Over the Horizon: a Framework

In 2000, McKinsey & Company management consultants Mehrdad Baghai, Stephen Coley, and David White introduced a “3 Horizon” framework to help break this pattern.¹²

1. Horizon 1 is the core business, accounting for most revenue. The business model is well understood and is executing (for now) with all cylinders firing. The primary focus is on near-term performance.

2. Horizon 2 represents internal businesses on the rise: products that have customers, have perhaps achieved product-market fit, and are ready to scale. These businesses have the potential of becoming core to the business—in other words, a Horizon 1 unit.

3. Horizon 3 contains early-stage startups. They might include research projects, prototypes, inventions, products in pilot phase, and strategic investments in external young companies. Most of these startups, for a variety of reasons, will fail.

This, it seems to us, is a reasonable way of looking at things. But how these groups are funded and how they interact with each other (if at all) are critical to their success. The three horizons should be seen as a pyramid, with a greater number of smaller investments on the bottom and winners bubbling up to the top, the same way the innovation economy works.

Geoffrey Moore, author of the marketer’s bible, Crossing the Chasm, sees a problem in the application of horizon planning whereby Horizon 2 teams are often tossed Horizon 3 projects that are little more than “prototype-stage products” developed by “lab-centric inventors.” Additionally, Horizon 1 marketing and sales organizations are often assigned to push Horizon 2 products that are unproven.

Horizon 1 business units have no real incentive to prove the viability of Horizon 2 products rather than making money on proven Horizon 1 products.¹³

Here, once again, we see products that may very well be the company’s future salvation being held to account by existing business metrics.

“Thus,” Moore concludes, “innovations are better off in bootstrapped startups, because at least there they can get access to the market and suppliers, and their investors will use fairer standards of measurement.” Although we’re not sure the latter is (yet) true, the prescription seems pretty close. The key is to combine lean startup methodologies with horizon planning to properly define the horizon boundaries. Businesses should use startups to prove product ideas and business models, before integrating core resources such as sales and marketing. Furthermore, labs and research centers should be considered pre-startup. In other words, experimentation in the development of technology is separate and distinct from the experimentation done in Horizon 3. Horizon 3 startups are for experimenting around developing the right application of the technology for a specific market segment. Research centers live in Horizon 4!

Case Study: Lean Startup Horizons

Intuit is a great example of a company adapting the horizon planning model through the application of lean startup principles. Of course, Intuit is no ordinary company. From its inception, Intuit has been focused on creating new value for its customers. That Intuit can be seen as a poster child of Moore’s Crossing the Chasm in the early 1990s to a leading practitioner of design thinking in the late 2000s and now a shining example of Ries’s lean startup is a tribute to the early vision and leadership of co-founder Scott Cook.

Thirty years of success means overcoming several periods of computer-based disruption from the era of shrink-wrapped software to modern mobile apps. Today, with the portfolio approach of horizon planning, Intuit continues to deliver on current-term commitments while purposefully setting a foundation for future growth through experimentation and continuous learning.

Here’s how Intuit defines its “3 Horizons”:

1. Horizon 1 extends and defends the core. In other words, it continues the growth of current proven products and improves profitability.

2. Horizon 2 builds emerging offerings. Product teams validate their business models or emerging products and prove the ability to scale.

3. Horizon 3 creates viable options. It proves the startup’s concept by validating that users love the product, and it has a compelling business-model hypothesis. As part of an ongoing refinement, Intuit has evolved away from using revenue numbers to determine horizon-level status and instead looks to validated learning metrics.

Where many companies get off track is that Horizon 3 products are seen as lab toys, non-market-testable prototypes—in other words, something that’s not yet been tested in the market.

Intuit’s Hugh Molotsi says: “Part of testing a user concept in Horizon 3 is putting it in the market and seeing what actual user behavior is. Therefore, it didn’t feel right to call something that’s launched in a scrappy way a Horizon 2 product. It’s still Horizon 3 because we’re still experimenting with it.”

Revenue numbers simply hark back to the traditional style of measuring all new endeavors by return on investment. Instead, Intuit turned to the following three love metrics:

1. Net Promoter Score, which measures the willingness of a customer to refer a product to others.

2. Active usage, which measures customer engagement with a product.

3. Customer benefits, which measures whether a product’s promise is achieved.

As Molotsi further states:

For each product you define the benefit provided to customers, such as saving time or saving money. So one of the things we measure is: Are you actually delivering that? So when you are a Horizon 3 you’re trying to run experiments to prove those things.

Horizon 2 is experimenting with the business model. You’ve found a set of users who love the product, are using it, and are benefiting from it, but is there actually a scalable and sustainable business there?

You have some hypothesis—you’re going to charge subscribers a monthly fee or you have an advertising revenue model, whatever the case is—you have some business model hypothesis that you’re going to try to prove.

Protecting the Core Business

In large organizations, fear is often the cause of failure to disruptively innovate. Some of the fear is well founded. As discussed earlier, it’s critical that internal startups are protected from standard, core-business operating procedures, but protection cuts both ways. Core business units have legitimate concerns regarding their young startup siblings:

Sales: For value-based organizations, salespeople’s compensation is dependent on the ability to sell products that provide value. Forced to sell unproven or mediocre products, salespeople will find workarounds or leave.

Marketing: New products that are perhaps incomplete or don’t jibe with existing core products might confuse existing customers, adversely affecting brand image. Furthermore marketing activities that support an unproven or mediocre product or service will prove wasteful.

Legal: Privacy, compliance, and intellectual property are a few legal issues that big businesses must concern themselves with.

Human resources: Some people are drawn to chaotic, wear-many-hats situations, whereas others prefer orderly, well-defined roles. This needs to be managed.

Job security: Anyone working in a business being disrupted by an internal startup will understandably feel vulnerable. Ultimately, you hope that your startup cannibalizes your core business. If the internal startup doesn’t do it, an external organization will. This points to a number of potential cultural issues that will need to be addressed as well.

Intuit helps business units deal with these issues. Using cross-functional teams and defining the Horizon metrics as learning rather than revenue means each business unit’s core business (H1) sales and marketing teams are not tasked with executing with unproven products developed by the H2s and H3s.

Employees are empowered to participate in innovation, and they can move between horizons. “We often have programs where we rotate engineers that are H1 engineers through the H3s and H2s, just because they have either personal interest or they just kind of want to see what it’s like or just to bring in fresh blood all the time,” says Intuit’s Bennett Blank.

Additionally, Intuit has an unstructured-time program, during which employees can spend up to 10 percent of their time working on projects they’re passionate about. “That’s actually been really powerful as well because a lot of our new ideas are coming out of that,” says Blank.

To protect the brand, Intuit deployed a sub-brand called Intuit Labs to let customers know that products released within it are still in the experimental stage. To address the legal component, Intuit developed a core set of legal documents and processes, which, if followed by H3s, do not require involvement by corporate counsel. This approach can simplify and speed up the H3’s progress.

Intuit has a number of in-market wins, including H3 graduates SnapTax and GoPayment.

Lean startups are not just for Horizon 3s and 2s.

H3s do lean startup to find a product that results in passionate users.

H2s do lean startup to find a scalable business model.

H1s can do lean startup, too. The lean startup processes help existing, core businesses become more effective by moving closer to the customer, becoming a continuous-learning organization, being more agile, and relentlessly improving internal processes.

Startups can apply Horizon ideas to their planning, as well. After nailing product fit for one segment, it could be beneficial to start exploring alternative products to sell to the existing segment, in addition to searching for additional segments.

Work to Do

A long time ago, we promised ourselves we would never suggest to someone that they write a vision statement. We will keep that promise. So, instead, you know those fun personality quizzes in airline magazines? We ask you to get in your favorite yoga position—c’mon, admit it, you do yoga—and answer the following questions as honestly as you can. You don’t have to show it to a life coach or anything. There are no correct answers.

1. Where does your product or idea fall on the innovation spectrum?

Idea:

a. Adds functionality to existing product category.

b. Dramatically lowers cost of new product for an existing product category.

c. Highly tailors functionality for an underserved market.

d. Is an existing product category for new large marketplace.

e. Is a new product category, new market.

f. Is flipping an existing market completely on its head.

