by Bill Aulet
Get everyone in the right mood: As discussed in Step 0 of this workbook, getting people in the mindset of “yes, and…” is incredibly important. The night before the brainstorming session, I strongly suggest having participants watch the brainstorming part (approximately the first third) of ABC News Nightline’s segment “The Deep Dive” about IDEO; you can find this video online. On the day of the brainstorming session, start out with David Morris’s 11-minute TEDxVictoria talk on “The Way of Improv,” also available online. The participants will hopefully be laughing by now and more relaxed than usual. The facilitator should then explain the key points of the David Morris video and how that builds off the IDEO video and is relevant to the exercise of the day. The fundamental concept of saying “yes, and…” has helped so many of my interactions with students and entrepreneurs to make situations much more productive.
Focus on being specific: The “F” word for entrepreneurs is “focus,” because it’s hard to do, and entrepreneurship requires continually keeping your focus. Make sure everyone understands they are brainstorming potential end users, and have them review Step 1 of Disciplined Entrepreneurship, which provides examples about how narrowly end users should be defined. Do not worry now about who will pay for the product; focus instead on end users who would gain significant value from some permutation of your idea. If there is no end user, there will be no economic buyer.
First pass to get the ideas out: Don’t critique, combine, reject, or otherwise discourage ideas. Just get them out and write them down in a nonjudgmental fashion.
The worksheet below is almost a blank slate, and that’s because the brainstorming process should be free flowing. Use the worksheet as a loose guide but let your imagination flow.
Brainstorming What My Startup Will Do
What is my idea or technology?
What industries and end users could my idea or technology apply to?
Industry or Similar Category End Users What They Would Use It For
Part 1B: Narrow
Now that you have lots of ideas, it is time to start narrowing down the field to eliminate from consideration market segments that would be weak options for your startup. The goal is to get to a manageable list so that later you can do a deeper analysis on a small number of market segments before you choose your Beachhead Market. I would say anywhere from four to 10 markets is a reasonable number of candidates to end up with, so that you can build your first draft Market Segmentation Matrix in Part 1C of this step.
Use the seven questions in the chart below as a guide for your discussions. Refer to Step 1 in Disciplined Entrepreneurship if you need more detail on how to answer those questions.
Start by focusing on your team’s values, passions, and goals, and eliminate ideas that violate your values. Don’t ignore your passions, because you will not be successful if you do something you do not like. You will probably also have some subset of ideas that the team quickly decides are not worth pursuing.
Each time, before you eliminate a market segment, allow time for the group to discuss to make sure the group has all the information before making such a decision. This discussion can be a powerful learning and alignment process. Lastly, once the obvious candidates are removed, have the group vote on the remaining market segments to get a prioritized list.
Use the chart below to record your prioritized list of top market segments and why they are particularly compelling. Record a sentence or two explaining each question on the chart. If, while filling out this chart, your team realizes another market segment is more compelling, discuss with the group whether to switch it out on your short list of candidates. Then, use the “Rank” column to prioritize each end user by how compelling an opportunity you think it is (“1” is best).
Top Target Markets to Consider for My Startup
End user Target customer well-funded? Target customer readily accessible to sales force? Target customer’s compelling reason to buy? Can you deliver a whole product? Is there entrenched competition? Can you leverage this segment to enter others? Consistent with values, passions, goals of team? Rank
Part 1C: Primary Market Research and Market Segmentation Matrix Version 1.0
Now that you have narrowed your market segments to a manageable number, you will start doing primary market research to build out the Market Segmentation Matrix below. You may be tempted to fill in the matrix with what you already know, but I urge you to be patient.
Instead, gather nearly all of the information through primary market research, by interacting directly with potential customers how they work today and what their customer pains are. Don’t assume you have the answer for a customer and start advocating your ideas. Instead, stay firmly in “inquiry mode” and learn from the customer. You will discover lots of things you don’t know about the customer’s needs, and you may find reason to revise your end user market segment definitions.
Before starting your primary market research, each person working on the matrix should read and understand the next chapter in this workbook, “A Practical Guide to Primary Market Research,” and should sign its “Primary Market Research Pledge.” Getting unbiased market feedback through observations, interviews, and experiments is absolutely crucial to your success.
Do not allow anyone to get too fixed in their opinion early in the process (i.e., stubborn). It is very easy to come to a strong point of view and then start advocating for it too early in the process. If someone appears to be leaning in that direction, the facilitator or someone in the group should openly note it and ask that person to explain the counterarguments to their own proposal, to get them thinking more broadly about both the pros and cons. It is important that people not be driving stakes in the ground with regard to their position, since it will make it emotionally hard for them to change later. You don’t have sufficient data at this point to make decisions; you need to do your primary market research.
