Customer-segment-bmc.docx

Business model canvas: Customer Segments It is important for an entrepreneur to recognize from the onset that your target customer is under no automatic obligation to buy your product or service. However, every business that wants to remain viable must appeal to its target customer segment or face a long and slow dissolution. To ensure a business’ appeal to its customer segment the business must work to understand who the customer is. These can be recognized by evaluating the customer’s environment, experiences and general context. All these factors contribute to how the customer will respond to your product. So a customer’s geographic, demographic and social context will define the customer’s persona, creating a customer archetype for your products and services.

© Entrepreneurial Insights based on the concept of Alex Osterwalder

WHAT IS A CUSTOMER SEGMENT? Customer segments are the community of customers or businesses that you are aiming to sell your product or services to. Customer segments is one of the most important building blocks in the business model canvas for your business, so getting this building block right is key to your success. Customers can be segmented into distinct groups based on needs, behaviors and other traits that they share. A customer segment may also be defined through demographics such as age, ethnicity, profession, gender, etc or on their psychographic factors such as spending behavior, interests, and motivations. An organization can choose to target a single group or multiple groups through its products and services. By matching your customer segment to your value proposition, you can achieve a more lucrative revenue stream. Hence, it is fundamental for an organization to understand the trade-off between different customer

segments and carefully select which segment it wants to target. Then, the organization must create a value proposition and employ a business model best suited to servicing their chosen customer segment’s needs. An organization can categorize consumers into distinct groups if they have the following characteristics; The customer groups have a particular need which justifies the creation of a product to match this need. The group needs a separate Distribution Channel to be reached. The groups require relationships of different kinds. There is a very clear difference in the level of profitability each group represents for the organization. Each consumer group feels strongly enough to pay for a different version of the product or service, tailored to their preferences.

TYPES OF CUSTOMER SEGMENTS Mass Market Products and services which target the Mass Market segment are appealing or fulfill the needs of a wide cross section of the population and does not discriminate between different Customer segments. The value propositions, distribution channels and customer relationships are meant for the consumption to a big number of people who have a common problem or need that requires fulfillment. The manufacturer for a fridge will have a very broad target market because there is very little differentiation required by people from their fridge. Niche Market Niche market refers to a customer segment with extremely defined characteristics and very particular needs. This segment requires, or rather expects, a highly tailored product, custom made to suit their needs. Therefore the value propositions, distribution channels ad customer relationships are closely defined according to the preferences of this particular customer segment. These business models are common in supplier buyer relationships such as those between automobile parts manufacturers who are extremely dependent on automobile manufacturers for sale of their products. Segmented Some businesses choose to provide products and services to customer segments which may have very minute variations in their needs and requirements. The organization creates different value propositions, distribution channels and customer relationships according to these small differences in the customer segments. In retail banking, a bank will create a distinction between consumers whose net worth is $100, 000 and those with a net worth of $500, 000. The differences between these two kinds of consumers are small but significant. Typically, a bank will find it more lucrative to invest in creating separate value propositions, distribution channels and customer relationships for both customer segments. Diversified An organization which opts to serve diversified customer segments is basically picking customer segments with very different needs and wants. The customer profiles have few overlaps but due to varying reasons, the organization sees value in investing in appealing to both these diverse segments. Amazon.com started by selling books online. As it’s business grew, it’s IT infrastructure became more and more sophisticated. Leveraging this value proposition, Amazon began offering its IT infrastructure through cloud services to business customers. Hence, Amazon now has individual customers and business customers as well. Multi-Sided Platforms/ markets

When customer segments are related through dependency, it makes business sense to serve both ends of the equation. Hence, for a credit card company, it is not just imperative that customers opt to use their credit cards but equally important for stores to accept their credit card. If either segment fails, the other will automatically follow suit. Simply put, it’s a chicken and egg problem. Today, one of the most successful online ventures is e-bay which operates with Multi-sided platform by requiring the presence of both buyers and sellers for it’s continued success. If eBay doesn’t have a sufficient customer base for its sellers, sellers will not be interested in advertising their wares on eBay. Conversely, if the buyers do not have a multitude of sellers to choose from, they may switch to other mediums to fulfill their needs.

CREATING A CUSTOMER PROFILE

© Entrepreneurial Insights based on the concept of Alex Osterwalder

The customer profile defines the customer segment more clearly for your organization by understanding the customer’s jobs and evaluating the customer’s pains and gains. Before creating a customer profile, one must understand the various archetypes customers typically fall into. These archetypes are as follows: 1

A Curator is someone who sifts through a lot of information and options available and funnels the relevant options to his or her audience.

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A Broadcaster shares information of value to a huge audience.

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A Tastemaker is someone with very specific tastes and is followed by an audience who have similar tastes and look to him for cues on what products to try and what services to adopt.