2. What’s your philosophy on taking money to fund the business?

a. Bootstrapping, baby!

b. Friends, family, and fools.

c. Cash, credit cards, coupons.

d. Accelerators, angels, a**holes.

e. Venture vampires (We’re kidding!).

3. What is most important to you?

a. There’s a specific (large or small) market segment I’m committed to and passionate about serving.

b. It’s important that everyone get ahold of my product.

c. My technology is game changing. I just need to find the right application for it.

d. My vision is radical and I will see that it is made real.

e. My vision isn’t as important as the fact that I will do whatever it takes to change the world.

Notes

1. We strongly suggest reading the Harvard Business Review case study “The Vision Trap” (March 1992) by Gerard H. Langeler.

2. http://blogmaverick.com/2012/03/18/dont-follow-your-passion-follow-your-effort.

3. Tony Hsieh, Delivering Happiness: A Path to Profits, Passion, and Purpose (Business Plus, 2010).

4. Donal Daly and Paul O’Dea, Select Selling (Oak Tree Press, October 1, 2004), 19.

5. Interview with Stephanie Cooper.

6. Seth Godin, Linchpin: Are You Indispensable? Kindle Edition (Penguin Group, 2010), 26.

7. Liker, Toyota Way.

8. Ries, 189.

9. Liker, 253.

10. Ries, 232.

11. http://steveblank.com/2010/04/15/why-accountants-dont-runstartups.

12. VastuShastri Khushdeep Bansal, Alchemy of Growth (South Western College, 2000).

13. http://hbr.org/2007/07/to-succeed-in-the-long-term-focus-on-the-middle-term/ar/1.

Chapter 3

All the Fish in the Sea

Ask first-time entrepreneurs who they plan on selling their product to, and the most likely answer you’ll hear is an enthusiastic “Everyone!”

Those a bit more savvy back off from global hegemony by proposing a vertical slice, such as “financial services companies,” or horizontally, “the Fortune 1000,” or by product, as in “people who buy milkshakes,” or even a specific demographic, such as “women between the ages of 18 and 73.” Unfortunately for new businesses, these ill-defined segments are neither realistic nor helpful.

segment: A defined group of people who share the same problem or passion and speak the same language.

Products likely do exist that are purchased by both those 18 and older and 73 and younger, but not by all women between 18 and 73. Why do those who buy, buy?

Imagine you were a commercial fisherman. Your livelihood depends on catching and selling fish. If you are asked, “What sort of fish do you plan to catch?” and you answer, “All the fish in the sea,” you are surely doomed as a commercial fisherman.

It turns out there are not only many fish in the sea, but they have different forms and different ethologies. Methods of fishing that work well for some species don’t work so well for others.

Battle-tested entrepreneurs know how to fish, and when asked who will buy their product, they respond not by reciting demographic characteristics, but by speaking about specific buyers and their particular pains, passions, and needs.

Who will buy your product is as important as the gloriousness that is your product. Although the customer chooses the product, when building a new business it’s up to you to choose your customer. In fact, depending on your values and vision, the choice you make may be even more important than your product idea.

If the most important element of your business idea is the particular market segment you want to serve, and you think you can serve them in a way that matches the vision you have for your business, then you may decide to treat your market segment as the fulcrum on which to pivot. In other words, you change your product idea, your distribution channels, and your marketing and sales plans to fit the needs of that segment.

pivot: To keep one foot firmly planted in one fundamental aspect of your business model, while changing other aspects.

If you are committed to solving a segment’s problem (or addressing a passion), you should be solution agnostic.

Famed marketer Seth Godin says:

Great customers . . . will engage and invent and spread the word. It takes vision and guts to turn someone down and focus on a different segment, on people who might be more difficult to sell at first, but will lead you where you want to go over time.¹

If the segment you choose is not one that resonates with you personally, will this adversely affect the passion you have for your business? Will the time and expense of a long sales cycle be difficult to overcome with your revenue model? Does the prospect, who has a budget, also have an adequate workaround to the problem you’re solving? When discussing how a prospect is solving the problem now, has the prospect described the specific shortfalls of the existing method? What is the cost of those shortfalls to the segment in terms of time, money, market share, risk, or customer satisfaction?