The best way to tackle the matrix is to assign each market segment to a subgroup within the team—hopefully more than one person so that the resulting analysis benefits from multiple perspectives. Set a deadline to get a first pass done on the matrix. Each team should talk to and/or closely observe a minimum of 10 potential end users from that market segment during the first pass.
After the first pass is complete, have the team come back together and discuss their findings, so that the group can give feedback on each market segment. A few markets may now be eliminated, and the remaining market segments can get even more attention in a second round of primary market research. Do not allow individual personalities or debating skills to dictate which market is chosen, but rather a systematic analysis. Passion does matter, but it needs to be the passion of the group, coupled with a rigorous and realistic analysis.
As we mentioned earlier in this section, it is important that when discussing the first pass results, if anyone seems to be getting too emotionally attached to a market, ask them to argue why the team should not pursue that market. If they still appear to be too attached, swap individuals and allow someone else to continue the research of that market segment.
You will want to iterate multiple times on your matrix, alternating back and forth between primary market research and group discussion of your findings. Getting the matrix as correct as possible will make it easier to achieve forward momentum and save you lots of time later. But institute deadlines for each iteration of the matrix to keep things moving forward at an acceptable pace. Forward progress is essential.
Once you have obtained consensus within the team that you have the best Market Segmentation Matrix you can build in the time frame that is acceptable to your situation, you are ready to move on to the next step in the 24 Steps. Participants should be aware they cannot expect to pull you back to restart this process unless there is truly overwhelming evidence agreed by all that the current market segment selection is not viable. You need to move forward with everyone in agreement. While it is possible that in a later step of the 24 Steps you will get som
e significant new information that was impossible to know previously, forcing you to revisit the Market Segmentation, in general iterating all the way back to the beginning is the most expensive kind of iteration because all of your work builds off each previous step. Completing the matrix puts your team at a “speak now or forever hold your peace” moment.
Market Segmentation Matrix Row Definitions
1 Market Segment Name Carefully name the market segment so it appropriately and precisely captures the group you want and no more; it is okay to be general at first, but you will have to narrow this down in time to make real progress.
2 End User This is the person who is actually using the product, not the economic buyer or the champion (more on this in Step 12)—even if you are selling to a company or a general organization, you want to list here the people in that company who will be using your product.
3 Task What exactly is it that the end users do that you will significantly affect or allow them to do that they could not do before?
4 Benefit What is the benefit that you believe the end users will get?
5 Urgency of Need What is the level of urgency to solve the problem or capture the new opportunity for the end user?
6 Example End Users Who are examples of end users that you can, have, or will talk to, so as to validate your perceptions of this market segment?
7 Lead Customers Who are the influential customers (i.e., lighthouse customers) where, if they buy the product, others will take note and likely follow?
9 Willingness to Change How conservative is this market segment? How open are they to change? Is there something to force change (e.g., impending crisis)?
10 Frequency of Buying How often do they buy new products? What does their buying cycle look like at a high level?
11 Concentration of Buyers How many different buyers are there in this market segment? Is it a monopoly? Oligopoly (a small number of buyers)? Or many competitive buyers?
12 Other Relevant Market Considerations This allows for customization of your segment for relevant considerations such as “high employee turnover,” “very low margins/commodity,” “high-growth industry,” “high virality effect” (i.e., word of mouth), etc.
13 Size of Market (# of End Users) Estimation of the number of end users to a relevant range (10s, 100s, 1Ks, 10Ks, 100Ks, 1Ms, etc.).
14 Est. Value of End User ($1, $10, $100, $1K, etc.) A first-pass estimate of the value of each end user, again to a relevant order of magnitude so you can make some relative decisions now (you will do a deep dive into this and other numbers later).
15 Competition/Alternatives What will be your competition from the end users’ perspective? Include the “do nothing” option as well as who else would be competitors if the end users analyzed their options.
16 Other Components Needed for a Full Solution Since most customers will only buy a full solution and not an individual component that they have to assemble into a full solution, what other elements are needed to construct a full solution to achieve the benefits above? These are the complementary assets that you do not currently have but would need to build or acquire to give the end user a full solution.
17 Important Partners Who are the partners or distributors you will have to work with to fit into the end user’s workflow (e.g., data must come out of vendor A’s system and then be picked up at the end by vendor B’s system) or business processes (e.g., the end user gets all his or her product via distribution channel C)?
