🤖 Find a profitable niche using AI

Many startups fail because they don’t find a profitable niche, and they cast too wide a net. Fortunately, your AI co-founder is a segmenting expert and is here to help.

Hey friend 👋

Startups fail every day because they didn’t find a profitable niche.

The founders cast far too wide a net — “we serve small businesses” — trading lucrative, specialized segments for inefficient, costly markets.

It’s the same challenge faced by every startup: how do you uncover an early adopter segment you can dominate?

Fortunately, your AI co-founder is a segmentation expert and is here to help.

Let’s go 👇

This is nothing new.

We talk about early adopters, beachhead markets, growth hacking, and on and on.

You have finite resources — such as time, talent, and treasure — that you need to put to the most efficient use possible. In an early stage company, you simply can’t target “small businesses”. It’s just not feasible.

To paraphrase Frederick the Great, “he who markets to everyone, markets to no one.”

Thus the aphorism:

The riches are in the niches, baby!

Finding your niche provides innumerable benefits:

• Uncover the most severe customer pain points

• Drive more revenue from marketing

• Increase operational efficiency

• Increase retention and loyalty

• Streamline sales processes

• Build better products

• Reduce CAC

• etc.

But what exactly is a niche?

You know those pitch deck “competition” or differentiation slides with the four quadrants? Three are filled with everyone else, but they have that upper right corner all to themselves?

That’s not just outlining the competition. It’s using differentiation to identify an underserved segment of the market:

The axes are putatively about the companies listed, but they’re really about what customers desire. The reason you want that upper quadrant all to yourself is that there’s a group of people who really need two things, and the current market makes them choose between the two. They can’t have both.

That’s an underserved segment. It’s a gap you can fill.

If you find that combination — and it’s real — you’re golden.

But doing guess-and-check on feature combinations is not a very efficient way to find a market opportunity — though many founders seem to try!

We can do better.

How do you segment the market?

The fundamental core of product-market fit isn’t finding the right customer for your product. It’s finding the right combination of customer and solution. Startups co-create their business with their customers.

It’s not about finding customers — but developing customers.

And in an early-stage startup:

Your niche starts with your early adopters, but they’re not the same thing.

It’s easiest to visualise this group in the Early Adopter Pyramid (originally from Steve Blank). It’s the ladder you climb to find the customer you should serve first:

It’s a process of increasing segmentation:

1. What is the universe of people who have the problem? We don’t care about those we can’t help.

2. Of those, who already knows they have the problem? We don’t care about those we who don’t know they need help.

3. Of those, who is actively looking for a solution? We don’t care about those who don’t prioritise solving it.

4. Of those, who is so desperate that they hacked something together out of spare parts? We don’t care about those who aren’t eager.

5. Of those, who has the budget to buy? We don’t care about those who can’t pay.

But the mistake most founders make is assuming the bottom of the pyramid is their TAM.

It’s not. That’s too broad.

Your early adopters aren’t your niche. They’re the group of people within your niche whom you’re best primed to serve first. In other words, the universe of people who have the problem is the little niche segment of the market that you can serve better than anyone else.

But! Before we can do any early adopter analysis — before we can try to climb the pyramid — we need to identify the bottom of the pyramid.

We need to segment the market to find our niche.

There are 5 ways to segment the market

There are just a limited number of ways you can divide people into groups. I like to think of them as the Who, Where, What, How, and Why questions:

1. Who are the people or firms who are uniquely primed to want this solution?

2. Where do you find people who are uniquely primed?

3. What are they uniquely getting from using the solution?

4. How are they behaving that makes them uniquely primed?

5. Why are they uniquely primed?

Let’s break that down into a little more detail.

Segment by who (demographics & firmographics)

This strategy includes demographic factors like age, income, gender, race, education, and occupation, enabling businesses to tailor products and marketing efforts to specific demographic groups.

This can increase resonance (this product is for me) or better match needs (this product is within my price range).

In the B2B context, this approach segments markets by firmographic variables such as industry, years in business, head count, market size, and company performance, allowing you to target organizations with specific characteristics.

In B2B, this allows targeting companies in specific industries for tailored solutions, or focusing on businesses of a certain size to ensure scalability of offerings.

Segment by where (geography)

Geographic segmentation involves dividing the market based on factors like location, climate, culture, language, and population density, helping companies to focus on regional preferences and needs.

This helps tailor marketing campaigns to local cultural preferences (which also lowers your costs), and it adjusts product offerings based on regional climate conditions.

Segment by their why (psychographics)

This segmentation method categorizes consumers according to their personality, lifestyle, social status, interests, goals, attitudes, and values, which provides deeper insights into customer motivations and preferences.

For example, this could enable targeting of environmentally conscious consumers with sustainable products, or appeal to lifestyle-oriented segments such as fitness enthusiasts with specific health products.

Segment by what (perceived benefits)

Beneficial segmentation identifies market segments based on perceived benefits like functional, economic, emotional, social, personalization, convenience, or service advantages, allowing businesses to highlight the specific benefits that resonate most with different customer groups.

For example, you could attract cost-conscious customers with economically advantageous products, or (on the opposite end of the spectrum) engage customers who seek personalized experiences with customized offerings.

Segment by how (behaviour & technology)

There are two ways to think about how consumers behave: what they do (behaviours), and how they do it (technology).

Behavioral segmentation focuses on consumer behaviors such as spending habits, purchasing reasons, and occasions, enabling companies to tailor their marketing efforts to specific actions and triggers.

This could look like targeting frequent buyers with loyalty programs and special discounts, or focusing on occasional buyers during holiday seasons with specific promotions.

Technological segmentation segments the market based on the technology consumers use, how they use it, and their technological needs, helping businesses to target tech-savvy customers or those with specific technological requirements.

For example, you can cater to innovators with cutting-edge products, or provide tech support and resources to customers with less technological sophistication.

Those are the questions.

But how tho?

The textbook market segmentation process is fairly straightforward 3-step process:

1. Define: Divide the market into categories based on shared traits.

2. Target: Choose the segment that feels the greatest severity and urgency (and who has the budget).

3. Position: Run experiments with various product, price, promotion, and placement combinations to drive conversions.

In fact, it’s so straightforward as to not be particularly useful — especially for an early-stage startup.

Because before you can do any of that, you still need to find the right way to slice the market. You could do that manually with guess and check, I suppose, but that ain’t how I roll...

Fortunately, when it comes ideation, our AI co-founder crushes it.

We’re going to train it on the different ways to segment the market, it’s going to spit out a ton of ideas, and then I’m going to teach you how to find the most promising ideas and test them with real customers.

Let’s go 👇

AI enters the chat!

Before we go any further, jot down a super brief elevator pitch (one or two sentences), and the broad market that you want your AI co-founder to segment for you.

Then throw it at this prompt. It takes the elevator pitch, market, and an overview of the process of segmentation, and provides 5 segmentation ideas for each of the 7 ways to segment the market — that’s 35 different segmentation ideas! For each niche, it also provides a justification for why they could work as an early adopter.

This should work in both free and paid ChatGPT, as well as in Claude and Gemini. My screenshots are from ChatGPT 4o.

Here it is: