Silicon Valley Growth Hacker Practical Manual!

This article is from the Silicon Valley Growth Hacker Handbook Chapter 1 Market Segmentation 1.1 Identifying the Most Valuable Customer Segment

If you’re in a growth-stage company, you’ve probably been asked the following questions:

Who are my most profitable customers?

How to get more customers like XYZ?

How many customers like XYZ are there in the market?

Am I striving for a reasonable market share?

What is the overall market opportunity?

How much market share have we captured?

Although these questions are old news, most companies don’t focus on them initially. As the company grows, the team needs to make trade-offs between which features to develop and the cost of acquiring customers. It is crucial for the company to know which well to dig for water.

There are four steps to answer this question: market segmentation, market size, competitive analysis, market capacity and selecting target markets. In this chapter, we will help you understand why it is important to sort out these things and teach you how to sort them out.

Why is identifying your customer segments important?

Entrepreneurs build on their personal experience, but the application may be broader

Entrepreneurs are often motivated by personal problem-solving experiences. Emery Wells, the founder of my current company, Frame.io, often felt pain in teamwork during the video editing process while running his post-production film and television studio.

To solve this problem, he and a member of his team (John Traver) decided to develop a product that would make teamwork in video editing as enjoyable as Google Docs (an American online document collaboration product, similar to Shimo Docs and Tencent Docs in China).

So they created Frame.io, a product focused on meeting the needs of freelance editors and small businesses.

Unexpectedly, Netflix (American paid online film and television giant: Netflix) came to visit not long after, seeking to better provide video editing collaboration services for the company's team of thousands of people. In order to support these enterprise-level customers, Frame.io must make fundamental changes at both the product and company levels.

Over time, customers will start using your product in ways you never expected.

In the first version of Frame.io, there was not even a concept of completed client work presented. But in just one weekend, CTO John Traver developed a demonstration page for early test users. Within a few years, a considerable number of advertising companies and creative agencies used Frame.io to showcase their portfolios, creative advertisements and client videos.

This fact clearly demonstrates that customers will distort the way they use your product to solve their own problems. And these are things you never thought about solving when you first started your business.

Exploring (potential) markets is the key to continued growth

Once you have built a loyal customer base with your initial product or service, you can generate greater profits at a lower cost by offering additional products or services to existing customers. Understanding who your most profitable customers are and how their needs are changing is critical to driving market expansion.

Customers who have no willingness to pay are wasting too much of your time

One of Frame.io's core users at the beginning - freelance editors - did not have the budget and job stability to justify the product's subscription model.

However, this group of users (freelance editors) accounts for 80% of the total users, but only contributes less than 25% of the revenue.

In contrast, video editing teams of more than 5 people brought in more than 75% of the revenue. To expand its revenue, Frame.io focused on a smaller customer base. This led to a shift in the company's strategic focus.

With all of this in mind, we can begin to move into the four-step process of identifying customers.

Identify the process of customers

Step 1: Segment the market

To better understand current and future customers, you first need to partition your customers, grouping customers with similar attributes together:

• They (customers) may react in the same way to the product
• They probably bring about the same amount of revenue to the company
• They may have the same needs or the same behavior

Creating clear market segments requires a bit of art and a bit of science. But in the end, both approaches lead to the same conclusion: the customer base is independent and complete. Every customer or potential customer is classified under each market segment, and there is no customer who does not belong to any market segment.

To simplify, it is best to divide the overall market into 6 or fewer customer groups.

Build a model

Before you begin market segmentation, it is helpful to build a model. The model focuses on two most important but independent needs: value and attitude when they search for solutions.

Set up larger category differences and ensure that customers belong to and only belong to one of the market segments through continuous trial and error. At Frame.io, we focus on the following two points:

• Is video his main source of income (does he make a living from video)? (whether)
• Is the pain level of team collaboration (editing) high at the moment? (High, Medium, Low)

These coordinates create a 6-point market matrix model, as shown below:

Define customer segment characteristics

The next step is to find out the characteristics of the customer base in each market segment. For Frame.io, the features are as follows:

• #Video team size
• #Different Teams
• #Current video project volume
• Video content sensitivity
• Industry
• Key decision makers
• Creative Software Budget
• Average monthly regular income

Fill the above characteristics into the 6-point market matrix model:

Fill existing customers into the defined matrix model

Replace 123 with your client

Customer behavior analysis through market segmentation

Once the existing customers are segmented, we can make an instructive analysis or discover the different contributions of different customer segments to business indicators. At Frame.io, we analyze the following features in depth:

• Free plan accounts
• Number of paid plan accounts
• Annual revenue contribution
• Churn rate
• Most selected plans
• Number of account users
• Function usage depth

We found unexpected results. As mentioned above, we found that individual creators accounted for 80% of total users, but only contributed 25% of revenue, but their churn rate was four times that of other customer groups.

Step 2: Determine the market size

Now that you have developed a method to engage your customers and prospects, you can use this experience to identify full business opportunities. There are many ways to define a business opportunity, but in the SaaS space where Frame.io operates, it is often defined in terms of potential annual recurring revenue. To estimate potential revenue, you need to know how many customers use your product or service and how much they pay on average each year.

Determine the number of potential customers

Existing customer characteristics can be used to determine future prospects. This process distinguishes B2B companies from B2C companies. At Frame.io, we use the North American Industry Classification System and the SIC industry classification to find the employee size of companies that may use our products.

You can also use third-party data sources such as Zoominfo, but Dun & Bradstreet is the obvious choice.

If you are a B2C company, you will need more industry and trend research reports to determine the potential market size for companies with the same characteristics and behaviors.

Once you have determined the number of potential customers, it will be helpful to lay them out in the chart below for comparison.

Calculating Potential Value

After you determine how many potential customers exist, the next step is to determine the average amount each customer can pay you in a given year. You can use existing customer spend as a proxy, but you may underestimate their spending potential. As a growth-stage company, you’ll likely be able to drive greater engagement from existing customers and introduce add-ons that can be cross-sold over time, increasing potential revenue.

At Frame.io, we use a combination of the following metrics to determine potential ARR (Annual Recurring Revenue):

• Number of Employees
• Percentage of employees featured in the video
• Average seat price

Calculating market opportunities

Calculating the market opportunity is simply the sum of the products of the potential entities and their products. Potential value.

Once you’ve completed this step, it’s also helpful to break out the relative opportunity by segment in the chart below.

The plain fact is that the market opportunity by segment is completely different from the number of entities by segment.

Determine your market penetration

To answer the original question, “How much of the market do we already capture?”, you can compare your current ARR (annual recurring revenue) to your potential ARR. It is often a pleasant surprise for growth-stage companies to see how little of the market has been captured and how much opportunity remains.

By Kyle Gesuelli

Source: Fan Dayong