A simple model to help SaaS founders map their markets, focus their efforts and align their resources.
One of the biggest challenges an early stage tech company can face is an abundance of choice.
Anyone who has witnessed a small child trying to choose from an array of ice creams will understand the tyranny of “too much choice!” For a tech company that has identified an industry-defining pain, that is common to an enormous array of customers, segments and geographies, this plentitude can be, on the one hand paralysing, whilst on the other, hugely dilutive of effort, resources and investment.
There is incredible value that comes from a company voluntarily constraining itself, indeed that constraint can itself be an incredible source of opportunity and creativity.
That version of constraint in an early stage business is to get everyone in the whole business aligned around the customers / segments / geographies, that are most important right now to achieving near term goals. This needs to be done while critically not taking an eye off the big prize, which may be 3, 5, 10 years down the line.
Let’s assume we have indeed nailed ‘product-market fit’ and have established our ‘ideal customer profile’ (both of which we have covered in-depth in previous articles). We are confident the market opportunity is huge, but we are addressing multiple market segments and serving different customer types with no real sense of their relative importance. While we may be growing fast, we are also burning a lot of cash, and more importantly the organisation is being pulled in different directions.
It’s easy to fall into the trap of thinking that segmentation and agreeing target markets is a sales and marketing thing. In reality ‘getting uncomfortably narrow’ about which customers we choose to target and serve is a strategic, companywide exercise. It’s as important to product managers and engineers, as it is to sales and marketing.
While there is plenty of talk about how to develop go to market strategies, there is little that is straightforward about how to agree which markets to go to.
Step 1 - Defining your target markets
We covered this at length in the previous “ideal customer profile’ report, but to summarise:
NB It’s worth bearing in mind that this method you apply at multiple levels, from assessing the relative priority of different countries or regions to assessing the relative importance of 100 strategic accounts.
An effectively executed market segmentation exercise should yield logical groupings of customers that can be addressed and served in a collective manner, with the highest capital efficiency possible.
You need to segment your customers …at the end of the day, your customers have different needs. The big customers have different needs compared to your small customers …If you’ve got everyone pooled into one bucket, the likelihood of you being able to pull the right levers for the right customers is low. (Source)
Gillian Heltai, SVP of Client Services @ Talkdesk
NB: Be conscious of the fact that you need to consider needs-based segments and firmographic segments, that is one of the most important reasons for using both the Market Attractiveness and Product Completeness filters on the segment selections as they allow you to apply your own subjective judgement on the market choices.
Firmographic Segmentation: This form of segmentation, is based on the descriptive characteristics of the companies. The process segments customers based on their characteristics. For instance, you could segment your customers in accordance with their location, size, or industry.
Needs-Based Segmentation: On the other hand, needs-based market segmentation does exactly what it says on the tin - the segmentation of a market based on needs. It is the process of segmenting the market based on the understanding of the needs and behaviours of your business’s end user. For instance, a start-up selling expensive software would group a construction company and a consultancy firm in the same segment based off of a need for expensive software, despite industry differences.
Whilst firmographic segmentation as a process is inexpensive and its results can be easily communicated to marketing and sales teams, the conclusions drawn from the results are limited. Just because two companies are headquartered in London, doesn’t necessarily mean that they have the same philosophies when adopting new technologies. It falls short in providing concrete reasons why customers have chosen your product over an alternative. Borrowing the words of Ben Cohen, VP @ Cengage:
[Firmographic segmentation fails to] capture the distinct needs, buying behaviours, or value [in prospective customers]” (Source).
Therefore, you must be careful not to make any sweeping generalisations about companies purely based on their occupancy of a firmographic segment.
Conversely, a needs-based segmentation, in theory, adopts a more comprehensive approach as it seeks to reveal the under and over-served segments that exist in a market and their respective sizes. Moreover, Founder & CEO of Strategyn Tony Ulwick highlights that
“it also reveals what needs are unmet in each segment” (Source).
However, an obvious drawback of adopting this form of segmentation is that needs can be difficult to recognise. Thus, relative to firmographic segmentation, a needs-based segmentation is a bigger drain on resources as it requires more research to understand the needs of the market. Moreover, in adopting a needs-based segmentation, you must ensure that your approach is reactive to the market, as companies’ needs can change from time to time.
Step 2: Narrowing your focus, establishing your best chance of success.
Let’s assume we have completed the segmentation and have narrowed our focus down to ten target market segments. We can look at these markets through many different lenses but in the example below we have chosen three: 1) the addressable value, 2) market attractiveness and 3) the completeness or fit of our product for each of those segments.
It starts to become clearer where our priorities should lie, but the true priorities only really arise when we visualise the results.
Step 3: Visualising your target markets.
The GE-McKinsey Matrix is a strategy tool that provides a structured approach to prioritize investments amongst different business units.
At Notion, we have devised a modified version of the GE-McKinsey matrix where in place of industry attractiveness (y-axis) and competitive strength of business unit (x-axis) we’ve substituted Market Attractiveness (MA) occupying the y-axis and Product Completeness (PC) occupying the x-axis, overlaying the market value for each segment.
The priorities start to become clearer.
Step 4: Introducing The Market Prioritisation Matrix.
The choices start to become self-evident.
Priority 1 (P1): Double down on the two segments in the top right-hand box, MS9 and MS6, with MS9 being by far the larger of the two.
Priority 2 (P2): Our next priorities would typically be the two quadrants immediately to the left or below the top right, however in this instance the opportunity represented by MS4 is possibly too small to warrant much attention, so the next priorities would be MS5 and MS1.
Priority 3 (P3) are very much a wait and see, and anything in the shaded-out areas can be ignored, regardless of market value.
While not an absolute science, what this approach will achieve is a common understanding of the relative value and importance of different segments and importantly the process used to arrive at that decision. It can form the basis of the prioritisation of resources, the focus for engineering as well as short, medium and longer term thinking whereby as markets or products mature, segments that are currently unattractive may well become more appealing.