying them more narrowly.
Exercise: Using DE Workbook Step 2 Beach Head Market rate each
relevant market to pick a beachhead!
Step 3: Build an End
User Profile
What?
Continue PMR to build out a
description of the needs and
wants of a specific customer.
Why?
Keep the focus on the user,
deepen your understanding of
them, and calculate the TAM
in the next step.
Image credit: B. Aulet, Disciplined Entrepreneurship, Wiley, 2013
Why Build an End User Profile?
• No value will be created unless nobody uses your product – build the
customer around the customer you serve, not what you want to sell
• Initially there will be only one product and one sales strategy – the
more similar your customers, the easier it will be to serve them
• Demographics (age, race, sex, income, job, etc) and psychographics
(goals, habits, aspirations, fears etc) both correlate with behaviour
Exercise: Pick a product you know well.
1. What are the demographics and psychographics of its customers?
2. Now check whether the company’s website confirms your guess.
How to Build an End User Profile
Focus on the six most common items:
1. Demographics – what are their common objective characteristics?
2. Psychographics – how do they behave and why?
3. Proxy products – what do they use that is comparable/complementary?
4. Watering holes – where do customers congregate and interact?
5. Day in the life – how do customers actually spend their time?
6. Biggest fears and motivators – what keeps them up at night?
Exercise: Use DE Workbook Step 3 BHM End User Profile to build an end
user profile for your Beachhead Market
Step 4: Calculate the
Total Addressable Market
(TAM) Size for the
Beachhead Market
What?
Estimate the total revenue
per year in your beachhead
market if you achieve 100%
market share.
Why?
To make sure your beachhead
market is not too big or too
small.
Image credit: B. Aulet, Disciplined Entrepreneurship, Wiley, 2013
Estimating the Beachhead TAM
• Important to get market choice right: If too big, it will be hard to
mobilise resources to compete. If too small, revenue will not suffice.
• TAM estimation involves two things:
1. Estimating the number of end users in BHM using top-down (secondary
market) and bottom-up (‘nose-counting’) analysis.
2. Estimating the annual revenue you can achieve from each user, starting
with
• What the customer currently spends (price, frequency, lifetime)
• What their available budget is (total budget and fraction spent on product)
• Comparable products (might not be same but sufficiently similar)
Is a Single Number Useful?
The TAM figure is a simplification, but there are other factors to consider:
1. Profitability: This varies greatly between products and sectors, goal is to
have positive cash flow before expanding to adjacent markets
2. Time to Conquer Market: The TAM will need to be higher if it takes long
to succeed or fail.
3. Compound Annual Growth Rate (CAGR): Mature markets will grow
more slowly than new ones.
4. Anticipated Market Share: Will network effects lead to winner-take-all
dynamics, or will we take a small share among many competitors?
Many of these issues will be looked at again in later steps. Do not inflate
figure, best to have a defensible/conservative estimate. $20 million is a good
general guideline for the right size.
Exercise: Working Out the BHM TAM
Look at DE Workbook Step 4 TAM for BHM and DE Workbook Step 4
TAM Triangle:
Step 1. Estimate of number of end users in BHM (using triangle)
Step 2. Fill in the revenue estimation table
Step 3. Complete the top-Down TAM analysis summary
Step 4. Checklist after TAM top-down analysis
(Step 5. Bottom-up TAM estimation)
Step 5: Profile the
Persona for the
Beachhead Market
What?
Identify one actual real end
user in your beachhead
market that best represents
your end user profile.
Why?
Creates great focus in your
organization and serves as a
touchstone for all decisions
going forward.
Image credit: B. Aulet, Disciplined Entrepreneurship, Wiley, 2013
Why Create A Persona?
• Might seem unusual, but this is actually fun and important
• The Persona creates a single real-world case that allows you to gain a
lot of clarity on all dimensions of the business proposition
• Going beyond the previous End User Profile, the Persona is not a
composite of target user profiles – they are a real person
• Should be the ‘most representative’ person in your market –
described by demographics/psychographics/watering holes/etc
• Can be someone in the team, this has advantages and disadvantages
Exercise: Use DE Workbook Step 5 Persona for BHM to define your
persona (or personas if you have multi-sided market)
