As technologists working on new products and new markets, we tend to forget where we are on the technology adoption lifecycle curve.  That’s a mistake.  Here’s why:

1. Nobody cares

See all that white space under the middle of the curve?  Those are people using products that aren’t yours. They are inundated with new offers every day. They exist in a world of information overload. It doesn’t matter how great your technology is, nobody knows about you, nobody cares about your product.  See that white space under the line marked by the blue dot?  Yeah, me neither.  If, for example, you are building a new web app that demands people spend time on your site, whether you’re the new deal site du jour or a “disruptive” new Q&A site, you’re competing against limited attention, ie., limited time carved out for spending time online.  Never mind your actual competition. You have to either increase the amount of time people spend online, or steal time from Facebook, Twitter, Google, Microsoft, CNN et. al.

2. You have a long way to go

Inside our early adopter bubble, we think a TechCrunch mention is the end all, be all.  What % of the US population has never heard of TC, 97%?  See where the curve starts accelerating up?  That’s about where the chasm lives, waiting to swallow you up.  Of course As Steve Blank likes to point out, you’re lucky if you even get to the chasm. We are easily distracted by minor (albeit clever) improvements to infrequent activity on technology platforms that from a global perspective, are obscure.  Say, like posting photos that look like Polaroids to Twitter. Not only are we enamored with such minutiae, but are ready to declare such features “the winner.” Of what, who knows?  You can try Leapfrogging early adopters, but that requires millions and millions of dollars (see iPhone/iPad).

3. Your entire ecosystem is early

Have you noticed the resurgence of email newsletters? It’s as if technologists finally got the DMA memo that email is (still) the online communication tool of choice among consumers.  In other words, if you want to reach customers, email is better than Twitter, Facebook, SMS, etc.  Not that these aren’t effective, too, for some segments, but like it or not, email is king.  The point is that the distribution of users on the platforms your product depends on, determines your market potential.

If your strategy depends on early majority platforms, you will need patient investors and money to burn. If you aim to leverage established platforms, remember that users generally like them the way they are (that’s why they were successful).  It’s hard to alter user behavior within a platform, too.

Of course, your objective might be to overthrow entrenched players, or perhaps to re-segment their market.  But remember that the momentum achieved by established companies successfully converting the “early majority” crushes your “better” product.

Use your fellow “early adopter” denizens to help vet your product, determine what works to solve pain, reward passion, instigate sharing, but don’t assume your success here and infatuation with your wiz bang technology represents a real market.

I’ve written about market segmentation before both on this blog and as an important concept to understand in The Entrepreneur’s Guide to Customer Development. I think it is vital to grasp because it’s fundamental to achieving Product-Market fit and building a scalable business. I’m writing about it again because it has come to my attention that I have perhaps not explained one of its primary precepts well enough.

As I wrote before, Geoffrey Moore in Crossing the Chasm defined a market segment as:

* a set of actual or potential customers
* for a given set of products or services
* who have a common set of needs or wants, and
* who reference each other when making a buying decision.

Most of this is pretty intuitive. In a nutshell, a market segment is comprised of like buyers who share the same pain. But there’s more to it. The reference part trips some people up. The key point to understand is that the customers and potential buyers must be willing AND able to reference each other.

This doesn’t mean that two customers need to know each other or even speak to one another, but simply that one respects the opinion of the other for a particular purchasing decision and that somehow the sharing of that opinion happens. Go to any well-marketed B2B web site and you’ll see case studies of successful customer implementations, often arranged by vertical industry, because the decision maker in one company likely respects his or her counterpart’s decision making about specific products.

Note that verticals are not necessary to define segments, since for some products, buyers may not consider industry a significant factor. Same holds true for other classic market segment variables, such as geography and buyer profile (gender, age, income, etc.). Those factors may come into play, but only as defined by “willing AND able to reference each other.”

One can quickly understand the tremendous importance of social media marketing within the context of market segments. Facebook’s “Like” feature by itself instantly expands the scope of “sharing a reference” by several orders of magnitude.

Market Segments and Product-Market Fit

As you search for Product-Market Fit, you are likely to investigate multiple market segments. Ideally, you want to reach Sean Ellis’ 40% “very disappointed” metric in one segment. In other words, if you have achieved 40% across your user base, you still need to segment those users and measure within the segments.   You don’t want to find yourself in the situation of treating a group of users who are only willing to pay $5/mo — or nothing at all — with one willing to pay more.   By segmenting those users, you might discover a lower score among the group you assumed you were targeting. Or you might find your 40% “very disappointed” is in a segment that is ridiculously small or has no money. In this case, you might choose to continue to work to get over 40% in the more promising segment.

Market Segments and the Scalable Business

Simplistically speaking, your Startup becomes a scalable startup when you have learned how to acquire and convert a big (or multiple) market segments.  If you are raising money, part of your story should be detailing your target segment and how you will convert its members, as well as how winning this segment will lead to a scalable business.
As in the diagram to the left, you might find that your total addressable market (TAM) can be split into various segments.  The TAM includes all users who share a problem to some degree and who you believe will be receptive to your solution.  The level of pain might differ, however, between some identifiable groups of users.  The features required in the solution might also differ.  Further, who the buyer is, who they consider trustworthy references, and how they are acquired and converted (funnel) are likely not the same across all the groups.

Your growth strategy — how you build a scalable business model — will depend on your strategy to capture these segments.   Best practices dictate that you choose and focus on 1 segment at a time, the reasoning being that 1) you don’t have the resources to tackle specific functionality required by the different segments; and 2) you don’t have the resources to acquire and convert multiple funnels simultaneously.

