Business Model Canvas Block #1: Customer Segments

What Are Business Model Customer Segments?

Customer segments are specific communities or groups of consumers and businesses. In creating a business model, startups should define the different customer segments. They can then create customized marketing plans that resonate with each community.

Identifying customer segments can be easily accomplished by dividing customers into groups:

• Needs or preferences
• Behavioral segmentation, such as spending habits, interests, and motivations
• Demographic segmentation, such as ethnicity, age, gender, and profession
• Geographic segmentation by city, state, and country

On the surface, this process appears simple. But startups should also consider other factors. One, in particular, is creating value propositions for each market segmentation.

What Are the Different Consumer Characteristics?

Companies can categorize customers into individual segments by their traits:

• Specific needs
• Distinct distribution channel
• Different kinds of relationships
• Level of profitability
• Variants of products catering to particular preferences

What Are the Different Customer Segment Types?

The most commonly identified business model customer segments are:

1. Mass Market

Products and services meant for the broad population fall under this category. In theory, companies approach the mass market without any market segmentation. Netflix, for example, caters to the general public.

But the reality is that practically all companies have some levels of segmentation. An appliance manufacturer, for example, produces products for the mainstream market. At the same time, they would also offer different models for specific segments.

2. Niche Market

Niche markets are customer segments that have very particular characteristics. Customers in these segments require products tailored to satisfy their needs.

Some examples are companies that produce auto parts for auto manufacturers. Businesses catering to niche markets would create value propositions, distribution channels, and customer relationships specific to their key partners.

3. Behavioral Market

Companies may define customer segments based on consumer behavior. For example, they may create value propositions according to how consumers use their products or services. Mobile phone manufacturers, as an example, market selfie phones for customers who love taking photos of themselves.

4. Segmented Market

Even within the same market segmentation, companies may create variations. It means offering value propositions based on tiny deviations in needs or preferences. For example, a financial institution may provide essentially the same service to all consumers. But they can make a distinction based on net worth.

5. Diversified Market

Contrary to segmented markets, diversified refers to two or more customer segments with only slight similarities. Usually, companies undertake this measure by adding an entirely different product category. Amazon is an excellent example. From books and consumer goods, they have since added cloud services. While these are not the same products, both share the same infrastructure.

6. High Net Worth Market

High net worth individuals (HNWIs) and ultra-high net worth individuals (UHNWIs) are lucrative market segments. Although they only account for less than 1% of the world’s population, these individuals have the money for purchases. Some startups may create value propositions for this coveted market segmentation.

7. Multi-sided Platform Market

Most startups’ relationship with customer segments is between them and the buyers. But on this customer segment type, the company provides that platform. In essence, they let the members create value propositions.

eBay is one example. The products sold by sellers become the value proposition, which attracts the general consumers. Another example is credit card companies. They need consumers to use their cards. But they also need stores to become merchants accepting their cards. In essence, multi-sided customer segments cannot work if either side fails.

What Do You Need to Know About Creating a Customer Profile?

Customer segmentation begins with creating customer profiles. Startups can accomplish this by considering and understanding these three key points:

• Jobs. What the customers want or trying to achieve.
• Pains. This term describes their frustrations and difficulties.
• Gains. Refers to the motivations of customers and the benefits of achieving their goals.

In addition, startups also need to know the usual customer archetypes:

• Curators sift through available options and information. They analyze the info and funnel relevant options to the audience.
• Broadcasters share information with a large audience.
• Tastemakers are people with specific tastes. They are followed chiefly by other people with similar tastes. Often, the followers look up to them for cues on which products or services to try.
• Celebrities are people with dedicated followers. Fans, many of them, think they can do no wrong. Apart from looking up to them, they also emulate their buying preferences.

During and after creating customer profiles and segmenting customers, it is essential to consider the pains and gains. These are critical to the creation of value propositions for each segment.

I. Customer Jobs

Companies, especially marketers and sales representatives, need to understand customer jobs. In particular, they need to know what the customers are trying to achieve.

The best way to accomplish this task is to think from the customers’ perspective. By doing this, startups can understand what needs they need to satisfy. More importantly, they can help the customers overcome challenges.

Startups should consider the context of customers performing when evaluating customer jobs. While it may be the same job, the context can be different. One example is dining out with children. It would be different if dining with a romantic interest.

At the same time, startups should also recognize the significance of jobs to customers. Some jobs, for instance, might be of utmost importance. Others, meanwhile, are not a priority and may be substituted or discarded.

1. Functional Jobs

These jobs are result-oriented and easy to define. Some examples are health-conscious consumers eating healthy foods and office workers meeting KPIs.

2. Social Jobs

Some customers place importance on their image. This profile, in essence, refers to how they project themselves in social settings. In most cases, their motivation is to fit in with a particular group.

