The 6-Step Process for Identifying Your First Customer Base, from Ernst and Young’s James McGovern

Before you start developing your product, you need to take the necessary steps to ensure your eventual product launch is successful. And that starts with identifying your customer base. Labs mentor James McGovern, senior strategy manager at Ernst and Young, held a session to discuss the 6-step process that every startup should follow to understands its customers and define its market.

Step #1: Conduct your primary market research

It’s important to conduct primary market research (or PMR) before you start building any products. This research is key to creating a product that helps address a common pain point or need. One method of conducting PMR is by interviewing potential customers in the market about specific pain points in their lives. For example, how do they deal with a specific problem area? If a solution existed for their problem, how much would they be willing to pay for it?  

Before you go out and start asking questions, be sure to come up with a hypothesis that supports them. For example, if you have a watch startup, your hypothesis coule be, I believe that current watch owners feel the need to have a watch that’s more stylish and easier to read, but are not willing to spend more than $300 for it. “The goal of PMR is to understand your customers in all dimensions. You want to make sure you're starting to find the right problems—at this point, you aren’t focusing on solutions,” McGovern says. “Instead, your research will focus on what customers' problems are and what opportunities those issues present.”

Step #2: Evaluate and segment your market

Market segmentation breaks up your customers into smaller groups based on a wide range of factors, such as age, location and income. These segments can be helpful for reaching specific groups in the most effective ways. For example, if you have a segment of 20 to 30-year-olds, you may try to target them via social media as opposed to email. “You can also try to segment based on categories such as personal interests and technology,” McGovern says. Remember, these segments should be wide ranging and general, not hyper-specific.

Step #3: Select your beachhead market

One of the biggest mistakes that early-stage entrepreneurs make is trying to quickly tap into as many markets as possible. When they do this, they end up spending a lot of time and resources in markets that may end up being a poor fit and wear out their resources. “In the early stages, entrepreneurs are excited and thinking about all the different possibilities with their startup. But then they start focusing on too many things at the same time,” McGovern says. “Running out of resources is probably the biggest killer of early-stage startups.” Instead, focus on a beachhead market, which is the ideal segment for your product to you get started. To help select your beachhead, take the various segments that you’ve defined and give them rankings based on factors such as strategic value and economic value—the segment that’s highest-ranking should serve as your initial target market.

A beachhead market serves as a North Star for your startup by giving you a sense of direction for who your main target audience is. “Amazon is one of the best examples of a company creating a beachhead market. They started off as a bookseller and built up their ecosystem and profitability. And now look at what Amazon is now,” McGovern says. By designating an initial target market, you’re giving your startup the opportunity to grow steadily in a market that’s core to your business.

Step #4: Create your target-user profile

Now that you have a beachhead market, you’ll want to create a high-level overview of who the end-users of your product could be. Start by using your primary market research to create a hypothesis about the potential characteristics of this person. “It's really important to speak to five to ten people to validate or refute your user hypothesis,” McGovern says. “There are probably some things that you hypothesized, that, when you speak to actual people, it turns out they feel differently.” But make sure that the people you are speaking to are targeted and specific in some way. For example, if you have a fitness app, you’ll want to go down to a local gym and ask people their age, occupation and how many times they work out every week rather than stopping people on the street and asking them the same questions.

Step #5: Calculate your total addressable market (TAM)

After you’ve determined your beachhead market, calculate how much revenue you would make if you captured a certain percentage of that market. “The question you want to answer here is, are we addressing a market that's big enough and that future potential investors will be interested in?” McGovern says. “If you determine that there's a big market but it already has incumbent players and there's no room to grow, then that should be a red flag to you and any investors.”

When you’re calculating your projected market share, be realistic. “You have to consider whether or not your numbers are believable. If you say, we've got a big market, and if we penetrated four percent we’d make... why do you think you can penetrate four percent? That's actually a common mistake that entrepreneurs make,” McGovern says.

Step #6: Create user personas

Finally, creating  user personas allows you to understand very specific details about your actual customers. These personas help you make better decisions about your customer outreach going forward by giving you a clear picture of who your end users are. “What does this user care about? What's their mindset? Where do they hang out? You have to try and put yourselves in their shoes and understand how they operate,” McGovern says.

When you’re creating personas, be as specific as you can. Take note of how the users operate emotionally and socially. You’ll also want to understand why they’re using your product and what’s motivating them to use it. “Generally if you can create multiple personas, that’s ideal—it’s all about quality though. If you can only create one quality persona, then that’s the right number,” McGovern says.

Whether you create one or five personas, create them as a team so that everyone is aligned and understands your end-user goals. This way, if you’re ever having an internal discussion with your product or marketing team and there’s misalignment on who to target, you’ll be able to refer back to your personas and let them guide your decisions. “Now you can start targeting your product. If you have to make some design decisions, you can start thinking about the best areas to focus on,” McGovern says. “Then you can start tailoring what you’re offering to what your customer really wants.”

Read more articles about product development and go-to-market strategy.

This post is based on content from a WeWork Labs programming session.

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