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let me talk about segmentation so like I said when you start developing your good it's strategy your business plan your strategic marketing plan you start with the core product which is what we usually start with then we do segmentation then targeting and then we do the positioning all right so let's start with segmentation and I said last time that as part of the class we're going to do the segmentation for a couple prod technologies yeah so we have this technology that your friend your genius friend created that basically converts heat to power with an efficiency that's much higher than the market we called it unobtainium because we know nobody else is using that name and basically your first goal is to find out what product to develop and who's the market and these usually go together the segmentation and targeting exercises are going to help us do both okay and I'm gonna use this technology to drive the example now you may or may not know those of you interested in energy that we actually waste we the world but this is specifically the United States we waste more energy than we use productively every time coal or gas power plant creates electricity they actually waste anywhere from 70 to 40 to 70% of the energy goes literally up in smoke okay that's called waste heat in your car unless you have an electric car something like 80 percent of the energy in gasoline is actually wasted wasted down the tailpipe and heat or in braking 80 maybe 85% depending on whether it's a gasoline or a diesel engine okay more energy is wasted than used productively so there's a lot of room for us to do energy efficiency and actually take some of that heat and convert it back into usable power which can be used for usable heat or air conditioning right so let me start the conversation about segmentation with the word value another word that is really abused in Silicon Valley in business in general okay so let's just describe what I mean by value and what we're gonna mean by value in this course and the first thing is features versus benefits what's a feature a feature resides in the product okay so when you talk about 1024 P 802 11 AG or 10 base T or whatever you're talking about a feature you're talking about a technology okay now a benefit reside in the customer now that specific technology that specific feature may or may not translate into a benefit into value for a specific customer a benefit is very specific to the very specific customer does that answer the question of the patent you want to deliver benefit not necessarily that specific technology customers care about benefits okay very few solar PV customers know about the specific technology in the photovoltaics very few if any or who makes the inverter and what makes that inverter better than the other what do they care about power they care about power clean power and price does that make sense okay your job is to find the benefits that are priceless because the same feature could be useless to some and priceless to others so that's our job in the segmentation and targeting exercises that's what we want to look for okay now two more things creating value versus capturing value again creating value is very very abused in the lingo in Silicon Valley everybody seems to create value right so let me see a show of hands who uses Facebook Wikipedia Gmail Craigslist YouTube Wow who doesn't that would be easier right so pretty much all of us do how much do you pay to use these no one come on Craigslist they need your money Facebook needs your money right no Google no they don't need your money actually Wikipedia does but see there's value creation when there are benefits that accrue to the customer to the user to you okay so all of you all of us use Facebook Wikipedia LinkedIn Craigslist and so on these companies are creating value for us otherwise we would not be using those products does that make sense they're creating value for us however capturing value is hopefully the other side of the coin where there's value creation the company pays for the costs when there's value capture somebody actually pays for the usage of that product okay now it doesn't mean that the user is going to pay directly but somebody has to pay when somebody actually pays then we can say that value has been captured see the difference value creation Facebook or LinkedIn or whatnot in value capture when somebody pays which in the case of some of these companies the value is captured in advertising for instance okay but it doesn't have to be so now much of the rest of the scores I'm going to talk about you know when the user actually pays but that doesn't have to be the case necessarily okay now the most successful companies find a way to maximize both value creation and value capture both you have to maximize both you have to attract users that you create value for and you have to find a way either for these users and/or someone else to pay for that value does that make sense and it's the yin and the yang value capture and value creation the companies that have that engine are you know the successful companies yes yes Craigslist didn't have funding they never raised money ever I mean you know Craig Newmark is allergic to VCS you know initially he did it from home and then you know at some point he started charging for rentals in San Francisco and then that grew and then he charged for rentals in LA and then New York and so on and now Craigslist I mean they're not public but I think they make two three hundred million dollars a year but they never ever to my knowledge got any funding outside funding it was an organic growth if I've ever seen one does that make sense eBay eBay actually grew they actually raised five million dollars but you know the one of the co-founders told me they actually had that check like you know on a board like that they never actually used that money they actually grew organically very much they ended up using it but at some point but yes so SolarCity you'll know solar so the question is how the solar city capture value you know it so they create value by you know installing and financing and you know doing the permitting and doing everything for the customer clearly you know how do they capture the value it's been said by some that Solar City is actually a financial services company they actually value the I mean capture the value of financing these things most of it is from finance so that's how they captured does that make sense yeah can it good it's not high cost but you know there are there's the investment tax credit I mean you know the solar like real estate as a lot of tax implications in financing implications and you know long term finance implications and the folks who you know know how to deal with all those pieces can make money just like in real estate right and real estate is very expensive all right let's talk about the value proposition so I talked about value I want to talk about the value proposition what is the value proposition the value prop is a statement of the unique benefits that your product or service delivers to your customer so I should underline unique benefits that your product or service will