3. Personal and Emotional Jobs

This customer profile describes individuals who derive pleasure from accomplishing tasks, including the difficult ones. It could be as simple as spending time with the family. Or, it can be challenging, like competing in sporting events.

4. Supporting Jobs

Customers who by value belong to supporting jobs, which comprise:

• Value Buyers. These jobs define general purchases from evaluating options and alternatives to paying for products or services.
• Value Co-creators. These types of jobs require customers to help create value propositions. They may, for example, propose ideas, test products, and do reviews online.
• Value Transferor. These jobs describe customers that dispose of or pass ownership of a product to others. In most cases, they do it because they no longer find value in the product.

II. Customer Pains

Customer pains describe the conditions that elicit negative emotions – before, during, or after performing a job. These pains are the reasons preventing customers from completing those jobs.

Undesired Outcomes and Problems

Customer pains can be functional, social, emotional, or ancillary. In general, any unappealing characteristics belong to this category.

• Obstacles. These are pains that stop customers from starting or completing a job. It also includes those factors that hamper job completion.
• Risks. These are the possibilities of anything that can go wrong with a job, including its consequences.
• Pain Severity. Customers can experience pains to varying degrees of severity.

Value propositions should solve customer problems. It is thus essential to understand the pain points and their causes. More than it, companies should respect its importance and urgency for customers. One example is a supermarket ensuring enough cashiers, so customers do not fall in line too long.

III. Customer Gains

These are the benefits customers derive from the purchase of products or services. It can be as expected or a surprise to the delight of buyers. Customer gains can be functional utility, social gains, positive emotions, or cost savings.

• Required Gains. These are the fundamental gains customers expect when they buy products. At the very least, it should meet their minimum expectation level.
• Expected Gains. More than required gains, these products not only fulfill their primary purpose. It does so with better efficiency and other superlatives.
• Desired Gains. These are the customer’s desired gains. Products that can meet these gains will lead to much satisfaction.
• Unexpected Gains. These are gains that customers have not expressed. In some cases, they may not even realize its usefulness. But once in a while, a product comes into the market, revolutionalizing an entire industry.

What Is the Relevance of Customer Gains?

Gains can be a luxury or a necessity, depending on individual customers. Regardless, each customer is also unique in that their attitude or belief also affects their purchasing decisions. For example, one person may value practicality, while others want the best that money can buy.

How to Define Your Business Model Customer Segments

Customer segmentation is best done by first understanding the following:

• Level of customer segmentation needed by the business model
• Availability of or the ability to obtain the necessary information, such as demographic data, behavioral data, and others
• Funds and time allocated to define customer segmentation

Considering that funding is one of the early challenges, startups should be mindful of spending. Gathering data, for instance, entails costs. Hence, avoid collecting information that is not useful in the customer relationship management (CRM) system.

Variable Dimensions

These variable dimensions serve as a starting point for data collection:

• Age. How old are you?
• Gender. Are you male or female?
• Place of origin. Where do you live?
• Prior purchase. Have you bought this [product] before?
• Benefits sought. What do you care about with this product?
• Motives. Why did you buy this product?

Tips for Customer Segmentation Analysis

The following are things startups should consider while working on customer segmentation models.

1. Deciding Segmentation Model Is Necessary. In general, startups targeting the mass market may not necessarily need different segments. But for others, the need is clear. In this case, see if there are obvious ways to segment customers based on the variable dimensions.
2. Aim for the Ideal Market Segmentation. Customers within a segment must be homogenous but distinct from others. Each customer segment must be large enough to justify the cost of creating a value proposition for them. Not only should they be identifiable or easily seen in the marketplace, but they should also be reachable. Lastly, the company must be capable of satisfying the customers’ needs.
3. Collect the Data. The customer information gathered falls into two categories. It can be a segmentation criterion, represented by 0 for males and 1 for females. Or, it may be a descriptor, which contains a description.
4. Explore the Data. After collecting customer profiles, startups can begin analyzing the information gathered using a segmentation strategy.
5. Extract the Customer Segments. After analyzing the data, startups can begin grouping customers.
6. Profile the Market Segments. After organizing the potential customers into specific groups, identify their key features.
7. Describe Each Customer Segment. For each of the viable customer segments, write a detailed description.
8. Evaluate and Choose the Target Segments. Not all the identified market segments are feasible. Hence, startups should carefully evaluate and choose those profitable segments.
9. Develop Marketing Campaigns. Startups can now begin creating a tailored marketing plan for each customer segment. Some may be exclusive to one group, while others may combine two or more customer groups.

Importance of Customer Segmentation

Identifying distinct customer segments lets companies create tailored value propositions that are more attractive. Not only that, but they can also ensure customer satisfaction. As a result, brands can genuinely enhance customer loyalty and relationships.