When You Choose Your Entry Market, You Must Aim Small to Miss Small

Mat Scholtec
Oct 9, 2020
5 min read

No matter what product or service your startup offers, every business manager must confront the question, “Who am I going to sell this to?”. Most startups are pitched to investors as opportunities with billion-dollar potential and tens of millions of paying customers. Over time, companies may achieve an impressive market share, but every business that has ever existed has started with a single customer. As Richard Branson stated, “A big business starts small.” Regardless of how popular you believe your product will inevitably become, you must unavoidably start with customer number one. Importantly, this first customer segment should be carefully chosen through a thoughtful process to reduce the possibility of initial failure. After all, these are the customers for which you are investing your efforts. With any investment, you want to conduct the due diligence necessary to maximize returns. In terms of your customer investment decision, the process of selecting your initial or beachhead market should pay adherence to the following activities:

1. Segment your potential customers into no more than six of the most viable market segments.

2. Rank these segments in regard to customer success qualities.

3. Identify the highest-ranking segment and perform further segmentation on it.

4. Select your target customers.

By conducting these activities, you will define your market entry point narrowly enough to give yourself a clear, precise target at which to aim your business. Let’s examine these activities in detail.

Activity 1 – Segment your potential customers into no more than six market segments

Customer strategy involves choosing which customers you want to target and, importantly, which customers you do not want to target. It is impractical and infeasible to consider all potential customer demographics, geographies, behaviors, and psychographics as your target market. While many companies believe catering to everyone will put them on the fast track to unicorn status, they usually find themselves trying to serve everyone and no one at the same time. Instead, organize your total addressable market and extract no more than six market segments. This process should not be burdensome or time intensive, and the segments should not be collectively exhaustive of all potential customers – that is the basis for limiting the segments to a maximum of six. However, the segments should pass an initial sniff test of having the best legitimate potential based on you and your team’s knowledge.

Figure 1. The outcome from this initial segmentation activity will put your obtainable market into clearer focus.

After the segments are defined, the next step is collecting data to validate the market segments you’ve identified. Ideally, the best data are the data you collect yourself because it will provide more insight and depth than any market report or secondary research available for purchase. Leverage your network, pick up the phone, send an email, and venture into the real world to talk to your actual customers. If, through your research, you realize that one or multiple segments are not viable, then remove those segments from consideration and brainstorm other potential market segments as a replacement. This validation is very important, and the effort you exert on this step will correlate to reduced risk of improperly selecting your entry market.

Activity 2 – Rank these segments in regard to customer success qualities

You may have a hunch of which segment will be the most profitable, or you may be drawn to a segment due to personal preference. As compelling as those emotions may seem, an objective analysis is your best tool to continually reduce risk. This analysis applies a rank to each market segment by scoring each segment across four customer qualities:

1. This segment has a true pain point that your product/service remediates.

Stated differently, your product is something the customer must have rather than something the customer would like to have. Your product is compelling enough to upheave the customer’s status quo solution.

2. This segment has sufficient buying power.

Obviously, the customer must have the available funds to buy your product, and not only buy it once, but also have the potential to be a long-term source of cash.

3. This segment is currently underserved by competitors.

You must always know the competitive forces in the markets in which you compete, so perform a quick competitive analysis. Plot your value proposition versus your competitors against the dimensions of your customers’ two most critical needs. Assess your position relative to your competitors.

4. This segment can be efficiently reached.

There must exist at least one channel through which you deliver the product to your customers. This channel should be comprised of the least number of intermediaries as possible.

For each segment, score the four statements with a value of 1 through 5 (1 = strongly disagree, 5 = strongly agree) and sum the numbers. The segment with the highest total score is the lucky winner.

Figure 2. The outcome from your ranking activity will lead you to select only one of your potential market segments.

Activity 3 – Identify the highest-ranking segment and perform further segmentation on it

The segmentation doesn’t end after just one pass. Once your optimal segment is selected, it should be segmented further to drill down to beachhead segments that are as homogenous as possible. The potential beachhead segments should be determined using the same demographic, geographic, behavioral, and psychographic dimensions as in Activity 1. There are multiple purposes to doing this additional segmentation activity. As the golf adage states, “aim small, miss small”, meaning if you aim at a smaller target, then the shot error is likely smaller. If you aim at a smaller target beachhead segment, then the potential error and negative effect from not succeeding with those customers is likely smaller. You are also able to optimize and streamline your go-to-market activities. Since you’re only serving one very specific type of customer, marketing waste on less valuable segments can be eliminated.

Figure 3. The outcome from the sub-segmentation will provide a clear idea of beachhead segment options.

Activity 4 – Select your target customers

Score and rank the beachhead segments using the procedure from Activity 2 once again. By this point, the highest ranked beachhead segment should be a tight, homogenous group of customers. This set of activities has defined them as a likeminded demographic living near each other that has the buying power to fill an unmet need with your well-fitted product.

Figure 4. The final ranking will reveal your optimal segmented beachhead entry market.

These activities do not guarantee a perfect segmentation or selection process for the customers you should target. They simply develop a focus that increases your probability of winning quickly. Even if the eventual outcome from the selected entry market proves unsatisfactory, you will still have two positive takeaways. Firstly, you will have left yourself an “investment memo” outlining the decision-making process and data inputs you utilized. This now becomes a tool to analyze and correct missteps. Secondly, because the entry market was focused and small, any fallout is minimized. The customer acquisition costs, reputation demerits, and opportunity costs incurred are not likely to sink your business nor soil the opportunity with a different segment.

Like an archer aiming at a bullseye, a business leader must aim at her smallest, highest scoring target. If you are prudent in doing so, you may be pleasantly surprised at how small you will miss.

Mat Scholtec is a Founding Partner of Austin Consulting Group. His client work includes growth strategy, market entry strategy, and sales strategy across the technology, CPG, and manufacturing industries.

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