Minimum Viable Segment (MVS) — achieving growth through smaller customer segments

The Internet is mainstream — there is no doubt about that. With billions of people online either through their personal computer or their mobile device — it is a huge market. Every startup targeting consumers or businesses can easily tap into a large pool of potential customers. The ultimate goal of any entrepreneur is to find and take over that billion dollar market with millions of customers waiting to buy their product. This is a great goal but how do you start?

These days I mostly work with SaaS startups. No matter what the market they all have the same problem — how to find initial customers and then scale. Most SaaS products are focusing on doing some sort of a job for the customer. Be it accounting software, prototyping, marketing automation, publishing. In most cases if you pick any business software category there are probably thousands of business around the world who could benefit from your product (there are more than 200 million businesses worldwide).

What I have noticed is that most startups fail in identifying their initial market segment and trying to dominate it first before going for the broader market. When we launch a new product we are bombarded by many different customer types from all over the place. It is very hard to stay focused on a single customer archetype (or initial market segment) because we are pressed to sell and generate revenues to meet our plans. This might not seem as something hazardous at the beginning but later on it might turn out deadly. If you are trying to meet the expectations of customers within the same target market but many different market segments you are being pulled in “ten” different directions. This waterfalls down to product development, marketing, sales and the whole company, leading to much confusion. As Steve Jobs often said — the hardest part is to decide what not to do or which feature not to implement. The same goes for customers and market segments.

When you are building a product you are building it for a very specific customer who has a certain problem or a need. There is always that image of a perfect customer. This should be your initial market segment. I am not referring to early adopters — I see the initial market segment as something slightly different. These are the typical customers which are most likely going to buy your product, for the price you set and in the way you imagined/designed. The initial market segment is a portion of your target market. It is small enough so that you can dominate it very quickly, and at the same time big enough to allow you to generate decent numbers in revenues to validate your business model.

Focusing on your initial market segment gives you freedom to really understand those customers. It is almost like playing darts being only few inches from the board — the chances of hitting bullseye are much greater. How big should an initial market segment be? Well this is a tricky question. If we are talking about a SaaS product for the business customer I would say that 1 000 customers is a pretty good number. If your product is targeted at restaurants, your initial market segment could be 1 000 italian restaurants, with no less than 30 tables, located in a specific geographical region. The market insight you get from dealing with a 1 000 almost identical customers is enormous, and this will build up your competitive advantage.

Before you get to having 1 000 customer you will have to go through even smaller segments and you always start with your first customer.

How to identify your initial market segment. What I usually do is, I write down as many, as specific characteristics of my ideal customer as possible. Once I have all of them down on paper, I think about which of them are the key characteristics which define a market segment. You should iterate this exercise a couple of times. The next step is to try and figure out (using available market data) how many customers meet your characteristics. You should try to model these characteristics so that your are able (at least on paper) to acquire those 1 000 customers. This can be any other number which you feel comfortable with. It should be big enough dough to validate your business model.

Now let’s say your startup is building that product for restaurants. You have identified your initial market segment. Your product is sold in a subscription model at $50 per month per customer. This means that if you reach your target of 1 000 customers you will accrue a monthly recurring revenue of $50 000 (of course you will have to deal with churn). This might not seem much, but remember this is only your initial market segment, hopefully one of hundreds of other initial markets which make up your target market. Reaching this goal also means that you pretty much dominated that segment and are the leading vendor.

I’m a Partner at Innovation Nest, a seed VC fund focused on B2B Software. Helping SaaS founders with growth strategies and tactics.

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