deliver to your customer okay so it's a specific application delivering value to a specific use does that make sense now I see websites with here are our 8 value propositions ha okay clearly they don't know or clearly they're going after everybody okay which is not necessarily a good thing if you're a small company okay so if you're want to remember long long long from now how to do value prop here here's what it is the difference between before you and after you okay here's you before me here's you after me the difference is me it's the value proposition does that make sense so you have to be specific increase revenues by 20% cut costs by 40% save you no specific time save 20% fuel okay does that make sense very specific and I'll show you something funny this actually a coffee house but look at before-and-after right so if you drink our coffee here's how you feel before and here's how you feel after so that is a value proposition it has to be truthful I mean you know what I mean right but that's actually a picture we took in New Zealand we thought it was so funny I had to do it show it in this course so that's the value proposition here's you before here's you after now when you develop the value proposition in ten words or fewer describe what the benefits are not the features the benefits or to the customer and let me give you examples here's a strong three strong value props call anyone on any phone anywhere in the world at local rates I don't even have to tell you who that is right call anyone anywhere on any phone at local rates Skype now they have a you know some companies once they grow they tend to have fuzzy can a value props but this was brilliant Oh Belacqua zation for eBay horrible acquisition well eBay and then eBay spun it back off and then Microsoft acquired it I don't know hmm Google hangout came in between but were they worth eight billion dollars I don't know takeaway laugh eyes in less than one minute brilliant value problem okay haha you see it's it's I think I saw this in Nordstrom or something right Sachs Saks Fifth Avenue takeaway laugh lines in less than a minute one of these magic potions for two hundred bucks I don't know if it works but the value prop is brilliant okay clean energy cut heating and cooling costs by up to 80% okay see that they're friends between let's all be goody goody goody and green and cut costs by 80% this is a strong value problem weak value prop we help people achieve great things through innovative solutions you know shoot me now the best of the web on your device what hello right so these are terrible value props that they don't tell me anything okay alright so we're gonna see promotion later but here's a geothermal heat pump company saying that they got costs by 80% heating and cooling right okay now we can talk about market segments and I wanted to touch upon value because markets are all about value and all about benefits not about features not about technology okay so let me define a market segment a market segment is a group of customers or potential customers for a given product not for the company for a given product or set of products preferably a product line who have a common set of pain needs and buying patterns buying patterns is very important and who look to each other for adoption decisions and for purchasing decisions okay this is a market segment who looked to and this is important also this last thing they look to each other for adoption decisions okay a market segment should be measurable and reachable you need to be able to reach this market and you need to be able to say exactly how many of them have many users or potential users there are okay so when I started the company called print nation.com I knew that there were exactly 40,000 small and medium sized commercial printers in America sciama I'm defining in America okay because commercial trainers in Argentina don't reference commercial printers in America so that was not part of the market or in France does that make sense 40,000 measurable commercial printers in America measurable reachable I know exactly where they were each and every one of them had customer lists had phone numbers and all that good stuff okay they definitely reference each other before you know buying from a company and so on and so forth okay need to be very specific now how let's start segmenting how to use segment existing customer consumer markets now I'm giving you this as a background because we're not gonna segment using this okay I'm just giving you a little bit of background this is the way that most existing companies segment markets okay now there are segmentation bases like you know demographics so we say our markets you know California residents urban residents with incomes above $100,000 so we're saying we're expect many by geography California urban again geography demographics $100,000 or more does that make sense so we use many of these bases or correlates to segment markets all right and these are the four main main ones Geographic demographics psychographics psychographics people is very important okay psychograph what's the difference between psychographics and demographics because demographics is the way that it used to be psychographics is well the way that folks see themselves so even existing companies make the mistake of going after say I don't know thirty five year olds or older with 35 to 45 or 25 to 35 that's the market that they want to go after but you know what it turns out that a lot of folks if you want to go up to the 25 to 35 year old market a lot of folks who are 40 or 45 still see themselves as a 30 year old right there your market psychographically they will shop as if they were 30 okay so even though we're not gonna use these correlates here if you have to do it go after psychographics rather than just demographics does this make sense it's what the customer thinks not what you think about the customer okay all right so this is yes so when you do your positioning you have to know yeah yeah so so you like I said you have to have your target market and then you do your positioning based on that target market so you will know exactly what the psychographics are so you're right that does that make sense to people okay so the online dating market by now is very crowded I mean it's in the later stages of the adoption lifecycle and I'm not gonna ask for a show of hands but you know I mean there's there's a ton of online dating market companies and so these companies need I say what segments that are going after see each one of them is going after a different segment in that what happens once markets mature now you still have the general-purpose companies match.com and what's the other one he harmony exactly those are would be the two Biggie's right but there's like dozens of little companies like not so little that target very specific folks yes yes you can there you go brilliant brilliant so they're using that other positioning exercise right against two companies okay so business markets have slightly different paces to segments so Geographic just like consumer but here business size number of employees revenues profitability growth rate and so on and so forth so that's one way in which