Once you have a draft of your value proposition, you should turn your attention to the different groups of people or organizations that your solution is best suited, your target Customer Segments. This is where you need to answer who primarily experiences the problem you are trying to solve. This early identification of potential customers will be based on a number of assumptions. Check out an earlier post to review some of the assumptions you make about customers and need to test throughout the new venture development process.
During this first iteration of your business model, you should brainstorm all the potential groups of customers that experience the problem. Once you have created a comprehensive listing of all potential target customers, you need to refine this list as you better understand the profile of your customer and how various groupings may differ in terms of needs, demographics, behavioral characteristics, and purchasing decisions.
While there may seem that your product or service will benefit a large number of customers, you will see that for several reasons, you will need to reach out and engage customers in smaller segments. The main reason is the limited resources you have as a startup for marketing your products to customers. Few startups can afford to target everyone possibly interested in their new product. Attracting and acquiring customers is one of your major costs especially in the early stages of your venture. Therefore, it is important to place some boundaries around your customer base, thus focusing on a specific target market.
To create these boundaries, we use two approaches, the first is to categorize your customers by specific characteristics, forming an early profile of your target customer. The second approach is to rate in some fashion your preliminary assumptions about the customer’s experience with the task, problems with task, and current solutions. By using both these two approaches to each customer segment, you will later be able to make decisions about how to best prioritize your customer segments for early marketing and launch efforts.
One way to create this market focus is to categorize your customers by specific characteristics that allow you to divide and/or differentiate between and among the individuals within the subgrouping. This is called customer segmentation.
There are many ways to segment your customer base or market. Potential ways of segmenting a market include:
Geographic. We usually suggest that you start with establishing geographic boundaries for your early venture launch. From a geographic perspective, where will you most readily reach and engage your customers. You need to think about all aspects of customer engagement including marketing to the customer, answering pre-sale questions, distributing your product and service, responding to customer service issues post sale, and hopefully selling additional products later on. If any one of these engagement activities are limited by location, then can begin to assess your geographic limits.
Sometimes the decision is straightforward as with a physical store or labor intensive service. In these cases, part of the location boundary decision will be driven by how far customers are willing to go to visit your store or restaurant. Or how far does it make sense for your service providers to travel to provide the customer the service in question.
Demographic. The next segment category for your to research is the demographics of your customer base. Commonly-used demographics categories include age, gender, ethnicity, income, disabilities, mobility, educational attainment, home ownership, and employment status. In this early stage of customer definition, you should envision what your typical customer looks like? How old are they? Is your product most relevant for a specific gender and or ethnicity? Are your products or services related to home ownership or renters? Is income important for purchasing your product? Once you identify the most relevant demographic categories, you will have a good start on the profile of your typical customer…something we will come back to later in this module.
Behavioral. Another important way to segment your customers is based on common behaviors that they manifest, either in general or as they relate to the task and problem area your venture is attempting to solve. For example, if you are starting either a retail food establishment or possible an app that connects consumers to specific types of restaurants, you will interested in your target customers behaviors around selecting and going to restaurants. Behaviors should be quantified when possible, such as how many times does your typical customer go our to eat per week. This is different than lifestyle, which has more to do with patterns of behavior rather than one specific behavior. So being labeled as a “foodie” or “health food enthusiast” are lifestyle definitions that still need to be dissected into specific and quantifiable behaviors.
Lifestyle. Lifestyle is usually defined as behavioral patterns that you would expect to observe in your target customer. Lifestyle can be expressed as activities, attitudes, interests, opinions, values, and allocation of income. It may also reflect your customer’s self image, the way they see themselves and believe they are seen by the others. As mentioned above, the lifestyle definition goes hand in hand with the specific behaviors that are important part of your customers’ overall behavioral profile. So if you plan to target health food enthusiasts, then you will want to know about their behaviors around finding and selecting healthy restaurants, as well as menu preferences, choices, and frequency of visits.
Special Characteristics. This final category of customer segmentation can be used to list any special product ownership or characteristics related to the customer task or problem being addressed by your venture. For example, if your product or service offers accessories or support for smartphones, you may want to target customers who already own a smartphone or a specific operating system.
Reason for Solution/Purchase. This last category allows you to articulate the core reason that the customer will want to purchase your solution. This should coincide with your value proposition, in other words the key benefit the customer will want to derive from the purchase of your product or service.
The last step in your defining your customer segment is to look at some of your assumptions about the customers’ experience with the problem and current solutions and rate them is some way in order to help you prioritize the various segments you have identified. We typically ask that you rate each customer segment on their view on how important it is for them to solve the problem and the severity of the existing pain points. We also ask for you to look at the ease and affordability of reaching each customer segment as well as how much competition is already engaging these target customers. In the next module, we will also talk about how to size each customer segment, another important element to consider in selecting which customers to focus on early.
Here are associated Customer Segments Analysis Worksheets to help define your customer segments. We have included two different versions, one that focuses on business to customer (B2C) and customer to customer (C2C)) markets, the other designed to support thinking about business to business (B2B) models. Use a worksheet for each customer segment allowing for comparison and selection of your primary target customer.