Your solution must address one or more of these shortfalls. How does your solution do that? Be specific. What functionality or feature of your solution resolves which shortfall?

Does the passionate customer represent an impossibly small market to support a business?

Market segments drive your business model. Alex Osterwalder’s seminal business-model book, Business Model Generation, breaks business models down into nine components:

1. Customer segments—who you aim to reach and serve.

2. Value propositions—products and services that create value for your segments.

3. Channels—how you communicate with and reach your segments.

4. Customer relationships—types of relationships with customers; for example, direct and personal, indirect, automated, and so forth.

5. Revenue streams—how you will be paid.

6. Key resources—physical, financial, intellectual, and human resources required.

7. Key activities—the most important things a company must do to make the model work.

8. Key partnerships—suppliers and partners that complete the model.

9. Cost structure—how much it costs you to run your business.²

If you look at the nine building blocks, you can see how your values and customer segments drive the business model: The segment determines the preferred method of payment and how customers would like to interact with the business—in other words, the “relationship.” Conversely, a business that chooses a specific type of relationship is purposefully blocking segments from becoming customers. (There’s nothing particularly wrong with this.) Specific segments determine sales channel, how much customers are willing to pay, what type of solutions they require and, therefore, cost structure of the business, as well as key partnerships and activities, and resources required to serve the chosen segment(s). Alternatively, a business can choose to commit to specific channels, revenue streams, or key activities that will, once again, purposefully eliminate some market segments from consideration.

Not to beat a dead fish, but this is a critical point in understanding your business model: Are you committed to certain business-model assumptions and, therefore, seek to find customer segments that may fit?

Or are you committed to addressing a specific problem or passion and, therefore, seek to find the customer segments that fit and will let the remaining business-model building blocks fall where they may?

Or are you committed to serving a particular segment and, therefore, seek to find their most pressing issues and work toward assembling a business model capable of addressing those?

Whichever way you choose, the process of segmenting your market is one of the most poorly understood concepts in today’s business startup world, yet as we can see, it is one of the most powerful.

Case Study: The Ethology of the Fish

In the kelp beds off the coast of Southern California, one can find thousands of species of fish, but two of the most sought after by commercial fishermen are the California halibut and the white sea bass. Both fish are classified as demersal, meaning they live near or on the bottom of the ocean floor, and catching fish of both species in the 20- to 30-pound range is not uncommon.

Halibut are flatfish. They make themselves effectively invisible by nestling into the sandy bottoms between patches of eel grass, and when sardines swim by, they explode out of the sand to nab them. They have two eyes on one side of their body, which make them very adept at ambushing predators. Fishermen know that one of best baits for catching halibut is a fellow denizen of sandy bottoms, the lizardfish.

White sea bass are long and cylindrical, and have a much more typical fish form. They cruise the kelp beds looking for squid or mackerel to eat. White sea bass are very difficult to hunt with spear guns because they are very sensitive to noise, and the slightest inorganic sound will set them off.

Any amateur fisherman can throw a line off the end of the local pier baited with frozen squid and pull in a few mackerel, or maybe even a rockfish.

But commercial fishermen have to—day in, day out, in good weather or in bad—acquire their target fish and then sell it for more than the cost of catching it. To do that repeatedly and scalably, they must develop a deep understanding of the ethology of the fish. They must learn what sort of bait to use with what tackle, the best time of day, and what environment will maximize the potential to catch the particular fish they are looking for. Fish can only be caught when they are accessible—it doesn’t help you to know that there are fish 1,000 feet below your boat, if your line cannot get down to that depth.

The market segment you pursue is inextricably linked to the other aspects of your business model.

Segments determine how future customers expect to interact with the product, how they will be marketed to, and their method of purchasing. Differences in how people are reached, their expectations of the buying process, how their trust is earned, the price point they’ll accept, what distribution methods are most efficient, the messaging that attracts them—all these factors (and more) may represent different subsegments.