you can segment markets by industry so as I see code is the government code for very for every single business in the nation by urgency etcetera etcetera so these are all ways in which companies segment markets so you know can you tell me a company that segments by urgency FedEx you see if you want it in four hours it's gonna cost you this much we have this product for the UN it overnight by 8:00 a.m. forty bucks by 3:00 p.m. 20 bucks three days right so this is my urgency how quickly you want it you you know you have about different values for each one of those you know target markets okay now having said all this I'm gonna tell you we're not gonna use any of that stuff or actually that's not gonna be a primary goal because especially when you segment new markets there's no data how do you segment a market that does not exist or that's an emerging market so you hope it will exist or it exists but you know it's 1% of what you expect it to be okay so what we're gonna do is bottom-up segmentation which is going to be slightly different actually very different from the top-down that most existing companies in existing markets will do okay and it's a five-step process so back to our unobtainium product okay five steps number one feel the pain feel the pain you start by thinking of a potential customer a person not a market a person a specific person with a job title okay or with a function I'm going to assume that mostly it's going to be a business segmentation at this point but it doesn't have to be so when you do this I want you to think of a real person okay with a name okay example nyle is an independent truck driver it's a person in a title or a function understand your potential customer now understand means if you can live a day in the life or do your best to understand right study the workflow study the workflow what that means is okay when does nyle get to work what are his tools what are his resources what does he do you know describe a day in the life without your product okay you got create scenarios where your product is being used by this potential customer so describe scenarios were Niall is going to use your product okay describe the pain they need or want that's going to get Niall not Allison to seek or consider buying your product okay I mean why would Niall even return your phone call right why would he bother returning your phone call because he has a pain that's why and if you don't find the pain don't bother find it that's the first thing feel the pain and to do that you have to understand the workflow to list the applications or users of your product so our technology that converts heat to power still it's a technology so we can still conceptualize what products we can develop okay what specific applications and what uses can you think of for this technology okay be specific be creative okay use verbs if you're imagining new applications let me give you examples so we know that this technology converts heat to power but there are different circumstances there are different types of heat okay so you can convert exhaust from the tailpipe to power you can convert metal heat to power maybe you can attach this to something right and convert that to power convert sunlight heat to power so you know basically you can be a substitute for PV for instance just put it on the roof of something and convert sunlight to power use the heat not the another photons like PV convert break heat to power see where I'm going there are different manifestations of heat to power find them okay and note that an application is not a benefit so the fact that we can convert exhaust heat to power it's still not a benefit we need to find out what the benefit is to the specific customers okay does that make sense yes convert that's a verb yeah download that's a verb okay save that's a verb does that make sense increase that's a verb develop the value proposition for this one specific customer for Niall now each use of this technology is going to have a different value proposition there's not an overwhelming value prop for this customer each application is going to have a different value problem so convert exhaust heat to power maybe the value prop if you put this thing in the you know tailpipe of the truck it's gonna save them 30 percent fuel costs that's a very clear value prop save 30% on your fuel costs yes yes yes let me get there you're two steps ahead of me okay does this make sense so far for each application for each use there's a different value prop for this one potential customer so you do this number for you list other potential users so we started with Niall who's an independent truck driver but again users are specific show me a name show me a title all right so here are four examples that I came up with at Starbucks in Menlo Park right Sophia is a suburban car owner Stewart is the office building operations manager in a large you know city office building Diego is a cold plant manager Sarah's a data center operations manager so these are very different types of customers or potential customers so you may want to be as specific you know think about 10 you know I went through 300 which is a bit much when I did my business plan for predation took me a few months but you know you may want to start with four five six or ten and then what you're going to come up with as a step five is a value proposition matrix so for each potential user and each potential use or application describe the value proposition okay see each cell is going to be different because the value prop for each combination of potential user and potential users is going to be different okay whether it's save 20% on fuel costs or lower power consumption by 10% or what not each one of these cells are gonna be probably it's gonna be different does this make sense so you need to go step by step so what's gonna happen is that the segments are gonna come from the bottom not the top so one of your market segments is the group of nails and you can further segment this by saying you know what I want to go after all independent truck drivers in America or I want to go after just the independent truck drivers in the Midwest and Southwest depending on where you find the value prop or I want to go after independent truck drivers with trucks that are older than ten years because these are the fuel inefficient trucks so we're making assumptions here right this is how segments emerge from the value prop from potential users and from potential use this okay so this each one of these is going to be a market segment does that make sense huh why do I call it oh because I started with that one user and then I add up to a segment rather than the conventional way of saying I'm gonna go after all you know California drivers who make more than a hundred thousand that's from there to a specific user does that make sense that's why it's a bottom up rather than the usual top down and this is how the segment's emerge now we still haven't decided what our target market is going to be and we're gonna choose just one so again segmentation is a five-step process feel the pain list the applications develop the value prop for each use and user and develop the value prop matrix question