How to Develop a $300,000 Target Audience Segmentation Like McKinsey

In the introduction, we talked about strategy being “a specified way to solve a problem”. But how do we know who you're solving the problem for? Maybe your product solves multiple problems for multiple types of customers - who do we focus on?

After setting a clear objective, good marketing or product briefs need a clear articulation of who your end consumer is. You might have a brilliant best-in-class product, but if targeting the wrong customer then no one is going to use it. So the question is:

Who is my target audience?

I’ve been in meetings where board members making nine-figures are getting stumped when asked this question. It is the most important and often hardest question to answer for many startups - and even enterprise businesses.

Instinctively, many assume that “everyone is my audience” as every person on earth technically could use or benefit from your product.

•  We’re a burger fast-food chain - everyone loves burgers, why not target everyone?
•  We’re a SaaS startup helping users manage their tasks - everyone could use that right? 
•  We’re a nature-focused magazine - who doesn't love nature!?

The answer to these questions mainly comes down to one thing: Why would anyone pick your company over another solution to their problem? Keep in mind that we’re not only talking about competing companies, but competing ways of solving the problem.

•  A burger fast-food chain? - I can get cheap burgers at McDonald’s or fancy Kobe sliders at the Japanese restaurant up the street.
•  A SaaS startup managing my tasks? - I'll just use my notepad, I don’t need expensive software.
•  A nature-focused magazine? - Why read about nature when I can go out and experience it instead?

Some of these answers are hard to rebut. But a clear audience definition will help you do multiple things:

• Convince the prospects above that your product is of value to them
• Not wasting time and marketing budget on bad leads
• Internally communicate who the company needs to reach & build for - and getting everyone (product, sales, marketing, even HR) to row in the same direction

Don't worry about alienating potential consumers - if you understand your core audience and manage to sell to them, the rest will always follow.

How to define a target audience

There are plenty of ways to define an audience and one is not more correct than another - however, they differ by the stage your company is in.

In this article, we’ll focus on businesses with some form of product market fit or traction, with a pre-existing set of initial users or customers. This means that we already know some people that are willing to buy our product or service - but we find it hard to define who they are and scale our marketing accordingly. If you're very early stage without many or even any customers and looking for product validation, I recommend this video by Y Combinator instead.

However, at our stage, many larger corporations will hire a consulting agency like Bain or McKinsey to create an initial segmentation of their existing and potential customers. The next best thing would be to let a “creative agency" like Ogilvy, Grey or Saatchi & Saatchi do the legwork.

A marketing segmentation is just a fancy word for asking your audience a bunch of questions and grouping them in segments according to their needs, values and problems they need solving. This allows companies to focus on one group at a time which often undermines competitors and unlocks growth. As many entrepreneurs know, finding the right problem / audience to work with is many times more important than positioning your solution.

Using a combination of methodologies like quantitative and qualitative research (guidelines outlined later in this article), the output of a segmentation usually takes the form of a PDF that ranks the segments per business opportunity and pinpoints the most attractive set of customers to pursue.

Don’t have the money to hire Bain for $300,000? Let’s see how we can create our own.

Create a customer segmentation

Start by creating a list of needs your potential and existing customers would have. What do they care about? What’s important to them?

•  Burger chain
   -  Has the most delicious burger possible
   -  Has vegan options
   -  Gets me the most quantity of meat for the money
•  SaaS task manager startup
   -  Has a simple and beautiful user interface
   -  Has the fastest learning curve to get started with
   -  Has a 24/4 chat support ready to answer any question I have
•  Nature-focused magazine
   -  Comes out regularly (at least once a month)
   -  Has an equal amount of beautiful and inspiring pictures as amount of text
   -  They care about the environment and show commitment to offset their employee CO2 emissions

You can come up with these by intuition, asking relevant stakeholders such as your customers/client or conduct desk research to inspire your need statements. They could be about reliability, quality, customer service and countless others of “value buckets” depending on your product or service. Aim to have around 30 of them. Here is an example list with our fictional ApiHub example, with needs of B2B customers looking for an API to power their e-commerce business:

•  Has the most reliable performance
•  Displays a genuine sense of responsibility when handling my data
•  Consistently provides the highest quality products & services
•  Has real expertise in my specific industry
•  Is proactive in communicating with me and fixing issues
•  Reacts fast to any sudden changes in my business requirements
•  Has no unexpected costs, I’m charged what I'm quoted
•  Is a well established, financially stable organisation
•  Able to adapt to business needs that change over the long term
•  Offers long term cost stability
•  Has local/regional expertise in my industry
•  Offers timings & schedules that exactly suit my needs
•  Offers a full range of software products
•  Has transparent costs where different packages are itemised
•  There is always someone to contact/talk to if needed
•  Offers the fastest API response
•  Has a fair policy on additional fees, surcharges & penalties
•  Provide real time analytics of API usage
•  Provides an answer quickly to customer enquiries
•  Simple and convenient online solutions for docs, invoices, payments etc
•  Understands my industry and business dynamics
•  Offers the lowest possible price
•  Provides multiple options whining each product type
•  Offers consultation to help me optimise my software business
•  Is known for innovation within the industry
•  I have the same contact person for all my requirements
•  Credit is available

Talking with your users

Once you have this list, we have to talk to our users (prospects and existing customers). I recommend watching this great YC video on how to talk to users to mine insights. You can decide what mix of qualitative and quantitative research methods to use using these guidelines:

Who should I talk to?