What are the value propositions, the benefits and messaging (bait), the pricing structure and channels (tackle), and the length of sales cycle (how likely a fish will snap your line)? Will you need a big net (full-page ads in the Wall Street Journal) to catch lots of small sardines? Or will you need to staff and finance a whaling ship to be out at sea for months at a time to catch two or three whales (enterprise sales model)? Or perhaps you need to chum the waters a bit (freemium)? Maybe you’ll be hunting on a reef with a spear gun for 20-pound groupers (B2B sales at a conference)?

freemium: A term used to describe a product offered in a “free” version, as well as in one or more premium account versions, requiring payment.

You can build a mobile app for senior citizens, launch a Facebook campaign targeting Fortune 100 CEOs, or charge $25 for a food-cart hamburger if you’d like, but the mismatch between product, tactics, pricing, and segment might delay that Hawaiian perma-vacation you’ve been planning.

As with many aspects of entrepreneurship, the practice of segmenting your market seems commonsensical, but is more complicated than meets the eye. The problem is that few take the time to truly master it.

Entrepreneurs carry market segments around in the back of their minds, relying on gut feel to determine whether the customers they are seeing are the right customers. The problem is, when you’re chasing revenue, any and all customers will seem like the right customer.

Common mistakes in segmenting:

• Dividing groups of people by firmographics or demographics.

• Dividing groups by arbitrary characteristics, like early adopters or Facebook users.

• Dividing by product category, like fine-dining restaurants, or electronics.

• Dividing by vertical markets: healthcare, financial services, and so on.

Know Your Audience: Why Segmentation Matters

Lean thinking—for example, lean manufacturing—has a concept called pull.

pull: An arrangement in which nothing is done simply means that nothing is done in product creation or delivery until the customer (including internal customers in the design and manufacturing process) expresses a need or a demand for the product or for the intermediate “deliverable” from the downstream process.

Product-market fit can be thought of as massive pull.

Pull has two primary characteristics:

1. Demand demonstration. We’re not building the product, part, or feature because we think the product is wanted; it has been ordered.

2. No overproduction. We’re building just in time (JIT)—in other words, no inventory. The product, part, or feature is created only when pulled by the next downstream process.

Combined with lean’s concept of flow, pull means that not only is the final product not overproduced, but neither are all intermediate parts, so that from design to delivery, a product flows from raw materials to the customer’s hand without waste: no wasted activity, time, or materials.

Product-market fit can be thought of as pull on a large scale. So many customers are demanding your product (and product features), that a clear market signal has been sent saying your product is needed. Marc Andreessen, when first describing the concept, used the term pull without referencing lean: “the market pulls product out of the startup.”³

This is different from normal market pull. Remember, in a nonstartup environment, the customer is known, as is the value being provided to the customer. The company is in execution mode, having already figured out how to build, market, sell, and distribute the product. Lean helps the business do that better.

product-market fit: A match between product and market segment that results in high growth or high demand. This isn’t an assumption, but rather describes a significant change in the number of customers based on having achieved the fit.

In a startup endeavor, however, we seek to discover the customer and the value. Pull in this context means two things:

1. Demands demonstration: Value has been discovered.

2. No overproduction: Only features contributing to value are built.

Product-market fit represents this discovery for one or multiple subsegments.

Defining and understanding subsegment pull is the only way to measure progress toward product-market fit. Product requests from engaged customers may be a good indication that you’ve nailed—or are close to nailing—the core value proposition, but if these requests are scattered across multiple segments, it’s easy to misunderstand the signal.

On the other hand, if you understand your subsegments well, you can measure pull coming from a specific group of users with a common need. The same applies to other measures of market signal—in other words, what the market is telling you about the demand for your product. Looking at month-over-month growth rates across all users is not as effective as month-over-month growth rates per segment.

Better to understand which segments are growing fast versus those that are, perhaps, not growing at all.

If you measure user satisfaction, it makes a lot more sense to know a lot about who is satisfied and why, rather than monolithically knowing that most customers are happy (or not).

