Deciding on which customers you should focus on as you launch your venture is an important decision. Getting this right can be the difference between the success or failure of your venture.
Early in the venture realization process, you define who your potential customers are and whether they need your solution enough to pay for it. As part of identifying your customers, you realize that customers differ by how they experience the problem, how they purchase solutions, and how you will reach them to deliver value. These differences lead to the need to consider how to categorize best and prioritize your potential customers. This effort leads to the identification of your early target market.
There is much to consider when identifying your initial target market. Let’s start by looking at how you plan to categorize or segment your customer base. Customer segmentation entails dividing all potential customers for your product into subgroups that optimizes your new venture’s early traction and profitability. The entrepreneur creates these sub-groupings because customers have different needs, priorities, and financial capabilities.
There are several assumptions entrepreneurs make when defining customer segments to prioritize them for entry into the market. This prioritization is a critical step for new ventures due to the limited resources and inadequate infrastructure required to reach multiple customer segments at the start. However, before you can prioritize your customer segments, you need to identify your initial assumptions about the customer.
Typically one starts with several assumptions about who the customers are for their proposed solution. These assumptions often come from personal experience with the problem firsthand or based on conversations you have had with people within your network. You may have a gut feeling that this is a severe problem—one that many people experience frequently and desire an effective solution. However, like most aspects of your venture idea, these are just assumptions, not facts. The primary purpose of the customer discovery process is to turn these assumptions into facts.
I suggest that you group these early assumptions about the customer into these four areas:
- The customer’s experience with the problem you are hoping to solve.
- Solutions they are currently using to solve it.
- How readily you can reach and engage the customer.
- The customer’s demographic profile.
Let’s take a look at each of these areas.
The Customer’s Experience with The Problem
There is a good chance that you are making several assumptions about the customer’s experience with the problem, including how the problem may cause pain, discomfort, or inconvenience, the frequency the problem occurs, and the importance placed on solving the problem. As the entrepreneur, you assume that the customer experiences significant discomfort often and can’t wait for a solution. As with all the target customer characteristics, you must validate their experience with the problem during your market research.
To deeply understand the customer’s experience, it is essential to identify the specific context surrounding the problem in question. Context refers to the situation and circumstances while experiencing the problem—questions like what, when, where, and with whom work well here.
The starting point is to clarify what the customer is doing when experiencing the problem. Many products can solve a specific problem across several situations. For example, if you want to improve the lighting for your work zoom calls, you might look for a range of products, including lighting for home videos, podcasting, photographic portraits, etc. A product’s producer will want to market to various segments based on the different use cases in this scenario. One should consider use case as an essential part of segmentation.
Another vital contextual question to ask is when the customer is solving the problem and the time frame in which it takes place. When you consider the time frame of a customer’s experience, you usually start with the visible or easily observed. You can picture it in your mind’s eye, like a short video. However, this perspective is surface level and may not allow for estimates of when the customer’s journey begins or ends. You may want to think about this as similar to a medical diagnosis. The practitioner does not just consider the observable symptoms but explores what may have led up to the current circumstances.
Context also pertains to the where and with whom may be involved in the customer’s problem experience. Does the customer experience the problem at work or home, alone or with others? It is crucial to ascertain these elements to understand the customer’s authentic experience.
By understanding the context, you begin to see what situational circumstances impact the customer’s experience with the problem, both functionally and emotionally. Are inherent elements of the context contributing to the customer’s experience or to the problem itself? Does something about the what, when, where, or whom factor into the customer’s frustration or distress? This holistic insight into the customer’s experience helps create a deep and empathetic understanding of the problem.
The Customer’s Experience with Current Solutions
You are also making assumptions about current solutions to the customer problem. At times, an entrepreneur bases this core assumption that you have a better solution than what currently exists. Sometimes I work with an entrepreneur who believes that no solution exists in the market now—always a faulty assumption! You will need to focus a healthy portion of your discovery on learning how the customer currently solves the problem. What products or services do they now use to alleviate the problem? How do these solutions work for them? How are they performing or underperforming? What is missing? How can their overall experience with the solution be improved? What benefits do they expect from a better solution?
There are always alternative ways for the customer to solve significant problems. So as an entrepreneur, you should list all options that the customer may have at their disposal. As you begin to ask customers questions about the solution, you learn more about potential competitors. Based on the number of competing solutions and the current satisfaction with said options, you will be able to evaluate the degree of competition in your marketplace.
It is important to remember that you should be looking for direct and indirect competing products when evaluating current solutions. One identifies a direct solution as offering similar functionality and attributes to your proposed idea. The direct competing product does not have to be exactly like your idea, just similarly solving the problem. An indirect solution is a product in the marketplace that provides an optional way for the customer to solve the same problem. These optional solutions most likely take a completely different approach but still offer some pain relief.
Another way to analyze your customer’s purchasing behavior is to look at products that can serve as proxies for their potential interest in your solution. For example, suppose you plan to offer a high-end exercise spin bicycle for the home. In that case, you will want to know if your customers purchase other expensive adjacent home equipment such as a top-of-the-line treadmill or higher-end outdoor cycling equipment.
One final piece of information that may be important to your assessment is whether your solution requires that they already own another product in the marketplace. Commonly called an installed base, this occurs when the customer can only use your offering if they possess another product that will work with your solution. This situation commonly occurs with software products where the target customer must own specific hardware to use your application.
By learning all you can about the customers’ experience with the problem and solution, their accessibility, and competing products, you can better evaluate which customers are most willing to try your product and pay for its benefits. You can list your assumptions and build information on each customer segment to prioritize and select your first target customers. A unique customer segment is a group of end-users that have similar needs and pain points. They are most likely purchasing and using similar solutions.
