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New Enterprises · Lecture 6 of 12 · 3:01

Lecture 6: How to Do Market Segmentation

Study guide

What this lecture covers

This lecture explains the practical process behind market segmentation, a step in Aulet's disciplined entrepreneurship framework. It covers how a team should generate a wide list of possible target markets through brainstorming, then narrow that list down using direct customer research rather than secondary sources.

Watching this gives you a concrete process to apply when deciding which markets to pursue for a technology or idea, and why talking to real customers matters more than reading reports.

Key ideas

Start from what customers already do: if a technology already has users, ask them directly what they use it for.
Brainstorm broadly: lay out every possible market opportunity as a team, without dismissing ideas that initially seem too crazy.
Primary customer research: go out and talk to real potential customers rather than relying only on internal assumptions.
Understand customers holistically: grasp their needs rationally, emotionally, and socially, not just their stated problem.
Narrow in stages: cut a long list of markets, such as twenty, down to a manageable six to eight through a first pass of research, then research again more deeply.
Distrust secondary sources: do not rely solely on internet research or third-party reports; go see for yourself.

Before you watch

Watch "Varieties of Innovation" and "Three Ways to Start a Company" for context on how a market segmentation exercise fits into building a company around a technology or idea.

Check your understanding

Why does Aulet recommend brainstorming a large, even unrealistic, list of markets before narrowing it down?
What is primary customer research, and how does it differ from reading a market report?
Why does the lecture warn against trusting a report from a source like Gartner?
What are the three dimensions Aulet says you need to understand about a customer beyond their stated problem?

Vocabulary

market segmentation (noun): Dividing a large market into smaller groups of customers with similar needs.
Market segmentation helps you find the right group to sell to first.
brainstorm (verb): To generate many ideas quickly as a group, without judging them at first.
The team brainstorms a wide list of possible markets.
primary research (noun): Gathering new information directly from people, rather than using existing reports.
Primary research means talking to real customers yourself.
secondary source (noun): Information already collected and published by someone else.
A secondary source like a market report can be outdated or wrong.
holistically (adverb): Considering all parts of something together, not just one piece.
You should understand your customer holistically, not just their stated problem.
rational needs (noun): Practical, logical reasons someone wants a product.
A customer's rational needs might be saving time or money.
emotional needs (noun): Feelings-based reasons behind a customer's decision.
Emotional needs can be just as important as practical ones.
social needs (noun): Needs related to how a person is seen or accepted by others.
Social needs can influence what products people choose to use.
narrow down (phrasal verb): To reduce a large list of options to a smaller, more focused set.
The team narrows down twenty markets to six or eight.
shortlist (noun): A small selected group chosen from a much larger list of options.
The shortlist of markets comes after the first round of research.
target market (noun): The specific group of customers a business aims to sell to.
Choosing the right target market is the goal of segmentation.
candidate (noun): A possible option being considered among several choices.
Each candidate market gets tested against real customer feedback.
assumption (noun): Something believed to be true without proof.
Teams should test their assumptions with real customers.
stated problem (noun): The issue a customer directly says they have.
The lecture warns not to stop at just the customer's stated problem.
validate (verb): To confirm that something is true or accurate through testing.
You must validate a market idea before committing resources to it.
opportunity (noun): A favorable chance to achieve something.
Every possible market opportunity gets listed during brainstorming.
concrete (adjective): Specific and clearly defined, not vague or abstract.
The lecture offers a concrete process for choosing a market.
process (noun): A series of steps taken to achieve a goal.
Market segmentation follows a repeatable process.
internal assumptions (noun): Beliefs a team holds based on their own thinking, not outside evidence.
Relying only on internal assumptions is risky without customer input.
grasp (verb): To understand something fully.
You need to grasp customer needs beyond the surface.

From the YouTube description

MIT 15.390 New Enterprises, Fall 2013
View the complete course: http://ocw.mit.edu/15-390F13
Instructor: Bill Aulet

Discussion of the process for performing market segmentation in a rigorous manner.

License: Creative Commons BY-NC-SA
More information at http://ocw.mit.edu/terms
More courses at http://ocw.mit.edu

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