• It depends on your business but I’d recommend a mix of people such as existing customers and people you think could become customers. If you're selling high-end burgers, chat with the local hipsters in your neighborhood. If you're selling expensive B2B solutions, you'd probably want to talk to CEOs or IT managers of other businesses. Find the decision makers, the ones that will open their wallets.
• An incredibly underutilized source of knowledge is the people in your business who (hopefully) speak to customers every day. Make sure to interview your CEO, founder, sales department and customer service reps who will provide a treasure trove of aggregated insights about your audience.

How many people should you involve?

• There is no magic number that will ensure the best possible result but the more the merrier - it really depends on your client. In my experience, Global Fortune 500 companies might go with a sample size of 2000 people. But this would definitely not be necessary for a mid-sized business that might do 10-15 interviews and 100+ survey responses. For startups, some say you only need 5 users. 1 is better than no one - I'd say get as many as you need to feel intuitively confident in your results.

What qualitative and quantitative research should I use?

• Using the list of needs we created above, create an interview script, a group discussion guide and a survey where you ask our interviewees to rank all needs according to what’s resonating with them. Next, take down demographic and psychographic information about them which we’ll use later to cluster our segments.

For a midsize company, I’d go with:

• 10x 1-on-1 interviews
• 3x group-discussions (traditionally called a “focus group”) with 3-5 people in each
• 100x responses to a well crafted & pre-tested survey

The interviews will add some depth and insight to our customers and why they feel like they do, while the survey works brilliantly to rank groups of people by the needs they find most important. Again, if you only get to speak to one person, it is better than nothing.

Analysing your research

As the research is conducted, you’ll now do the actual segmentation. Start off by using answers from the survey to cluster sets of needs that seem important to your customer.

How many groups should you come up with? It depends on your business - with the SaaS list above, 4 solid segments emerged but it can be up to 10 or even more.

Next comes the obligatory part of naming your segments something quirky and easy to remember - it sounds dumb but will help you communicate these audiences internally within the company. Keep in mind, these are different from "Customer personas" which we'll talk about later in this course.

•  The Expanders
   - Ambition to scale their company quick
   - 30% of current customer base
Top needs:
   -  Has local/regional expertise in my industry
   -  Reacts fast to any sudden changes in my business requirements
   -  Is proactive in communicating with me and fixing issues

•  The Seekers
   - Needing expertise to help guide them through the current business landscape
   - 20% of current customer base
Top needs:
   -  Has real expertise in my specific industry
   -  Provides an answer quickly to customer enquiries
   -  Is a well established, financially stable organisation

•  The Bargainers
   - Wanting the cheapest solution possible
   - 10% of current customer base
Top needs:
   -  Offers the lowest possible price
   -  Has no unexpected costs, I’m charged what I'm quoted
   -  Offers long term cost stability

•  The Streamliners
   - Simplicity is the name of the game
   - 5% of current customer base
Top needs:
   -  Offers a full range of software products
   -  Simple and convenient online solutions for docs, invoices, payments etc
   -  Offers the fastest API response

Now, flesh out your segments using the demographic & psychographic information you collected - use quotes from your interviews to provide insight, colour and depth to make your segments come alive. The goal is to have a solid audience profile that makes it clear who the segment represents. These profiles can be used from informing top level decisions like new product features to ground level tactics like what targeting settings to use for a Facebook ad.

Once you have a few solid segment profiles, you’ll need to figure out which segment(s) would be the most lucrative to focus on for your business. You can do this by asking yourself questions such as:

• What is the current business objective of the company?
  (E.g: Break into a new segment, increase market penetration, sell a more expensive product, increase shareholder value)
• Which of your segments did most of your respondents fall into?
  (Side-note: Most customers identifying with one group does not necessarily mean that this segment is the one to focus on. You’ll have to take your current business objective into consideration.)
• Which segment has the most punching power / would pay the most for your product?
• Which segment seems overlooked by your competitors?
• Which segment's needs align the most with what your company is offering?
• Which segment seems easy and cheap to reach taking your marketing budget into account?

Using your research, we can rank the segments and make a recommendation of which segment(s) the business should focus on from a marketing point of view.

After this exercise you should have a complete deck with your methodology (how you conducted the research), your segments and finally your recommended segment(s) to focus on - preferably in a presentable PDF deck. See, wasn’t that hard? And you just saved $300,000!

Now when you have a clear understanding on who your target audience is, it’s time to use that information to position your brand:

Next module: The 4 C's of marketing ->

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