What are Customer Segments in Business Models?
At the heart of your business model, and in the heart of your company itself, are your customers. Without customers, clients, users, your company can’t be profitable and can’t stay alive. Your customers need to be profitable, ie. they need to exchange money for your products and services.
It seems logical and is just of common sense, but maybe business owners, startup founders, young entrepreneurs bypass reason, because of the passion they have for their enterprise, or the prospects of financial and/or personal vanity gratification.
I totally understand that, and I have been a culprit of being so ferociously certain about my product, that I didn’t pay attention to whether or not my customers were profitable. Needless to say the failure in that venture was quick and sharp.
In order to make your customers more satisfied and so, more profitable, you will need to design precise customer segments.
Each segment should be distinct to fulfil common needs, behaviours, and other attributes that is appropriate.
I suggest your initial business model defines one single customer segment to start with. From that segment, you can learn, grow, and diversify.
But ultimately, you can define as many customer segments as you need. You will however, have to make a very clear decision on what segment you should focus on, and which ones to ignore.
Be careful, because it is not because a customer segment is not directly profitable that it is not of high importance. Maybe one of your segment brings you no financial reward, but engages profitable customers with their ability to influence large groups.
So be mindful when you categorise your segments. There might be hidden value in one segment, while another customer segment is only designed through your own ego.
Make a distinction, and I highly suggest you talk about it to your business coach, or any neutral third party (not your equally enthusiastic co-founder, or your unconditionally loving and supporting grand mother.)
Once you have made a clear decision on your customer segments, stick to it.
Decide. Commit. Learn.
No they are not written in stone, but you need a sufficient amount of time to gather data and pivot when and where it is needed.
You can then add your CSs to your business model. This will show your stakeholders (even if this is only you and your business buddy to start with), that you have a deep understanding of your current and future potential customers.
I want to quote a short passage from the book Business Model Generation, co-authored by Alexander Osterwalder and Yves Pigueur:
“Customer groups represent separate segments if:
- Their needs require and justify a distinct offer
- They are reached through different Distribution Channels
- They require different types of relationships
- They have substantially different profitabilities
- They are willing to pay for different aspects of the offer”
To finish off here, let’s take a look at a few examples of Customer Segments:
Mass Market:
If you are targeting mass market, which is a business model that can be often found in consumer electronics, then you won’t even really need to worry about customer segments too much. That is if the value proposition, the distribution channels and the customer relationships are all focused on the same massive group of customers with the same needs, wants, and expectations. If you are a brand new company though, you might want to segment your customer groups, if only for A/B target testing.
Diversified:
This is the case if you are serving two or more unrelated customer segments, that have different needs and problems. For example, amazon started selling books, diversified, until it was selling almost everything. And then, in 2006, they diversified even more with a new customer segment: web companies, by selling them cloud computing services, server storage space, and so on. Again, if you are a brand new startup, having diversified customer segments is probably not a good idea, even if you raised millions in seed funding.
Segmented:
In your business model, you may very well distinguish smaller differences in your customer segments. For example, Credit Suisse will distinguish between its groups of customer that possess assets of up to 100k USD, and a smaller group of customers that have over 500k USD. It is a slight difference, but both groups might have different problems and different needs. This will have a number of impacts in your business model, such as your value proposition.
Niche market:
If you have a very specific customer segment, your business model will be targeting niche markets. This will model very specifically your value proposition, distribution channels and customer relationships.
Multi-sided platforms:
Some companies will cater to the needs of two or more completely independent customer segments. For example, if you were a credit card company, you will have to serve the needs of the card holders and market your products to them, while at the same time, you will need to serve a large amounts of merchants who will accept those credit cards. Both these customer segments are dependent one on another, they are both required to make the business model work, and yet, they are targeting opposite market segments.
I hope this article was useful in shedding a light on what customer segments are, how they should be used, and why, in some cases, they are very important.
