I love this bit from the movie “Three Amigos!“:
Jefe: I have put many beautiful pinatas in the storeroom, each of them filled with little suprises.
El Guapo: Many pinatas?
Jefe: Oh yes, many!
El Guapo: Would you say I have a plethora of pinatas?
Jefe: A what?
El Guapo: A *plethora*.
Jefe: Oh yes, you have a plethora.
El Guapo: Jefe, what is a plethora?
Jefe: Why, El Guapo?
El Guapo: Well, you told me I have a plethora. And I just would like to know if you know what a plethora is. I would not like to think that a person would tell someone he has a plethora, and then find out that that person has *no idea* what it means to have a plethora.
When discussing market segmentation and the dramatic changes we see with the rich segmentation happening as we speak, I often feel like companies we talk to say they understand what market segmentation looks like only to realize they really have no strong grasp of their customer or how deeply customer needs, desires, and wants have evolved. We believe we are seeing the rise of micro markets and many of them. You may say, a plethora of micro markets is emerging.
Understanding market segmentation, at a basic 101 level, is a fairly routine idea. However, most modern thinking around segmentation is flawed. It makes assumptions about profiles and attempts to capture diverse nuances but often just ends up grouping as many people as possible together in order to bring about the appearance of a larger market opportunity. I believe markets are splintering off, and richly segmenting, at a much deeper and wider level than many others believe.
I came across a trend research report where the CEO used the term, “the audience era.” Below are a few paragraphs capturing what this means:
Today we live in what I call the ‘Audience Era’ – an age where everyone and everything has an audience.
The origins of this are not news for anyone in marketing; mass-market social media combined with 24/7 mobile access has radically reshaped our communications environment. Publishing to an audience today has been simplified to a single button press, so it is no surprise that our data quantifies that an incredible 81% of internet users now publish a video, photo or review online at least once a month. In a little over a decade, we have gone from thousands of outlets to billions.
In the mass-media era, there were limited channels to engage an audience, meaning content and its distribution were dictated by the media owner. Today there is infinite choice, from the on-demand platforms of Netflix and YouTube to content aggregators like Apple News, Facebook, and Flipboard. We live in a search-centered world where we dictate what we consume. The result of this is that audiences have splintered and fragmented, but are more centered around passions and interests.
The Audiene Era is an apt phrase for what is happening. These statements emphasize one of the larger trends I’ve been watching unfold. An era where everyone can have an audience and these audiences are very wide and diverse. Think about this from the standpoint of Facebook, YouTube, Twitter, Snapchat, Instagram (Insta as the youngs call it). All of these platforms have created at scale micro-audiences. Instead of one very large audience, there are now multiples of scale of smaller ones. This makes reaching your audience potentially less expensive but also much more difficult. Instead of blanketing a marketing campaign, the opportunity can be to target it and receive maximum return on investment. The challenge is, in my opinion, that markets may end up being smaller and less financially lucrative as a result.
Look at the Dollar Shave Club, for example. As successful as this transaction was (a billion dollars is a good exit), it is far short from the crazy valuations and acquisitions we see around Silicon Valley today. Look at the WireCutter as another example. Perhaps my absolute favorite review site was purchased by the NY Times for 30 million dollars. Again, not a bad exit given the company did not have a ton of private debt but, again, not the sale figures we are accustomed to these days.
I have a sense things like this will become more the norm than the exception. If what were once large millions of user markets begin to segment into micro-markets within the larger product category, then the total business opportunity may not be as large as it was historically. Again, the benefit is a more lucrative business opportunity, since these companies won’t require as much capital to be successful yet can operate with much higher margins, but the total dollar figures may be in the millions rather than billions more often than not.
There is nothing wrong with this but it does mean we need to change our expectations. This changes how companies will go about assessing a market opportunity and consider the total costs associated to make sure it is a profitable venture. Investors may need to rethink how they capitalize, and how much capital, they pour into private companies. Smaller deals may become the norm, along with smaller acquisition expectations and smaller overall market cap IPOs.
I also wonder to what extent we will see conglomerates owning brands or sub-brands designed to target these micro-markets but are owned by the same umbrella company. Facebook is a good example of this. As the social media platform market fragments, they are likely to buy companies that fill gaps in their overall offering. A company like Snapchat may be lured to go public and try to chase scale only to realize their market is much smaller than they first anticipated and then likely pivot or sell.
I can see many examples in news and social media, entertainment, and more where this is likely to happen. It fits my thesis that the overall tech world will operate fundamentally like the consumer packaged goods segment. Several enormous companies own the different brands targeting micro-markets. CPG understands rich segmentation better than any industry out there and I have a strong feeling the exact same dynamcs will apply to the technology industry.
As we move into this new territory for tech, the age old mantra will become increasingly more important — “Know thy Customer”.