18 Other Relevant Personal Considerations In many Market Segmentation analyses, there are additional important factors that should be considered. These could be things like where the market segment is geographically centered, whether it matches the values of the founding team, existing knowledge and contacts in market, etc.
Market Segmentation Matrix Starter Template
Market Segment Name
End User
Task
Benefit
Urgency of Need
Example End Users
Lead Customers
Willingness to Change
Frequency of Buying
Concentration of Buyers
Other Relevant Market Segment Considerations
Size of Market (# of End Users)
Est. Value of End User ($1, $10, $100, $1K, etc.)
Competition/Alternatives
Other Components Needed for a Full Solution
Important Partners
Other Relevant Personal Considerations
Team Composition and Dynamics
Before you move on to Step 2, Select a Beachhead Market, consider the team you have assembled. Throughout this step, you should have been keeping an eye on the team composition and dynamics. Be open and honest about how things are working and if everyone should continue with the project. It will be much easier to change team members now than later.
You know it is crucial to iterate on your product to be successful, but your team’s composition and cohesion is just as important, if not more important. And yet, people are reluctant to iterate on their team. Don’t be like that. You all will pay later if you don’t optimize your team now.
I’ve included the following team table from Step 0. Consider it again, including not just the founders you initially identified, but other participants in the brainstorming process of this step. Which of them may have valuable insights, perspectives, and experiences? If they do not want to join the team, are there others with similar qualities you want to add? Are there members who you do not think would contribute positively to the team?
Name How Do We Know Each Other? Knowledge Skills Passions/Interests Founding Team Potential
Make sure you document your decisions so everyone has a clear understanding of how you are going forward, and so team members understand their “ownership” of the business venture. Even if you are not quite ready to incorporate your business, you don’t want a misunderstanding at this early stage to fester and cause trouble for your team later on. Getting legal help may be a wise strategy at this point. The 24 Steps do not cover legal issues related to company formation, such as how to split equity between team members, but Noam Wasserman’s The Founder’s Dilemmas is a good initial resource to better understand how to manage team dynamics in a startup.
BONUS TOPIC
A Practical Guide to Primary Market Research
This is new material that was only covered at a high level in Disciplined Entrepreneurship. I want to express my thanks to my colleague Elaine Chen at the Martin Trust Center for MIT Entrepreneurship, as well as the entire marketing group at the MIT Sloan School of Management, specifically Professors Catherine Tucker, Duncan Simester, and Drazen Prelec, who provided important intellectual contributions and consultations with regard to this chapter. The good ideas are theirs, and I take full responsibility for interpretations or extrapolations to the entrepreneurial environment that might be more controversial.
WHAT IS PRIMARY MARKET RESEARCH?
Primary market research is direct interaction with customers to understand their situation. The skills required to do effective primary market research are required to complete almost every step of the 24 Steps. Step 1, Market Segmentation, is heavily fueled by primary market research, but you never stop doing primary market research when you want paying customers.
I’ve added this supplemental material to help you develop a fundamental skill that underlies the entire process of starting a company—the knowledge and ability to do good primary market research. Disciplined Entrepreneurship gives an overview of the topic, but this chapter will help you research much more efficiently and effectively.
The entrepreneurship community has lagged behind in incorporating primary market research into startup formation, which is a missed opportunity. Customer-focused companies such as Procter and Gamble and leading product design firms such as IDEO and Continuum Innovation have long practiced primary market research in their user-centered design processes.
More recently, with terms like Ste
ve Blank’s “customer discovery,” primary market research is becoming less intimidating an idea for entrepreneurs. But primary market research has deep roots, and this chapter explores the depth and breadth of academic and practitioner insights on the topic.
Primary market research feeds into the 24 Steps all along the way and is the fuel that keeps the process going in the right direction.
Entire books have been written on this topic, so I am going to try to synthesize it down to what entrepreneurs really need to know to be successful. As Dharmesh Shah says, one of the key things you need to do to be successful in a startup is to start. It is right there in the name. So don’t get overwhelmed by the magnitude of this task; just get started.
Definitions
Primary Market Research: When you (or someone you hire) directly interact with the potential customer to gain knowledge specific to your potential new venture. I will often call this “bottom-up” market information. Depending on where you are in the 24 Steps, you may be interacting with the end user or with other individuals within the company, such as the people who make spending decisions (the “economic buyers”), the people who will advocate for the purchase of your product (the “champions”), or others who influence or control the procurement process (collectively, the entire group is called the “Decision-Making Unit,” which I will get into much more detail in Step 12).