Your Reach and Engagement Potential with Customers
Another vital aspect of segmentation is the assumptions about customer access and ease of reach. I always have entrepreneurs think carefully about how easy it will be to deliver their product to target customers. Many entrepreneurs overestimate what it will take to reach the customer regarding preliminary marketing and product distribution. It is important to articulate these assumptions about customer reach and access, thinking about how the customer will first learn about your offer and continuing touchpoints throughout the sales process.
One of the customer’s attributes to explore is to get their information when searching for solutions. This knowledge can help validate whether the customer aligns with one segment or another. Here, you are interested in where they do their research, who they exchange information with, and generally who they listen to for advice.
The Customer Demographics Profile
Many of your early assumptions focus on identifiable characteristics of your potential target customers. List these first. Do you suspect that your early customers will be predominantly of a specific gender and age range? Education and income level? Do they have a particular lifestyle or manifest specific behaviors? With these characteristics, you are making assumptions about the demographics of your target customers. As with all assumptions, you will test these during early customer discovery. You will be looking to speak to customers with the specified demographics to learn about their experience with the problem and current solutions. You will begin to validate whether your assumptions about your target customer’s demographics are indeed correct from these interviews.
There are many ways to segment your customer base or market. Possible methods of segmenting a market include Geographic, Demographic, Lifestyle, Behavioral, Special Characteristics, and Reason for Solution or Purchase. These segments work well for Business-to-Customer (B2C) profiles. For Business-to-Business (B2B) profiles, the focus for segmentation is on business entities, the purchasing decision-maker, and the end-user where applicable. See the Worksheet image for B2B below included in this post.
Geographic. I usually suggest that you start by establishing geographic boundaries for your early venture launch. From a geographic perspective, where will you most readily reach and engage your customers? You need to think about all aspects of customer engagement, including marketing to the customer, answering pre-sale questions, distributing your product and service, responding to customer service issues post-sale, and hopefully selling additional products later on. If location limits any one of these engagement activities, you begin to assess your geographic limits. Sometimes the decision is straightforward as with a physical store or labor-intensive service. In these cases, part of the location boundary decision will be driven by how far customers are willing to visit your store or restaurant. Or how far does it make sense for your service providers to travel to provide the customer the service in question?
Demographic. The next segment category for you to research is the demographics of your customer base. Commonly-used demographics include age, gender, ethnicity, income, disabilities, mobility, educational attainment, homeownership, and employment status. In this early stage of customer definition, you should envision the characteristics of your typical customer. How old are they? Is your product most relevant for specific gender and or ethnicity? Are your products or services related to homeownership or renters? Is income level a significant factor for purchasing your product? Once you identify the most relevant demographic categories, you will have a good start on imagining your typical customer.
Lifestyle. Lifestyle is behavioral patterns that you would expect to observe in your target customer. A customer’s lifestyle includes activities, attitudes, interests, opinions, values, and income allocation. It reflects your customer’s self-image—how they see themselves and believe how others see them. The lifestyle definition goes hand in hand with the specific behaviors that are an essential part of your customers’ overall behavioral profile. So if you plan to target health food enthusiasts, you will want to know about their behaviors around finding and selecting healthy restaurants and menu preferences, choices, and frequency of visits.
Behavioral. Another critical way to segment customers is around common behaviors that they manifest, either in general or related to the task and problem area your venture is attempting to solve. For example, suppose you are starting either a retail food establishment or possibly an app that connects consumers to specific types of restaurants. In that case, you will be interested in your target customer’s behaviors around selecting and going to restaurants. It would be best if you quantified behaviors when possible. For example, how many times does your typical customer go out to eat per week? This specific behavior is different from an overall lifestyle, which has more to do with behavior patterns. Being labeled as a “foodie” or “health food enthusiast” are lifestyle definitions that breakdown into specific behaviors.
Special Characteristics. This customer segmentation category is commonly any unique product ownership or characteristics related to the customer task or problem. For example, if your product or service offers accessories or support for smartphones, you may want to target customers who already own a smartphone or a specific operating system.
Reason for Solution/Purchase. This last category allows you to articulate the core reason that the customer wants to purchase your solution. These reasons should coincide with your value proposition. In other words, the key benefit the customer will want to derive from the purchase of your product or service.
Once you have conducted preliminary research regarding each of the assumptions outlined above, you can create your customer profile.
Defining Your Customer Profile
A customer profile provides your venture team and associated stakeholders with a clear picture of your target customer segment’s common characteristics and behaviors. Typical customer profiles include demographics like age, gender, socio-economic status, income range, family size, education level, hobbies, purchasing behaviors, and lifestyle. Keeping this picture in the front of your mind, you can help make decisions that align with your customer’s requirements and desires. These decisions include adding specific features to a product, adding new ways to engage the customer via social media, or creating new customer service programs.
Defining customer profiles helps you to identify how you will best reach and engage your target customer. Start with your top priority customer segment, otherwise known as your “Beach Head.”
Selecting Your Primary “Beach Head” Customer
In the early stages, you should brainstorm numerous potential market segments for your venture concept. Once you have done so, focus your selections on the top three or the most exciting market opportunities. Based on your customer profile efforts, you should review each segment in terms of the assumptions mentioned above. Through your market research and customer discovery process, you will be able to answer the following questions to help prioritize your selection.
- Is the customer in this segment compelled to purchase due to their current state of needs or wants, dissatisfaction with current product options, etc.?
- Can this customer afford to buy your product or service?
- Is this customer readily accessible to you in terms of marketing and distribution?
- Can you enter this customer segment and gain early traction, performing better than the existing competition?
- Is the customer segment large enough to help create a sustainable venture?
The following post will continue to explore how to prioritize your customer segments and determine your market size.
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