Entrepreneurship 101: Who is your customer?
Just around the new year, I have enrolled in the edX course MITx: 15.390.1x Entrepreneurship 101: Who is your customer?.
It kind of slipped off my radar in the past 2 weeks, but it's now back in my focus and I plan to make good progress on it quickly. The estimated effort is around 4 hours per week, and the course lasts for 12 week, so I'd better get to it quickly to not accumulate too much backlog...
I will be updating this post as I go along the course. Last update: 2015-03-04.
Table of Contents
- Step 1: Market Segmentation
- Step 2: Beachhead Market
- Step 3: End User Profile
- Step 4: Total Addressable Market
- Step 5: Persona
Entrepreneurship Can Be Taught.
"Our goal is to identify some misconceptions you may have about entrepreneurship and what it takes to create a successful business."
10/10: it quickly turned to "let's give some pretty bold (but false) statements".
We're going to embrace that pirate spirit, that pirate spirit inside of you, and we're going to add to it the execution skills of a Navy SEAL.
See the world through the customer's eyes.
Here's what you'll learn to do in this course:
- Explore and analyze potential applications for your idea
- Choose the most promising markets and estimate their size
- Develop a comprehensive, actionable understanding of the prospective customer
6 Myths of Entrepreneurship
Entrepreneurs are born, not made.
Skills such as management, sales, and product consumption can be taught and learned.
Individuals start companies.
Usually a diversified team of founders. Building your dream team with more founders equals a better chance of success.
Entrepreneurs are the smartest people in the room.
They tend to focus on something that deeply fascinates them, and then go into hype-focused mode. Focus and dedication make for successful entrepreneurs.
All leaders are charismatic and their charisma is a key factor in success.
More than charisma, successful entrepreneurs exhibit characteristics such as vision, systematic thinking, strong analytic skills, a blend of humility and ambition ("humbition") and outstanding, disciplined execution skills.
Entrepreneurs love risk.
Most successful entrepreneurs don't enjoy gambling. Great entrepreneurs prefer intelligent risk-taking, removing as much risk as possible and only take calculated risks.
Entrepreneurs are undisciplined.
Successful entrepreneurs must have extreme self-discipline because they have few resources, no reputation, and a very finite amount of time in which to succeed.
Articulate the idea. Describe it. If you aren’t sure how, focus on answering these questions:
- What is the problem you want to solve
- Who experiences that problem
- How you want to solve that problem
- Why this is a better solution
- Reach out to at least 10 people who you think are potential users/customers for the idea. Schedule time to meet with them or speak by phone.
Step 1: Market Segmentation
The Lamborghini Story
You have set up a Lamborghini shop, a friend that owns a Volvo asks if you can repair her car. You shouldn't. If you want to have a business, you need a paying customer. But we need multiple paying customers. So we have to focus on getting a paying customer that's similar in nature and deselect all these other people.
We're going to focus on a specific customer, or group of customers where they're all pretty similar. And then we're going to build the company back from them. And we're going to do it with great focus, and deselect everything else and not get distracted.
What is market segmentation?
A systematic categorization of potential markets for your idea, a description of multiple groups of target customers, groups that are homogeneous and distinct.
Identify potential industries for your idea. Subdivide each industry into markets and market segments. List the people who might benefit from your idea in each industry, and ideally in each market segment. Focus first on end users, not customers. Your end user is a person who uses your product, your customer pays for it. Once you have identified the end users, describe the various tasks that they perform and how they would use your product. List the top six to twelve market segments that are most interesting. After that, your next step is primary market research. In other words, going and talk to some real people. Theory doesn't produce data, action does.
What to Do Next
- Interview prospective customers/end users for your idea (Try to interview at least 10)
- Begin conducting market segmentation
Have a look at the following slides:
Step 2: Beachhead Market
A beachhead market is the first market that you will choose to pursue. And it will give you the advantage and capabilities that you will use to pursue additional markets later on that will be as good or better than your first market.
Criteria for Selecting Your Beachhead Market
7 questions to analyze very different and seemingly equally attractive market opportunities and then to take one amongst them:
- Does your customer have the money to pay for your product?
- Can you easily get the product to your customer? Is the customer accessible to you?
- Does the target customer have a strong reason to buy your product?
- Can you deliver the whole product?
- Is there entrenched competition that could block you from getting this business?
- If you win this market, we it help you win other segments as well? Is this a strategic market that will give you capability, credibility to win other markets that will be equally profitable or more profitable for you?
- Is the market consistent with the values, passions, and goals of the founding team? Is this something that you're going to feel comfortable doing for the next six years? Are your personal financial goals something that you need to realize in a three-year time horizon? And the market that you're looking at might require 10 years to mature.
Key Measure of Success
Being able to select a market and then to be disciplined and deselect other markets is key to success.
What if you choose the wrong beachhead market? If it's going to fail, fail quickly, eliminate that option, and focus on the other ones that are higher potential. Action will produce real data, and that data will tell you whether your beachhead market will or will not be viable.
Bigger Always Better?
No. You want to find a market where you have the ability to totally dominate that market in a relatively short time period. And narrow focus markets is the best way to do this. You want to continue segmenting until your market opportunity matches the following three criteria that define a market:
- The customers buy similar product.
- The customers have a similar sales cycle.
- There must be word of mouth between the customers in this market. If you get one, they tell other people in that market.
- Lesson #1: The beachhead market is the market that you choose to attack and dominate first. It serves as a platform for attacking follow-on markets.