Without proper segmentation, you are left in the dark about who is testing your value proposition. As businesses achieve some measure of positive market signal, customers will provide feedback: what they like, what they don’t like, what works, and what doesn’t. They will do this solicited or unsolicited. Some of it is valuable, some of it isn’t. All of it indicates market signal, but how do you know what to listen to and what to ignore?

In their quest to achieve the oft-stated ambition of “thinking big,” entrepreneurs express the desire to have access to huge markets, and if they convert a conservative percentage of them, the revenue is so huge that investment is a foregone conclusion. When discovering the value you’re creating, however, it’s virtually impossible—from the outset—to discover a core value proposition that suits this whole market en masse. Instead, successful solutions evolve over time to attract more and more subsegments without losing the early adopters, or the early adopters are used to attract the mainstream customers, after which the early adopters are abandoned!

This is arguably the case with Apple’s iPhone and iPad. Having watched and learned from (and participated in, to some degree) the early entries in the tablet/microcomputing device industry for over a decade, Apple leapfrogged the early adopter market with the first iPhone release. Early adopter is the name coined by Everett Rogers and popularized by Geoffrey Moore to describe an early customer of a particular product or technology. These customers are often willing to put up with unfinished or imperfect products for a variety of reasons:

• The solution solves a problem or pain just enough.

• The buyer likes to be seen as a leader.

• The buyer is a tinkerer in particular areas.

Note that one common misconception is that an early adopter is strictly a personality type—that is, a particular person who is an early adopter generally will be the first buyer of anything. This is certainly not true, even by industry.

Those who must have the latest electronics gadget don’t buy the early versions of all new electronics product categories. Additionally, someone who buys products to play with and quickly discards them is a tinkerer, not an early adopter. It’s important that an early adopter understands and needs your value proposition.

We often see this misconception lead to problems in the high-tech industry. Startups seek coverage for their product on online media sites like TechCrunch, assuming that readers tend to be early adopters. Unfortunately, the bump in traffic they receive—even that which results in conversions to product sign-ups—is misunderstood as product-market fit and can wreak havoc on young companies.

The TechCrunch bump, as it is called, literally can kill a company by sending them off on a wild goose chase once the first wave of (non) early adopters subsides.

The would-be early-adopter crowd for Apple’s first iPhone (who were not fierce Apple brand loyalists but tech junkies) decried the limited feature set and lack of customization available—functionality that they desired as early adopters but that would have hindered the usability by the mainstream adopter.

Ironically, the way to go big is to focus small. You are more likely to discover what will go big by focusing on individual use cases.

One of the biggest entrepreneur traps is to be all things to all people. Big companies get big by being a few things to a large number of groups of people. Although a plethora of feature requests might indicate a positive market signal, they are potentially fatal without knowing who they come from or why they are being requested.

A Southern California startup we spoke to was recently shuttered by its CEO after he had an epiphany during a meeting with a large, influential partner prospect:

I was sitting in his office and the potential partner asked the rather simple question: “What is your core value proposition?” I sat there, mulling over the features upon features we had added to the product over the prior few months based on in-depth customer interviews, automated feature requests, and conversations with prospects, and I realized I couldn’t answer the question.

I went home that day and sent an e-mail to my list of 1,500 customers telling them that regretfully, the product would no longer be available.

If you haven’t done the proper market segmentation, categorized feature requests by segment, and made the effort to understand why the customer asked for a particular feature, then you are no closer to product-market fit than if you were receiving no requests at all.

This isn’t to say that you will not pursue additional market segments. The point is that it’s very difficult to pursue many at once, especially if they’re particularly divergent. GroupMe, the group messaging service acquired by Skype in 2011, had explicitly rejected a corporate segment that was willing to pay for its service. For several reasons, it chose to pursue the free-user route instead. Sometimes saying no to a segment means saying no to immediate sales, but yes to building out a long-term business model or, in this case, an attractive acquisition target.

When you catch a fish you didn’t mean to catch, it is called a by-catch. This can be serendipitous—for example, if you were fishing for mackerel (a small fish) but you accidentally hooked and landed a white sea bass (a large and very delicious fish). Generally speaking, however, you do not want to hook a leopard shark when fishing for halibut.