Whether this is truly best practices depends on your startup.  How different are the feature requirements?  How different are the funnels?  How much bleed over into adjacent segments does your social media marketing provide?   For web-based business models anyway, as the costs of online marketing have decreased and the ability to track the return on your marketing dollars has increased, the need to focus on only 1 segment has diminished.  (When you are  first starting out, however, there’s still a lot of benefit to the learning that is accomplished by focusing on narrowly drawn segments.)

The one core principle that remains, however, is to focus on one core value proposition. If you start selling to a segment with a different need or change the product for a group of users because they’re solving a different pain, in actuality you are “pivoting.”   In this case, you are better off not serving multiple masters and must “fail one” in order to pursue another.

Market Segments and Early Adopters

Early Adopters are not a segment unto themselves.  Early adopters are those prospective customers who readily recognize the problem you are trying to solve and are often looking for solutions for themselves.  Early Adopters are important since they are likely closer to the pain then you are and will help modify and validate your core customer-problem-solution assumptions.   They will also likely champion your product if you are successful at solving their problem and will form the base of core passionate users you seek that determine Product-Market Fit.  In the early going, you will likely find that your early adopters represent different segments and you will eventually disappoint some of them.

I hope this clarifies some of my past writing on market segments.  What has been your experience?

Presumably if you are committed to the principles of customer development, you are already committed to “getting out of the building.”  Before you can interview potential customers, however, you have to find potential customers to interview.  Unfortunately, there are no magic bullets.   This is painstaking work.  Just as with other portions of the customer development model, to find early adopters you make assumptions, test, and iterate.  If you are having trouble getting started, try these steps:

Step 1. Profile your Customer

Write up a description of your ideal mainstream customer.  Are they male or female?  How old are they?  What do they do for a living?  Are you targeting them as a consumer or professional?  Are they online?  Where do they hang out?  Where do they congregate offline?  How do they spend their day?  Describe their personality like?  What are their hotbuttons?  Where do they fit on the technology adoption curve?  What technologies do they use?  Late adopters of social media, for example, may just now be heavy users of e-mail.  Include as much detail you want, letting your creativity guide you.

Re-read your description and remove attributes that are not unique.  In other words, if they are male or female, then their sex is not a differentiating characteristic.

Step 2.  Brainstorm Locale

Brainstorm how to reach these users.  To state the obvious, users who are not active online, are not likely to be reached online.   This is the whole point of “getting out of the building.”  Don’t build an online strategy for reaching offline users.  If your potential users attend networking events, then that’s where you’ll have to go.  You have to be clever about finding them!

Andrew Chen has a great post on using surveys and Craigslist to talk to customers.  Note, however, that posting on Craigslist or buying ads on Facebook won’t work if your potential customers don’t use Craiglist or Facebook.

Don’t consider your method yet, consider where they are.  Have you thought of:

Your network -> Some here may also be biased, but those 2 or 3 degrees away are likely to offer real answers.

Social networks -> For b2b, have you considered LinkedIn groups?

Your blog readers

Networking events

Web surveys

Customer registration cards (ha ha)

Store fronts -> stand out in front of Trader Joe’s with a clipboard!

Talk to your customer’s customers

Database, e.g., Hoover’s or Lead411

Initially, the idea is to cast a wide net, because you really don’t know the best place to find your prospective customers.  There are no wrong methods, if the end result are users who understand the problem you’re trying to solve.  I was speaking with a colleague in Shanghai on the recent Geeks on a Plane tour, who expressed some consternation over the fact that he had found early customers through PR (actually a newspaper interview), which is verboten according to the customer development model.

Models are only that.  There are no rules, only methods to acquiring answers from the customer.  If a magazine article (not, BTW, the result of a PR campaign), puts you in touch with hard-to-reach potential customers (in this case the Chinese government), then that is valid customer development.

Step 3.  Who determines how

Your endgame is an interview.  You want to speak to your customers in order to confirm your assumptions about their need for your product.  You’re not selling, you’re listening.  You are not gathering feature requirements, you are gathering understanding of their pain.  You do not ask leading questions, you ask open questions.  You not to cajole users into contributing to or beta testing your product, you learn what it would take for them to pay you for your product.

The method you use depends on the person.  Surveys are used to provide you a sample, from which you cull early adopters.  Remember, your objective is to interview the early adopters.  Though it may provide you valuable information, the survey is not the endgame.  The interview is what you are getting to.  For potential customers whom you have identified via phone call or through in person networking, you need to setup a meeting, preferably in-person.  Tell them that you would like to conduct an informational interview or you are doing research and that the meeting will only last 15 minutes, and that no selling will be involved.   Be sure to keep yourself honest!

At this point, you are satisfied to be speaking with any potential customer, whether or not they represent early adopters.  Remember, you are testing each of the assumptions comprising your profile.

Profile 1 -> has pain? -> if no, iterate to Profile 2

->Locale 1 -> if yes, I can reach them through Craigslist?  -> if no, iterate to Locale 2

-> if yes, etc.,

You must have a concise set of objectives for the first interview.  Remember, you only have 15 minutes.  You must learn:

• is problem assumption valid
• are current solutions insufficient
• does your solution sound plausible
• is the person I’m speaking with a potential early adopter

Step 4.  Identifying the early adopters

Simply put, early adopters have these three determining characteristics: they understand the problem you’re trying to solve are passionate about finding a solution, and if your model calls for it, are willing to pay.   They do not have to be passionate about your solution, but recognize that nothing out there today adequately solves a problem that is very important to them.

You learn valuable information from all your interviewees, but are happiest to discover early adopters.  Hopefully you can establish a long term relationship with them, since they will help you build the right product and teach you how to market and sell to them.  More on that later.

Where have you found your early adopters and how did you find them?   Let me know in comments!