While there are many different ingredients to your business model, there are few that are as important as understanding who you are selling your product or providing your service offerings to. Unless you can clearly define who your target audience is, it will be challenging to focus your scarce resources on activities towards that market.
Sometimes you may find multiple distinct groups that would benefit from your offering. Each of these groups can be described by particular demographic information about the members of each group.
In this post we’ll look at how to create customer segments, how to make use of them, and what you want to stay away from when evolving them.
To evaluate your business model you will need to get “out of the building”. While in the majority of the cases it pays off to meet in the same location, what it really means is that you won’t find the answers to any of your questions waiting at your desk. Instead, you need to get out there, onto the internet, engage with your audience, interact with them, listen and ask intelligent questions.
Over time you will start discovering commonalities of topics that you hear and talk about. Perhaps they all talk about a similar set of issues they are facing in their line of business or in their lives. Perhaps you discover that most people fall into a particular age group, or work in particular industry, have a similar education, cultural background, or something like that.
It is these commonalities that you can then use to form customer segments. For example, you might form a customer segment of 15 to 25 year old males. Or you might form a segment of businesses with 50 to 100 employees. Of you might decide you want to sell to hairdressing businesses or to government agencies.
At the beginning it doesn’t matter whether your segmentation is perfect. It needs to be good enough to base further evaluations on them. Perhaps you have only one customer segment. That’s fine. If you have multiple segments, that’s just as fine. In the latter case, you want to look at all of them initial while at the same time trying to identify the most promising customer segments for your business. Try to narrow the list down until you are at one or two segments to focus. Keep in mind that you can change your choices at any time if you have newer and better information.
Here is a far from complete list of criteria to help you form customer segments:
Once you have defined a (or more) customer segments that you want to target first, you are in a much better position to make good choices for other ingredients of your business model.
For example when you select how to deliver your “story” to your customer segment. If your customer segment is businesses, perhaps you want to use conferences or trade shows to get the message out. If your customer is a consumer then perhaps a Facebook campaign might be more effective.
If your target audience is girls around 8 years old (actually their parents), then perhaps the color that works best on your web site might be pink. If you are selling to 17 year old boys, then blue or black and saturated colors might work better. Keep in mind, though, that colors can mean a lot of different things in different culture. The color white has a different meaning in more traditional parts of China than in most of Europe.
Another area where customer segments are helpful is partnerships. If your customer segment is a particular industry it might help to team up with companies who have complementary products for the same target segment. For example, your product might be a new inventory management system. You could team up with companies that offer accounting systems or production management systems for the target industry.
Similarly, your choice of customer segments influences activities in other areas of your business model.
Customer Segments are not static. Demographics change. For example, the proportion of people over the age of 75 is expected to increase in almost all countries. This represents a huge challenge for most societies. At the same time it represents business opportunities, e.g. for a rest home operator.
Therefore it is important to be able to adapt your customer segment over time. What do you do once your target segment of 15 to 25 year old males is 10 years older? Should you evolve along with them and then adapt your product or service offering to target 25 to 35 year old males? Or should you stick with the original target segment?
For some business models it might also work best to keep an existing segment and to identify an additional customer segment to generate new revenue. For example, you might be selling fashion to adult females only. You might choose to add pre-teen girls as a new segment. Or you may choose to add men’s fashion as a new product line. Yet another choice could be to add sports clothes, business dresses, or casual clothes.
One risk you take with any customer segment is that it might be too small or too big. If it is too small, you may not find enough demand for a sustainable business. If it is too big you might not have the resource to address all of it properly, or you might not be taken seriously because people may not understand your story. Again, it pays off to experiment and adapt quickly. Usually it is better to err on the too small side. It’s easier to start in a small and narrow niche with a very specialized product or service and then grow as needed.
Another risk you encounter is that a chosen customer segment may lead you away from your core business idea. This can be good or bad. If it helps you to “go after the money” and it is good for the business, then by all means go for it. If, however, it pushes you into a corner where customer love your product or service but are not willing to pay enough for it, then you want to stay away from it. Equally if there is no leverage with other customer segments, e.g. same product (component), then you should check whether it makes sense commercially.
Please note that just because you decided to target a particular customer segment, it doesn’t mean that you will refuse a prospect who does not fall clearly into that segment. After all, customer segments are just a tool. They should not be a strait jacket.
Let’s have a look at some examples. In the US there is a fast food chain called “In-N-Out Burger”. They have segmented their customers also by geography. At present they only have locations in Arizona, California, Nevada, Texas, and Utah. They are growing only very slowly as quality and customer experience is very important to them and their business model. They opened their first store in 1948 in California. Today (May 2014) they have 219 stores in California and they have expanded to only four other states over 65 years.
Another example is Pumpkin Patch, a kids wear retailer in New Zealand. Initially just kids wear they have also added maternity clothing as a new segment. Pumpkin Patch also experimented with markets outside of New Zealand, with mixed results. Important to note is that their customer segments are not static but that they try to evolve over time to improve their business. At the moment (May 2014) they distinguish newborn, baby girl, baby boy, little girl, little boy, girl, boy, “urban angel girl” (8 to 16 years), and maternity clothing as customer segments.
Yet another example is BMW Group. Their BMW brand is for those who want to own “the ultimate driving machine”. They don’t sell cars. They sell automobiles. They are in the premium segment. All their activities are lined up in support of that story. As a result and for many years they have enjoyed one of the highest profit margin in their industry. People who like cars with a sporty touch, for who the journey is the goal (rather than the destination), will like BMW’s. It’s the brand’s reputation that keeps selling their products. Equally they have designed their other brands, Rolls-Royce and Mini, around particular customer segments.
As we have seen customer segments are important. They help us focussing our scarce resources on our target audience. As always we can start somewhere reasonable and small. We can always incrementally evolve, adapt, and improve as needed.
Posted: Sunday, May 18, 2014 10:27:00 AM UTCShare