In the Business Model Canvas, the Customer Segments building block details the different groups of people the organization hopes to reach and serve. Customer segmentation is one of the key building blocks, as it’s the foundation of a business model, and it enables it to go through its first stages of traction.
Aspect | Explanation |
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Customer Segments | – Customer Segments is one of the nine building blocks in the Business Model Canvas, a strategic management tool used to describe, design, and analyze a business model. It defines the different groups of people or organizations a business aims to reach and serve. |
Importance | – Identifying and targeting the right customer segments is crucial for business success. It helps in tailoring products, services, and marketing efforts to meet the specific needs and preferences of these segments, increasing the likelihood of success. |
Types of Segments | – Customer segments can vary widely based on criteria such as demographics, geographics, psychographics, behavioral patterns, and more. Businesses often have multiple segments, each requiring a unique approach. |
Value Proposition | – The choice of customer segments should align with the Value Proposition offered by the business. The value proposition should clearly communicate how the business’s products or services address the specific pain points or desires of each segment. |
Channels | – Customer segments influence the selection of Channels through which a business reaches its customers. For instance, an online segment may be reached through digital channels, while a local segment may be targeted through physical stores. |
Revenue Streams | – Different customer segments may generate revenue through various pricing models, such as subscription, pay-per-use, or one-time purchases. Understanding the revenue potential of each segment is essential for financial planning. |
Customer Relationships | – The nature of customer segments also impacts the type of Customer Relationships a business should establish. For example, segments requiring personalized support may have different relationship needs than self-service segments. |
Market Research | – Thorough market research is essential for identifying and understanding customer segments. It involves gathering data on customer demographics, preferences, behaviors, and pain points to make informed strategic decisions. |
Customization | – Effective segmentation allows businesses to customize offerings for each group. Tailoring products, marketing messages, and pricing strategies based on segment characteristics can enhance customer satisfaction and loyalty. |
Scale Opportunities | – Identifying scalable customer segments can be advantageous for business growth. These are segments that have substantial market potential and can be served efficiently without a significant increase in resources. |
Adaptation | – Customer segments may evolve over time due to changing market dynamics or external factors. Businesses must be flexible and willing to adapt their strategies to meet the evolving needs of their customer segments. |
Conclusion | – Customer Segments define the distinct groups a business intends to serve. Accurately defining and targeting these segments is critical for product-market fit, efficient resource allocation, and overall business success. |
Understanding customer segments in the Business Model Canvas
Customer segmentation is the first and most important building block of the Business Model Canvas – and for good reason. The business that can accurately identify its customer segments will remain viable for longer, avoiding the long and slow demise of a competitor that develops and releases irrelevant products.
Creating customer segments begins with dividing a customer base into various groups according to commonalities in gender, needs, interests, financial position, social position, geographic position, age, jobs-to-be-done, and purchasing habits, among many other things. Note that the customer in this context may be an individual or another business.
To establish a lucrative revenue stream, the business must match one or more customer segments to its value proposition. To do this, it must consider a range of scenarios and assess the trade-offs between each.
Customer segment types
In this section, we’ll delve into some common customer segment types:
- Mass market – these segments describe broad swathes of the population with a common problem or need. Television targets mass-market segments because there is relatively little differentiation in consumer needs.
- Segmented – here, customer segments have small but appreciable differences. An eCommerce company may distinguish between those with a store membership and those without. Each segment is defined by separate value propositions, customer relationships, and distribution channels.
- Diversified – where an organization targets multiple segments with contrasting needs and limited overlap. For example, Amazon sells books to individuals and cloud services to businesses.
- Niche market – as the name suggests, a niche customer segment is defined by specific characteristics and a highly tailored product. Niche markets are common in buyer-supplier relationships.
- Multi-sided platforms – where multiple customer segments are related or dependent in some way, businesses target all of them. eBay targets buyers and sellers because each is critical to the success of its platform. Credit card companies target consumers and retail stores to ensure their cards will be accepted as a form of payment.
Creating customer segments
As hinted at earlier, there are many criteria with which to segment customers. Each should ultimately help the business better identify its target audience.
With that in mind, the business should consider these pointers:
- Reach – how will the business reach its customers? Might it be prohibitively expensive to reach them in person?
- Market size – does the segment reflect at least 10% of the total addressable market? Is the total market size large enough to be profitable?
- Value – does the customer segment hold values or beliefs that align with the company mission and vision?
- Depth of pain – the business must also understand customer pain to determine how motivated they are to find a solution. The more extreme the pain, the higher the motivation.
- Budget – are customers willing to pay for the potential solution? Do they have the capacity to pay? To some extent, willingness is also determined by the depth of pain. Again, consumers with larger problems tend to be more motivated to spend.
Key takeaways:
- In the Business Model Canvas, the Customer Segments building block details the different groups of people the organization hopes to reach and serve.
- Common customer segment types include mass market, segmented, diversified, niche market, and multi-sided platforms.
- There are many criteria with which to create customer segments, including age, gender, geographic location, and purchasing habits. Regardless of the criteria chosen, however, businesses should consider reach, market size, customer value, depth of pain, and customer spending power.
Key Highlights
- Customer Segments Definition: In the Business Model Canvas, the Customer Segments building block outlines the distinct groups of people that a business aims to serve. Customer segmentation is fundamental as it forms the basis of the business model and contributes to gaining initial traction.
- Importance of Customer Segmentation: Accurate customer segmentation is crucial for the sustained success of a business. It helps avoid the downfall that comes with developing and offering irrelevant products.
