• Jazgul Ismailova

Why is market segmentation important for startups?

Updated: Sep 16, 2020

A segmentation model is a map that guides the selection of consumers to target. A good model includes distinct customer groups that differ in life values, attitudes toward a category, and reasons for choosing a specific brand, and its findings are based on a sufficiently large quantitative survey designed to gather data representative of a selected market. The data can be used to estimate market size, the business value of its segments, and ways to grow the brand. Startups use segmentation studies to evaluate market potential and determine the drivers and barriers of a target group. The survey usually includes a competitive landscape and reveals the market sizes and brand equities of competitors. These insights are the foundation for a good brand positioning strategy and target group selection. Selected target groups are used later as personas for product design, marketing campaigns, and customer experience designs.

To maximize the value of the model, experts examine human insights, category insights, and brand insights. Human insights reveal needs and life attitudes. These are considered to be more stable over time than life stages or shopper needs. Category insights reveal drivers and frustrations for a specific category or industry. For example, customers with good financial skills likely prefer a platform that can be used to easily trade stocks and funds with a minimum of fees, whereas beginners likely prefer a bank that provides personal service and guidance. Finally, brand insights reveal why people prefer one brand over another. For example, those seeking stability likely prefer traditional banks, whereas early adopters are likely to experiment with new brands such as Opti or Fundler.

How to build a segmentation for your startup:

1. The cornerstone for a good model is a hypothesis about the customer groups and their needs for the product and brand. Ideally, qualitative research such as focus groups or customer development interviews are used because they capture the assumptions about life values, category needs, and brand preference.

2. The next phase is quantitative research to gather data representative of the market using a sufficient sample size that allows the market to be broken down into segments. At least 800 interviews are required; the standard is 1200 to 1500 interviews. This phase can span up to 4 weeks: 1 to craft the questionnaire, 1 to program the survey, and 1 or 2 to collect and process the data. Assistance with these studies can be provided by firms such as Norstat and SSI.

3. Multivariate techniques such as factor analyses and cluster analyses are used in combination with hypotheses-driven input to iterate and develop an actionable model. The model is evaluated against criteria such as the size of the segment, the number of segments, homogeneity within a segment, and heterogeneity. Segments should differ from each other enough to allow logic and reachability. This part is hypothesis-driven, and modeling can span 2 to 3 weeks.

4.After completing the segmentation model, the segments are evaluated against business goals, and core and secondary target groups are chosen. Typically, identification or persona cards are developed for each segment as outputs. They are rich in data describing the demographics, interests, life values, and attitudes of the consumer group.

What did we learn from Sparla’s segmentation model?

The segmentation survey was performed in partnership with Norstat in February 2020 by conducting interviews with members of the Swedish population aged 18 to 60 years. The interview was designed to reveal the life values and attitudes toward personal finance of the interviewees and to elucidate the competitive landscape and a list of concepts that could shed light on interest in the product and pricing. Iterative modeling yielded a five-segment model, two of which were selected to be parts of the target market. Both are highly open to accepting a new personal finance app and have a willingness to pay for the app. Other insights from our survey:

1. Men on average believe to have stronger skills in personal finance compared to women.

2. Of the young adults (those aged 18 to 25 years), 51% find it challenging to cover all their expenses with each paycheck.

3. Of that same group, 65% are open to reining in their consumption to decrease their climate footprint.

These findings confirm that the problem Sparla aims to solve is significant, and they provide direction for focusing on and winning these target groups.

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