Death by Dendogram

Below is the ‘Tip of the Week’ transcript from the Podcast Ep50: The Value of Data, Part 2 (Leo Polovets)

On today’s episode, the concept of dendograms and clustering came up. If you are not familiar w/ Dendograms, they are sort of like a vertical decision tree… but instead of decisions, each branch represents sub-markets within the greater market. The nice thing about these visual tools is it helps marketing and the executive team make data-driven decisions about what to innovate, how to position and customer messaging. This is related to discussions about TAM vs. SAM. What is the total available market that, w/ geographic, channel and product expansion, can be accessed. Where w/ SAM, what is the specific target market that can be served right now.

So at the very top of the tree is the entire customer market and, conceivably, at the very bottom one could include every customer on a separate branch. And, with a Dendogram, the length of each branches indicates the relative difference between between customer segments. The longer a branch for a node from it’s parent, the more disparate the traits of this sub-segment.

So, let’s take the outdoor grilling market, for example. At the top of the tree is the entire market. If we think about the types of customers that buy grills… let’s pick three straightforward groups:

1- The Weekend Warrior… This customer uses the grill once a week or less, during the summer

2- The Outdoor Chef… This customer may not use the grill frequently, but considers theirself a grilling expert and requires more control and better grilling equipment

3- All day, Everyday griller… This customer may use the grill every chance he or she gets, amounting to 3+ times a week.

So those are the three broad categories, but maybe their are sub-categories within each.

So the Weekend Warrior maybe be split into:

1a- The Holiday Dad… Who likes to grill on holidays for neighborhood block parties and

1b- The Tailgater… Who takes a portable grill to the football games on Sundays

and maybe the second group, the Outdoor Chef, is broken into the:

2a- Culinary King… Who has the top of the line, convection-style grill for the most accurate cooking and

2b- The Party Yard… Who has the most expensive grill, landscaping, firepit and pool but rarely actually uses the equipment to cook food.

 

Below is an example dendogram for the outdoor grilling market.  Numbers are hypothetical and only for example purposes.  Dendograms are often generated from Clustering Analysis on customer data.

Example Dendogram

These are all just hypotheticals. I don’t actually know much about the grilling market. But, as you can see, limitless levels of sub-groups can be broken out that further define the differences between customer sets. And each of these segments have different sets of needs and wants the must be considered. This can be very valuable as the marketing team sizes each of these sub-components. How realistic is it to build one product that serves all of these segments? Not very. Most startups will need to create a new, disruptive, product with tremendous value for a niche or sub-segment of the overall market. And this niche needs to be large enough to justify the effort. The really great startups that I come across not only have a distinct and tightly defined strategy around a specific segment of the market but also a vision by which their offering can expand to eventually address the majority of the market. The biggest mistake, that I call Death by Dendogram, is when all segments are pursued right from the beginning. Those trying to be everything to everyone often end up being nothing to anyone. The other common issue I see is those startups that don’t have a vision or path to the big market. While executing and serving one segment very well is great, if there is no larger market opportunity than the liklihood of a large venture return is much lower.

I would not advocate asking an entrepreneur for their dendogram at the risk of getting some strange looks… but rather, I think it makes sense to ask founders about their customer segments. And if it’s an early-stage B2C company, maybe the amount of data is too limited to clearly define the segments. But that doesn’t mean they can’t have a hypothesis. Here are some questions that I’ve asked:

  • What are the target customer segments within the greater market?
  • What are the need/want profiles for each?
  • What is the degree of homogeneity between these target groups? Do they have wildly different psychographic and demographic profiles or not?
  • Will an initial offering, with a focused key benefit, be able to serve each primary target group? In other words, can positioning and messaging be adapted such that you can appeal to the needs of each group without fundamentally changing the product or feature set?
  • Are you able to use demographics to accurately predict which segment a potential customer will be in?
  • Does your channel or marketing approach allow you to adapt the value sell for each target segment?

Part of what makes B2C so hard is that target markets often have much more disparate dendograms and profiles and it can be very hard to define these segments. Whereas in Enterprise B2B, a shorter number of customers can be interviewed, surveyed and defined much more explicitly. But regardless of the customer type, using data to understand customers and drive a go-to-market strategy is increasingly important and measurable into today’s digital environment.

Big thanks again to Leo for his wisdom on the value of data. All show notes and links can be found at fullratchet.net.  Until next time…

 

 
   

   

Listener Feedback

Pete Maglio

The takeaways to end this episode are fantastic! Thanks @TheFullRatchet & @BenEinstein! pca.st/Fey4 #smartHardware #startups