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A Celebrity is someone with a dedicated fan following in whose eyes he/she can do no wrong. This is usually someone famous whose every move is watched and whose purchase preferences are emulated by the audience.

Customer Jobs Customer jobs describe what customers are trying to achieve in their personal and professional lives. It could refer to the work they are trying to get done, needs that they are trying to satisfy or challenges that they are trying to overcome. It is important in this section for the entrepreneur to think from the customer’s perspective to better understand the customer. Functional Jobs These are specific tasks and results that the customer is trying to achieve and is working towards. They are simple and easily defined such as cook a meal, complete my Math homework, eat healthier as a consumer or meet my KPI’s as an employee. Social Jobs These describe how a customer wants to project him or herself in a social setting. This includes wanting to fit in with a particular crowd socially, or wowing the boss with a presentation at work. Personal/ Emotional Jobs Customers also work towards feeling a particular way. Most people will aim for the rush of succeeding at a difficult task such as participating in a triathalon or having dinner with their family every night. Supporting Jobs Customers also consume or buy value, thereby performing a supporting job. The following three roles contribute to supporting jobs: 1

Buyer of value: this job includes any purchase of value and can cover the spectrum from evaluating available options and alternatives to signing for a delivery or paying for a product you have selected.

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Co-creator of value: these are jobs in which you have a direct hand in the creation of the product with the organization. This can include brainstorming for ideas for the design of the product to testing the product yourself and providing reviews online.

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Transferor of value: these jobs represent the close of the product use lifecycle and are characterized by the consumer disposing off the product or transferring tis ownership to someone else because they find no further value in it.

Jobs Context While evaluating customer jobs, it is equally important to evaluate the context in which the job was performed because the context has the power to impact the job type itself. To elaborate, there is a marked difference between how a customer would approach going to watch a movie with their children and going to the movies with a significant other. Job Importance Different jobs will hold varying degrees of importance in the eyes of the customer depending on their impact and the customer’s priorities. It is important for the entrepreneur to recognize which jobs are crucial to the customer and which one the customer can easily discard or substitute. Customer Pains These are conditions which either prevent the customer from getting a job done or elicit negative emotions before, during or after a job. The risks of doing a job or negative results arising from it also fall within the ambit of Customer Pains. Undesired outcomes, problems and characteristics

Customer pains are of the following types: functional, social, emotional and ancillary. This also includes characteristics unappealing to the customer. Obstacles These are pains which either prevent a customer from starting a job or hamper the customer in completing an assigned task. Risks These are possibilities of something going wrong or negative consequences of an action. Pain severity Customer pain varies in its severity from extreme to moderate. Tips for clarifying customer pains It is important to delve into the depth of what causes a customer pain so we understand its urgency and importance for the customer. Hence, if a customer complains about being made to wait in line too long, an entrepreneur can understanding this pain better by inquiring how long after getting in line did the wait become an unbearable pain for the customer. Customer Gains Customer Gains are results or benefits that customers desire. Some gains will be taken for granted by the customer upon purchasing a product or service, but others might be a surprise for them resulting in customer delight. Gains are of the following types: functional utility, social gains, positive emotions and cost savings. Required Gains These are the most basic gains expected by the customer when purchasing a product. Hence a person purchasing a smartphone will have the minimum expectation that the new phone will let him make and receive phone calls. Expected Gains These are also basic gains but ones without which the product or service would still fulfill its basic purpose. Hence, even if a smartphone makes a call, we expect it to be sleek and visually appealing. Desired Gains These gains represent the customer’s wish list. These would be highly coveted and treasured gains by the customer and would lead to a lot satisfaction from the customers. One such desired gain is for smartphones to be easily synced with other devices. Unexpected Gains These are gains that haven’t been expressed by the customer. They are ideas and innovations which have the power to revolutionize the customer’s experience with a product but the customer isn’t aware of them and their potential benefits until they are introduced. The Touch screen was an unexpected gain for customers of Apple. Gain relevance A successful entrepreneur needs to be able to evaluate how essential the gain is to the customer. Gains can vary from essential to nice to have. Tips for clarifying customer gains

It is important to have clearly defined gains for the customer so the products and services can be tailored accordingly. If a customer gain is “need better performance’ from a product, it is key to the product’s success for the organization to know what level of performance will be viewed as a gain by the customer. The more information one has about customer gains, the better the value proposition will appeal to the customer segment.

Steps for using the FRAMEWORK To summarize, outlined below are the steps to effectively employ this framework; 1

Pick a customer segment that you would like to analyse in detail.

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Figure out what tasks your customers are trying to accomplish and mention each on a separate sticky note

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Pinpoint the pains customers have including the challenges and risks they face

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Pinpoint the gains the customers would have

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Rank the jobs, pains and gains in order of relevance and severity for the customer.