- Lesson #2: Focus is vital. In the beginning, your startup's scarce resources should be spent on attacking one market and one market only.
- Lesson #3: Attacking your biggest market first isn't usually the wisest plan.
Step 3: End User Profile
Are we ready to build the product now? Nope, we still have to refine our target end user even more.
User Ignoritis is curable only with a heavy dose of end user focus.
What is an End User Profile?
An end-user profile is a description of a narrowly defined subset of end-users with similar characteristics, similar needs, and word-of-mouth.
How to build an End User Profile
Prospective end- users fall into three broad categories-- demographics, motivation, and behavior.
- Demographic: What's their gender? What's their age range? What's their income range? What's their geographic location?
- Motivation: What motivates them? What do they fear most in the world? Who's their hero?
- Behavior: Where do they go for vacation? Where do they go for dinner? Where do they go before work? What newspapers do they read? What websites? What TV shows do they watch? What are their watering holes?
Your process will be iterative. With each new end-user interview, you will learn new and important questions to ask other people. And you'll get a more and more refined end-user profile.
So in the beginning, it was a lot of cold emails. So basically just Googling the blind community or organizations that serve the blind. I randomly contacted people through LinkedIn and Facebook, and Twitter. [...] So I had a big list, a long list of organizations that serve the blind. And I basically emailed them, I called them. And in the beginning, the response rate was pretty low. [...] And so it was really hard to get their attention. So we started with really small self-organized organizations. [...] So I literally have to go knock on the door to meet with them individually. One meeting, it takes about at least one hour. [...] So I collect their feedbacks. And even if I make a really slight improvements in these iterations, I have to make another whole set of physical prototypes and again, do the whole thing over and over again, bringing the new iterations to them and say, "Hey, is this what you meant with your feedback?" Is this correct designs that you wanted? We went through more than 50 iterations.
This persistence, this patience, these iterations, this dedication to truly listening to your end-users creates the foundation that you will need to achieve a breakthrough like Hyungsoo.
Now, let's do an exercise. Think about a product that you buy often, and ask yourself, why? What makes you buy this product? Now, what you're going to do is build an end-user profile of yourself. Describe yourself in detail. Focus on factors that you think contribute strongly to the reasons why you buy this product. Think of others like yourself who would buy the same product. Do they fit in a homogeneous group with you? That would be an end-user profile.
Step 4: Total Addressable Market
TAM is the amount of annual revenue expressed in dollars per year. Dollars per year your business would earn if you achieved 100% market share in your chosen market.
Primary market research is essential, because you really find out what your target customers are looking for, how are they currently doing this? What do they he about doing it? How could you make it more efficient, better, or just more enjoyable for them? The best way to estimate TAM is to determine the number of end users that fit your end-user profile through a bottoms up analysis. Of course, you can complement this with a top down analysis, and you should. This will confirm your findings. But only complement, never replace, primary market research with top down analysis.
When you have the number for the end-user population variable, you look at the revenue, on average, that one end-user generates per year. Then multiply the two together, and you know your TAM.
Generally, I recommend a TAM for your beachhead market between $20 million and $100 million per year. A TAM over $1 billion raises red flags. Your beachhead market is either not specific enough, or there will be formidable barriers to entry. If your TAM is less than $5 million per year, it's likely you haven't found a big enough beachhead market.
Homework: Estimate the number of end-users in your beachhead market. Determine how much revenue each end-user is worth per year. Do both by a bottom up analysis but also check with a top down analysis. But focus mostly on the bottom up analysis.
Step 5: Persona
The persona should be a real person, not a composite, not an abstract. It should be someone you know and you have interviewed in the context of your startup and you can remember. By choosing an actual end-user as your persona, your persona becomes concrete and there's no room for second guessing. We can debate "these" questions internally 'til the cows come down, but if you have a real persona, there's only one right answer and it's pretty easy to find it.
Prepare a fact sheet about the persona based on the information you already have. Include a visual picture, drawing, diagram of the individual. Include general demographic information about your persona:
- When were they born? Where were they raised?
- Where did they go to school?
- What kind of family did they have?
- What age are they today?
- How did they look?
- What kind of places do they like to go?
- What company they work at?
- How many years have they been there?
- What kind of training did they go through?
- What kind of managers did they have?
- How often did they change?
- What's their salary?
- How do they get measured?
- How did they get fired?
- How did they get promoted?
Once you have the draft fact sheet, interview the end-user --who is your persona-- and fill in the gaps that you know. Some successful start-ups also share the persona with each new employee. Other companies are very proud in the fact that they have personas for the customers that they target and they have personas for the customers that they're going to de-select.
The persona is that north star that gets us all on the same page, and keeps us focused, efficient, and effective.
- No persona will represent all the characteristics of the target customer end-user profile. Get specific, get the best persona you can, but don't worry that it's not perfect.
- Iteration is good. Correct errors, update your persona fact sheet. In fact, you may change your persona in its entirety. A persona is not a one-time event, but an iterative process that involves your entire team. Remember, keep your team involved. Their buyin, their understanding, is very, very important.
- Building a persona is extremely helpful process to get to specificity, because it fosters cohesion in your team, not just when the exercise is done, but going forward thereafter.
- When you have a multi-sided market, where you might have buyers and sellers, or users and advertisers, it's important to make a persona of both of them. But the first one you're going to make a persona of is the end-user, and then the economic buyer.
- The persona discipline can be used to choose who your customer is, but the same persona discipline will choose who your customer is not, the anti-persona. Because discipline entrepreneurship is about not only knowing who your customer is, but who your customer is not.