Market segmentation is the practice of breaking down a larger market into smaller identifiable groups of users who share specific needs and reference each other.
You can segment a market in an infinite variety of ways, but for the purpose of discovering new value to create, I define a market segment as a group of like-minded people who share a common interest or need, have access to each other, and look to one another as a trusted reference.
If a customer prospect in California shares a need with a prospect in Zaire, but they do not have a means of communicating, they are in separate segments. Similarly, if both prospects are in New York, have the same job title, but work in very different industries and have different levels of responsibility, they are likely in different segments. You treat them separately, because the problems they face, their product needs, and the marketing and sales techniques to acquire them will differ.
The point isn’t that the individuals within a segment must speak to each other, but rather that they “have access” to do so. Access could be that they attend the same conferences, read the same magazines, or attend the same meetups. Often, they belong to the same subject-based community. Proper segmentation allows you to:
- Learn faster about whether you have a market for your product
- Find an undeserved segment where existing products are non-existent or inadequate
- Become a market leader earlier (by dominating a segment)
- Line up (and knock down) segments like bowling pins (one segment conquered successfully destabilizes adjacent ones)
- Maximize capital efficiency by focusing existing resources where you’re most likely to succeed