How To Leverage Market Segmentation

When launching a new start-up or venture, perhaps the most vital step is making sure you’re reaching the right target market. But how do you know if you’re doing it? It all starts with four key steps.

Explore the advantages of leveraging market segmentation with Gilad Rosenzweig, executive director of MITdesignX, in the Entrepreneurship in Architecture, Planning and Real Estate online short course from the MIT School of Architecture and Planning (SA+P).

Transcript

Market segmentation involves four key steps. The first two involve a process of divergence and convergence, a method by which you widely open up your potential market and then carefully hone in on just a few selections.

Divergence

To start, we want you to diverge, to open your mind. Brainstorm as many people and categories as possible who would be potential users or customers of your proposed product or service. You may have already started with one person or a place in mind. For example, millennials in London. But what about seniors in Nairobi? Could that also be a potential market? When diverging markets, you will add many levels of segmentation, creating dozens, perhaps even hundreds of different alternatives. That process is actually relatively easy. Just make sure you have a lot of room to write cause your chart can expand quite quickly.

To begin the process of diverging, you need to have a starting point, remember to make this a person or a specific type of people, like bike riders or coffee shop owners or students. Next, we will start branching out divisions from that initial market type, you can divide using demographics, geography, size, typology, behaviour, or any other criteria that might be specific to your needs.

Each division should be compounded wherever possible. For example, if you divide students into elementary, secondary, and college levels, you can then apply another division, such as public or private institutions that would then apply to those initial divisions, creating six different markets in total. Add a geographic criteria, and you can quickly reach 12 possible markets. Each one different in at least one way. One thing to keep in mind is you don’t want to get too specific with locations or named places as that can lead you down the road to infinity. As you generate your divergent market segmentation, your market segments will begin to line up as branches. Each one, unique.

Convergence

Your market segmentation will create an overwhelming amount of options as to where your initial market lies. Convergence applies a set of criteria that will allow you to reduce your potential markets to just a handful of viable choices.

First, is the target market likely to have the need that the start-up aims to fulfill? And are they seeking to fulfill it? Does this market have the need you identified in the needs analysis? You want to make sure that you don’t veer from your original findings and assume another market has a similar need. Second, do they have a compelling reason to buy your product or service? Are you creating something that is better or cheaper?

Third, is the market readily accessible? Can you physically reach this market or do they have the necessary supply chains or infrastructure to allow you to enter that market? Fourth, is there entrenched competition? You don’t want to really initiate your venture in a market that is dominated by a really strong or successful competitor that might make your entry difficult.

Fifth, is the market well-funded? The question here is, is there money available? But don’t think of your potential user or customers as the only personal who might have to pay for your product or service. Perhaps a government or philanthropy will be paying. Or revenue might be generated by a third party, in which case, are those sources of funding available in this market?

Sixth, can you leverage this market into others? If you succeed with a specific market, will this lead to more and similar markets? You don’t want to invest and make your initial best attempt hit a dead end.

And lastly, we added one more criteria at designX. Will you have a significant social or environmental impact selling or serving this particular segment?

An important factor in a venture dealing with the built environment is that you want to be able to measure your impact. You might want to make a market decision that achieves the greatest impact, not just revenue. Although, they might like to be aligned.