Customers and Market Segments (Business Modeling Course- Part 2)

Part 2: Customer Segments

In this part, we dig deeper into the first component of the Business Model Canvas: the Customer Segments. We address Customer Profile, Target Markets, and how to link a customer to a Market.

The full lecture is now available as a video recording for a step-by-step process with explanation and examples. Make sure that subtitles in English are set for best results.

To understand who the customer is, we will have to address the Customer Profile (Avatar).

The Avatar is a personification of the ideal customer for whom a business is creating products and services. The more personal and detailed this avatar, the better. The avatar should specify:

• Personal info (age, status, Income Level, Education, Location, Occupancy).
  
• What is this avatar’s problem/ pain?
  
• How is it affecting the avatar’s life?
  
• What is this avatar’s current solution to this problem?  

Here is an example avatar for our business model in Riable:

“Our avatar is Raed, a 25-year-old programmer who has been working in separate non-connected tasks since he has graduated university. He has been wanting to start a startup for 2 years already, but he doesn’t have a clear idea on where to start. He is working on a freelancing task at the moment and is usually building his business concept and plan on the nights and weekends.  Raed lives alone and hopes to get married and settle down in a few years once he has made a decent business to sustain himself and his future family.”

How many Customer Profiles (Avatars) should a business address?

• As a new business

If you are starting off (idea is still in the conception phase), it is best to keep things simple with less avatars. One avatar may be sufficient.
However, you can set more than one avatar if your business serves customers in multiple differentiable geographic areas, or have multiple core products or services₁

• As an existing business

For existing startups and businesses, an avatar may already be in place. Still it is worth to recheck on it.
You would want to focus on three areas for your avatar(s):
-Previous customers who have already bought in the past
-Current paying customers who are receiving your products
-Potential customers whom you are after

Market Segments

Your avatar has a context: The market. Markets can go under any of the following classifications:

• Mass Market
• Niche Market
• Segmented
• Diversified
• Multi-sided Platform

We will discuss them one at a time.

The Mass Market

Businesses targeting this classification usually don’t distinguish different customer segments. Here, the value proposition targets one large group of customers without clear distinguishing elements.

A restaurant that appeals to the masses at cheap prices is a good example of a Business Model targeting the Mass Market.

The Niche Market

Businesses working on this classification target a particular customer or a specialized group.  Here, the value proposition targets one particular avatar or group of with a unique need.

A good example is a custom tailor. The tailor provides hand-made textiles for specific customers at higher prices than what is available in the market in return for a unique design or feel for the product.

The Segmented Market

Alternatively, a business can target multiple groups with multiple products and services. In the Segmented Market, businesses have multiple value propositions that are similar in their function, but different in their characteristics

A good example is a car factory that produces two types of cars: a base model that is worth $15K, and a premium model that costs $150K.

The Diversified Market

When a company is big enough and has a reliable infrastructure, it may want to utilize its own infrastructure to generate more income. Here, the company has different value propositions different in the nature and function. Note that this is not a good measure to start with for an early idea-stages startup

Take ABC corporation as an example. They operate shopping malls in multiple locations. ABC offers food produce and logistic services, car rental services, and insurance.

The Multi-sided Market

Mostly attributed to internet businesses, a Multi-sided Market has two (or more) customer segments where one depends on the other. Here, the company might have a product/service or not, but it should operate a platform that organizes the relation between different sides.

Take an online shopping site for example. It needs to approach sellers and vendors and offer their products in competitive prices (side 1) and needs end customers to login and purchase these products (side 2). The shopping site benefits from a transaction fee.

Mapping market classifications

An important task now is to see where your avatar lies, and what is the easiest way to get to him/her. So where does your avatar(s) belong to?
Since your avatar -virtually speaking- is a human who has a need and free will, then he/she can be in any of these markets. So the right take to this problem is to decide how we -as a business- can reach the avatar, not the other way around. The below figure taken the course slides (available for download from the link at the bottom) shows the method to map the market.

Classifying which market to target will require careful evaluation. Here are some questions to get you started:

• How badly do people need a product or service at the time?
• What is the Market Size?
• What is the highest price a buyer would pay?
• What is the Customer Acquisition Cost?
• How much would it cost to deliver the product?
• What is the Competitive Advantage?
• How quickly can a product or service be created?
• How much time and money will be needed?
• What is the Upselling potential?
• Is it sustainable to keep producing?

Example on how to embed the customer segments into the Business model

Get the example by downloading the lecture PDF file below now for free.

Files for this lecture:

Download Presentation

Business Model and Value Proposition Canvases here

 In the next part, we discuss with some depth the Value Proposition Component, in addition to the services and products of a Business, introducing the Value Proposition Canvas.
Ready for the next part? Click the link below

Next (Part 3): Value Proposition

Previous (Part 1): Understanding the Business Model

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