As you have no intention of eating the shark, you need to get the hook out of its mouth so you can let it swim free, but in the meantime, the hooked shark is aggressively thrashing about in your boat, destroying your equipment and tangling your line. You also aren’t terribly thrilled about getting your hand near its teeth to remove the hook.

You didn’t want to catch this fish. You aren’t set up to catch or even eat sharks. Yet, you got one on the line and you and your fishing buddies have to deal with the consequences. Accidentally hooking a leopard shark is a total buzzkill.

On the other hand, if, upon learning how to catch halibut, you found that the methods also led you to catching lingcod, you might have found the next segment you could pursue. Lingcod and halibut have overlapping ethologies. Halibut like sandy bottoms near what fisherman like to call structure, for example, rocks with eelgrass, or reefs, or maybe even piers, whereas lingcod actually live in the rocks. They’re both ambush predators that feed on bait fish.

As you start to dominate the halibut segment, you might send an additional boat and cast into deeper water to find the sweet spot for lingcod with little change to gear, bait, and existing processes.

Market Segment

An IT manager and CIO may face the same problem—network security—but they don’t speak the same language. Although the IT manager is actively fighting a breach, a CIO might be estimating the potential risks of exposed assets. The CIO doesn’t look to IT managers in other organizations to find solutions to network security issues. Neither do IT managers look to CIOs for the best products to solve their immediate issues. They do not look to each other as a reference for resolving the problem, so they are said to not speak the same language.

The benefits they hope to receive from a solution are different. Therefore, the product requirements will be different. They also tend to get information from different sources and their methods for approving solutions will differ, and will require different marketing and sales methods.

Clues that people are in different segments:

• Their depth of pain or passion is markedly different.

• They hang out in different places—for example, Facebook versus LinkedIn.

• They expect different solutions—for example, fast food versus a sit-down meal.

• They expect different distributions—for example, online versus brick and mortar.

• They expect different sales methods—for example, field sales versus e-commerce.

Clayton Christensen asks, “What job is your product hired to do?” The same product is hired to do a different job by different customers. In his now famous (among marketers) example, a researcher for a fast-food restaurant found that a large portion of milkshake purchases in the morning came from commuters:

They faced a long, boring commute and needed something to make the drive more interesting. They weren’t yet hungry but knew that they would be by 10 A.M.; they wanted to consume something now that would stave off hunger until noon. And they faced constraints: They were in a hurry, they were wearing work clothes, and they had (at most) one free hand.⁴

Proposed changes to the product to increase market penetration of this company’s milkshake focused on maximizing its utility to this particular use case for a specific segment—the commuter. Although this exercise—answering the question of what job your product performs—is a clever one, you don’t want to ignore the customer when answering the question.

Perhaps if you have the marketing budget of a fast-food restaurant it’s not an issue, but to startups, the fact that your customers who are hiring the product are identified as commuters tells you a lot about how to reach them and convert them into customers.

Market segmentation isn’t only about how to design a product for them, but also, just as importantly, how to market and sell to them.

As an aside, we should note that it has been known for many years that segmenting along demographic traits does not prove to be terribly useful,⁵ nor does it a market segment make—yet for some reason market segmentation is still thought and taught to be synonymous with a listing of intersecting demographic traits.

Back to the milkshake example: Other subsegments were hiring, too. A thinner milkshake was developed for parents who were looking to hire a product for the job of rewarding a child, but who didn’t want the drink to last a long time.

You can easily imagine the myriad reasons why different visitors to that fast-food restaurant hire a milkshake.

In fact, there were likely other subsegments who bought milkshakes in the morning alongside the commuters. Additionally, some commuters didn’t buy milkshakes. What did they buy and why? Most commuters didn’t even go to the restaurant. Why?

The more you know about your customers, the more you know about your segments and even your subsegments. The more you know about your subsegments, the more you know about attracting more of that particular group or alternative, and the more you know about which segments to ignore. Key aspects to the story include:

Problem statement: boredom on commute.

Existing workaround: bagels, donuts, milkshakes.

Solution: thicker milkshakes; add fruit.