Learn more about what market segmentation is, how to implement it, and its benefits.
Many new companies believe their product can fit into multiple different markets. While this may be true for the long run, for a new company it is not. Markets are heterogeneous, meaning each customer in the market is not the same. This means that each product has a submarket that directly correlates to the customer base they are trying to reach. Another common misconception is that markets refer to products or price; they actually refer to the customer base you are trying to tap into.
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Market segmentation is the practice of dividing customers from a larger market into homogeneous units. These units of customers are grouped in a few main ways:
For example, the market segmentation will be different for customers that buy electric vehicles and customers that buy pick up trucks.
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There are many advantages to clearly segmenting your market, especially for startups. Market segmentation prevents startups from focusing on customers that do not have a need or priority for their product.
Segmenting the market allows your company to clearly define who the product is intended for. Splitting up the market in this way can allow you to differentiate your customers behaviors from non-customers and crystallize their purchasing behavior to better understand your product’s demand. This will also lead to better product development, as a new company can be better equipped to make products their market has a need for.
This allows for a more economical approach to marketing, business planning, and even selling. Here are a few different ways to segment a market, beyond the ones mentioned above:
The most effective market segmentations will combine multiple dimensions of an ever-changing customer base.
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There are 4 main steps for starting to understand your product and company’s market segmentation:
Conduct preliminary research
Determine how to segment your market
Create your customer segments
Test and iterate
Conducting preliminary research starts at the roots, talking to customers directly. Usually this involves asking them open ended questions about their use for your product and how it fits into their needs. This was much easier in a pre-COVID world, where you could talk to people in person. Nonetheless, with the help of technology, there are great ways to get in contact with your current and potential customers.
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After you collect your data, you need to decide how you want to segment your market, whether it be by demographics, geography, behavior, etc. Then you will want to create your customer segments by analyzing the groups you have created. You can do this manually or with statistical software. Then you will want to test and adjust your market segments to see if they are usable. If not, you may want to consider segmenting your customers based on different criteria.
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In order to better picture a real world example, we can examine how the pandemic has affected the IVD industry. IVD stands for In Vitro-Diagnostics, which is a type of sample testing. Before COVD, the IVD market segments included mainly hospitals, reference labs (like LabCorp) physician offices, and specialty labs as their main customer base. The market size of this group was valued at around $60 billion.
After the pandemic hit, their customer segment has expanded to include a variety of market segments because of an increased need for rapid COVID-19 tests. This includes new customers like childcare, manufacturing, educational, fitness, entertainment, and many more market segments The market for IVD testing is now valued at about $100 billion.
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You can imagine that the behaviors of each of these customer segments differ greatly. We can also imagine each of these customer segments in smaller subsegments, for example the need for testing an urban school versus a rural school. The way a company approaches each of these subsegments needs to be different, which highlights the importance of extensive market research.
In the middle of a pandemic, the need to do constant research and customer outreach is more apparent because of changing attitudes and conditions. For non-COVID years, market research can usually be compiled around 1-2 times per year.
Market segmentation is crucial for startups. It allows you to better understand your customer base and where you should be focusing your efforts. Talking with real customers and hearing their opinion on the product is the first step to understanding which subsegment of the market your company should focus their efforts on.
Q: How is IP strategy and market segmentation planned during the initial phases of building a company?
A: Both of these aspects of an emerging business are very important, but they operate in different very ways. IP strategy is important to protect your position but market segmentation is important for growing and developing your customer base.
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Q: How can you make introductions and relationships with customers to further your market research?
A: The best way to create these relationships is to get warm introductions, as cold calls are generally ineffective. You can reach out to your healthcare provider or ask existing customers as well. You could also offer gift cards to potential contacts as incentives.
This information comes from a talk sponsored by the SBDC @ UCI Beall Applied Innovation and University Lab Partners featuring Richard Creager, PhD. Watch the full talk here.
Richard Creager has more than 30 years’ experience in In Vitro Diagnostics (IVD). He was the SVP Molecular Diagnostics and Chief Science Officer for Beckman Coulter. He also served as Group Vice President for Beckman Coulter’s Immunoassay Business. Richard is a partner in IOI Partners, a management consultant firm for IVD and biotechnology companies.
The SBDC @ UCI Applied Innovation is a resource for any high-technology, high-growth, scalable venture from both the Orange County and UCI ecosystem that needs assistance with business planning, business development and funding-readiness. The center hosts several VC and Angel investors on site, as well as various ecosystem partners and industry professionals who work closely with the entrepreneurs.
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