How to Find Your Perfect Market Segment

It can make or break your startup venture

Imagine having complete clarity about exactly who your customers are, what they need, and how to reach them effectively.

This is the desired state of proper market segmentation – a foundation so critical that skipping it is like building a house without blueprints.

Most entrepreneurs rush to develop products without this clarity, which is why so many startups eventually fail.

Market segmentation might sound like boring business jargon, but it's actually a fascinating process of exploration and discovery that can determine whether your business thrives or merely survives.

The Disciplined Entrepreneurship framework, developed at MIT, presents market segmentation as Step 1 in a 24-step process.

Let's break down why this step is so vital and how you can execute it effectively.

1. Why market segmentation matters

2. What makes a true Market Segment?

3. How to do market segmentation in 3 steps

4. Primary market research (don’t outsource this!)

5. How long to spend on the market segmentation process

6. What you’ll get by doing it

7. Next steps

Why Market Segmentation Matters

The first commandment of entrepreneurship is remarkably simple: the single necessary and sufficient condition for a business is a paying customer. Not a great idea. Not a brilliant product. Not even a strong team.

Without someone willing to pay for what you offer, you don't have a business.

This truth is why market segmentation is so essential. You need to identify exactly who those potential paying customers are, what problems they face, and how urgently they need solutions.

Many entrepreneurs fall into one of two common traps:

1. Selling to everyone: Thinking your startup with limited resources can create products that fit the needs of anyone you encounter. This scatters your focus and resources.

2. Abstract customer scenarios: Creating spreadsheet projections based on secondary research without actually talking to potential customers. This is what veterans call "having fun with spreadsheets" rather than validating real market demand.

Instead, disciplined entrepreneurs narrow their focus to well-defined, winnable market segments that can serve as a foundation for growth.

What Makes a True Market Segment?

A target customer or market segment isn't just any group of similar people. To be considered a proper market segment, the group must share three fundamental characteristics:

1. They buy the same product.

2. They buy it in the same way (same use case, value proposition, channel).

3. There is word of mouth between them – they influence each other.

The third point is often overlooked but extremely important. If potential customers don't communicate with each other, your marketing efforts will be far less efficient.

How to Conduct Market Segmentation in 3 Steps

Step 1A: Brainstorm Widely

Even if you think you already know your target market, start by brainstorming a wide array of potential customers who might benefit from your idea or technology. This isn't about viability yet – it's about creating as long a list as possible.

One team, who developed a solution for connecting young professional women and combating loneliness, initially considered markets ranging from youth to elderly across various demographics before narrowing their focus.

Similarly, another team, which created technology to feel three-dimensional objects rendered by computers, brainstormed applications ranging from boxing channels to flight simulators to computers for the blind.

No idea is too crazy at this stage. As one founder put it, "stealthy is unhealthy" – socialize your idea widely to get feedback rather than keeping it secret.

Step 1B: Narrow Thoughtfully

Once you have many potential markets, you'll need to narrow them down to 4-10 candidates for deeper analysis. Begin with this critical question: "Is this market segment one I could get really excited about and dedicate the next six years of my life to serving?"

If you're not passionate about serving a particular market, cross it off regardless of how lucrative it might seem. You simply won't last.

After applying this personal filter, use analytical filters to evaluate:

1. Business considerations: Market size, competition, value proposition, etc.

2. External resources needed: Teammates, partners, capital requirements

3. Execution risks: How many things need to go right for you to succeed?

Geoffrey Moore, author of "Inside the Tornado," suggests eight specific criteria for narrowing market opportunities, including whether the target customer:

• Is well-funded

• Is readily accessible to your sales force

• Has a compelling reason to buy

• Can be served with a "whole product" (possibly with partners)

Step 1C: Build a Market Segmentation Matrix

Create a framework to analyze your top market segments in a structured way. Your matrix should include rows for:

• End user description

• Task they're trying to accomplish

• Benefit they receive

• Urgency of their need

• Example end users

• Lead customers

• Willingness to change

• Market characteristics

• Size of market

• Competition/alternatives

• Other components needed for a complete solution

• Important partners

Now fill this matrix through primary market research (PMR) – directly interacting with potential customers. Secondary research (reading reports others have written) is insufficient, especially for innovation-driven startups creating products that don't yet exist.

The Power of Primary Market Research

When talking with potential customers, maintain an empathetic listening mode. Don't try to sell anything or steer the conversation toward your solution. Be in "inquiry mode," not "advocacy mode."

Remember:

• You don't have "the answer" for your potential customers

• Your potential customers don't have "the answer" for you

• Focus on understanding their pain points, not designing solutions yet

One team interviewed dozens of women to validate their assumptions about loneliness and friendship-building challenges.

This primary research helped them understand that women in different life stages (new graduates, relocating professionals, new mothers) had distinct needs and behaviors.

Another team spent three months on market segmentation because they had strong intellectual property protection. This allowed them to thoroughly research eight different industries, from entertainment to medical visualization to industrial design.

The key: Don’t outsource this. Nobody should know your customer like you do.

How Long Should You Spend on Market Segmentation?

Give this process at least a few weeks of full attention. The time invested depends on:

1. The speed at which your target market is moving

2. Whether you have a strong competitive advantage (which buys you more time)

3. The personal needs of your team

Don't let this become a never-ending process or fall into "analysis paralysis." Make your best assumptions and then test them. You'll revisit this step as you gain more information through the remaining steps.

What You Should Gain from Market Segmentation

When done properly, market segmentation delivers three major achievements:

1. A solid analysis: The matrix provides fundamental information to move forward in an evidence-based manner.

2. A mindset change: You'll shift from focusing on your product to seeing the world through your customers' eyes – building from the customer back, not from the product out.

3. A coherent and cohesive team: This process tests whether your team can work together, debate issues, and ultimately unite around a vision. If you can't collaborate effectively during this relatively easy step, you should consider adjusting your team.

Real-World Applications

Market segmentation works for both "technology push" (a solution looking for problems) and "market pull" (a problem looking for solutions) ventures (See 3 Pathways to Entrepreneurship That Actually Work for these definitions)

One team saw that teachers spent hours on the energy-draining task of grading papers.

They segmented the teacher market by subject (math, science, language arts), level (elementary, middle, high school), school type, geography, teacher experience, and technology receptivity.

This detailed segmentation helped them understand that "teachers" weren't a monolithic group but represented many different types of potential customers with varying needs and buying behaviors.

Inside this type of segmentation is your fabled, mythical, and often misunderstood and underserved ideal customer profile (ICP).

Your Path Forward

Problems showing up later in a startup's journey often come from entrepreneurs not doing rigorous market segmentation upfront.

Invest your time and effort here, and it will pay dividends.

The goal isn't perfection, but to develop a deep understanding of potential markets so you can make an informed decision about where to direct your limited resources for maximum impact.

As always, if you’re a founder who needs help figuring out your ideal customer profile and walking through this process in more detail, I’m here for you… Get in touch.