Customer Segments is the first and most important building block of the Business Model Canvas. So let’s explore what is the customer segments block and why segmentation can be the difference between your canvas’s success or failure.
No company will succeed without customers. If no public buys a product or service, the organization can close its doors because it will not make sales and therefore cannot survive. That is why the customer is the focus of any business.
To meet the needs and interests of these customers, it is important that the company or organization be able to segment them into groups by similarity. That is, these groups of people will have common goals and interests, kind of the same behaviors and needs, and a similar financial and social profile. This makes it easier for the company to visualize and reach each type of audience.
We are going to understand, then, how to segment audiences and what the relevance of this procedure is.
What is a customer segment?
Customer segments are, simply, the group of customers or companies for which you plan to sell your products or services. This is the first and perhaps the most important step for your Business Model, since getting the definition of this block right is the key to your canvas success.
Customers can be segmented into distinct groups based on their needs, behaviors, social and demographic profile, interests and motivations, and other similarities they share. An organization may choose to target a single group or multiple groups through its products and services.
Once a company has segmented and selected the customer groups it wants to serve, it will be able to create a value proposition and employ a business model more appropriate to meet the needs of the chosen customers.
The organization may categorize customers into distinct groups if they have the following features:
- a specific need justifying the creation of a product to meet this need;
- a distribution channel to be reached;
- different types of relationships
- the difference in the level of profitability that each group represents for the organization;
- each consumer group is strong enough to pay for a different version of the product or service, tailored to their preferences.
Customers can be segmented through different profiles, for example:
- Demographic: establishes the consumer community by characteristics such as age, ethnicity, religion, gender, educational level, income, among others.
- Geographic: defines the audience by area, such as country, city, region, and even by the differentiation between rural and urban areas.
- Psychographic: puts together clients with the same social status, lifestyle, personality traits, behavior, and consumption, in addition to the desired benefits.
There are thousands of ways to create Customer Segments. What you should keep in mind when setting your criteria is that if it does not help you better identify the customer, it is only a waste of time. When determining your customer segments, consider the following:
- Depth of pain: The greater the pain (need), the greater the chance that the client will be open to your solution.
- Budget: Are customers willing to pay for your solution? How many? And how much? The greater the pain (need), the more customers are willing to spend.
- Reach: How are you reaching your customers? Is it too expensive to deliver in person or more effectively?
- Market size: What part of the market do you need to meet? Does this market share represent more than 10% of the size of your market? Is that safe?
- Value: How do you feel about serving this segment? Do these clients match the mission of your company?
Types of Customer Segments
Business models geared towards the mass market, in fact, choose not to perform customer segmentation. Its products and services are attractive or meet the needs of a large part of the population and do not discriminate between different customer segments. In this case, value propositions, distribution channels, and customer relationships are intended for many people who have a common problem or need. This is the case, for example, of manufacturers of electronics or appliances, which do not usually differentiate between products. A refrigerator or a television usually serves different people equally, since, however distinguished the public, the need to be satisfied is the same.
These Business Models are intended for smaller customer segments, since they are specific and specialized, with very particular characteristics and needs. It is a segment that expects a highly personalized product or service, practically tailor-made. In this case, value propositions, distribution channels, and customer relationships are strictly defined according to the preferences of that particular segment of customers. It is what happens in Business Models where a supplier depends on a trade or distribution. Like a manufacturer of auto parts, for example, which depends on the automobile manufacturers so that its business can exist and remain.
In this Business Model, the organization develops products and services for different segments with very subtle variations regarding their needs and interests. For this purpose, several value propositions, distribution channels, and customer relationships are created according to these minimum differences. It is the case of a bank, for example, that offers different products and services for clients with income over 100 thousand dollars and others with incomes over 500 thousand.
Unlike Segmented, this Business Model chooses to serve customers with completely divergent needs and requirements. For a variety of reasons, the company believes that it is worth developing products and services that satisfy different customers, who do not share many similarities. This is the case, for example, of companies that serve both individuals and corporate clients.
Multilateral Platform (or Multilateral Markets)
These Business Models serve two or more customer segments. Such segments tend to be interdependent, that is, for business to function, it is necessary to satisfy both sides. This is the case, for example, of credit card companies, which need to be chosen by a wide range of consumers as well as accepted in a great variety of establishments. Both cardholders and business owners are customers of these Business Models.
The Business Model is, therefore, able to define one or several customer segments, even of different sizes. This way, the company can analyze each segmented group and decide which will be its target and which can be ignored.
Customer Segments are, as already mentioned, the first step to be developed within the Business Model. Thus, the entire Model will be designed with a defined target audience, tailored to its needs, goals, and preferences. Having established this first block, it will be time to move on to the next.
To make it easier to understand who your client is, you can also fill out the Empathy Map template in PDF!