- Creating Customer Segments:
- Begins with dividing the customer base into groups with common characteristics such as gender, needs, interests, financial position, and more.
- The customer can be an individual or another business.
- Matching customer segments to the value proposition is essential for a lucrative revenue stream.
- Types of Customer Segments:
- Mass Market: Broad segments encompassing a large portion of the population with common needs.
- Segmented: Small differences within customer segments, leading to separate value propositions, relationships, and distribution channels.
- Diversified: Targeting multiple segments with differing needs and limited overlap.
- Niche Market: Tailored products for specific characteristics, often seen in buyer-supplier relationships.
- Multi-sided Platforms: Targeting multiple related or dependent customer segments.
- Creating Customer Segments Criteria:
- Reach: How will the business effectively reach its customers? Is in-person interaction cost-prohibitive?
- Market Size: Is the segment a substantial portion of the total addressable market? Is the overall market size sufficiently large for profitability?
- Value Alignment: Do the segment’s values align with the company’s mission and vision?
- Pain Intensity: Understanding customer pain to assess their motivation to find a solution.
- Budget: Willingness and capacity to pay for the solution, influenced by pain intensity.
- Key Takeaways:
- Customer Segments in the Business Model Canvas define the groups of people a business intends to serve.
- Different customer segment types include mass market, segmented, diversified, niche market, and multi-sided platforms.
- Creating customer segments involves considering reach, market size, value alignment, pain intensity, and budget to better identify the target audience.
Related Frameworks, Models, or Concepts | Description | When to Apply |
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Lean Startup Methodology | The Lean Startup Methodology is an approach to developing and managing startups that focuses on rapid iteration, customer feedback, and validated learning. It involves creating a minimum viable product (MVP), testing hypotheses through experimentation, and iterating based on customer feedback. By applying lean startup principles, entrepreneurs can minimize waste, mitigate risks, and increase the chances of building successful and sustainable businesses. | Consider Lean Startup Methodology when launching a new venture or developing innovative products or services. Use it to validate assumptions, identify customer needs, and iterate on your business model based on real-world feedback. Implement Lean Startup Methodology as a framework for achieving product-market fit, accelerating growth, and maximizing the chances of startup success within your organization. |
Value Proposition Canvas | The Value Proposition Canvas is a tool for designing and refining value propositions that resonate with customer needs and preferences. It involves mapping customer profiles (jobs, pains, gains) and corresponding value propositions (products, services, solutions) to identify areas of alignment and opportunities for differentiation. By using the Value Proposition Canvas, organizations can develop compelling value propositions that address customer needs and create competitive advantage. | Consider the Value Proposition Canvas when designing or refining your organization’s value propositions. Use it to understand customer needs, pain points, and aspirations, and align your offerings to deliver unique value and differentiation. Implement the Value Proposition Canvas as a framework for developing customer-centric products, services, and solutions that drive customer satisfaction and loyalty within your organization. |
Business Model Innovation | Business Model Innovation involves creating, adapting, or reinventing the fundamental structure and logic of how a business creates, delivers, and captures value. It encompasses changes to key elements of the business model, such as revenue streams, cost structure, value proposition, and customer segments, to drive growth and competitiveness. By innovating their business models, organizations can seize new opportunities, respond to market disruptions, and outperform competitors. | Consider Business Model Innovation when seeking to transform or disrupt traditional business models within your industry. Use it to explore new revenue streams, business models, and value creation opportunities that capitalize on emerging trends and technologies. Implement Business Model Innovation as a framework for driving organizational change, fostering innovation, and creating sustainable competitive advantage within your organization. |
Blue Ocean Strategy | Blue Ocean Strategy is a strategic approach that focuses on creating uncontested market space and making competition irrelevant. It involves identifying and capturing new market opportunities by offering innovative value propositions that differentiate from existing competitors. By pursuing Blue Ocean Strategy, organizations can unlock new growth opportunities, differentiate themselves from competitors, and capture untapped market demand. | Consider Blue Ocean Strategy when seeking to develop innovative value propositions and new market opportunities. Use it to identify unmet customer needs, challenge industry assumptions, and create new market spaces where competition is irrelevant. Implement Blue Ocean Strategy as a framework for driving innovation, differentiation, and growth within your organization by offering compelling value propositions that resonate with customers. |
Design Thinking | Design Thinking is a human-centered approach to innovation and problem-solving that emphasizes empathy, creativity, and iterative prototyping. It involves understanding user needs, ideating potential solutions, prototyping and testing concepts, and iterating based on feedback. By applying design thinking principles, organizations can develop customer-centric products, services, and experiences that meet user needs and preferences effectively. | Consider Design Thinking when developing new products, services, or processes within your organization. Use it to gain deep insights into user needs, generate creative solutions, and iterate rapidly to develop prototypes that address customer pain points and aspirations. Implement Design Thinking as a framework for fostering innovation, collaboration, and customer-centricity within your organization to drive business growth and success. |
Platform Business Model | The Platform Business Model is a business model that creates value by facilitating interactions between two or more distinct groups of users. Platforms provide a marketplace or infrastructure that enables users to connect, interact, and exchange goods, services, or information. By leveraging network effects and economies of scale, platform businesses can create value for both users and stakeholders and achieve rapid growth and scalability. | Consider the Platform Business Model when building digital platforms or ecosystems that connect multiple users or stakeholders. Use it to create network effects, drive user engagement, and unlock new value creation opportunities through platform interactions and transactions. Implement the Platform Business Model as a framework for building scalable and sustainable businesses that leverage network effects and ecosystem dynamics to create value within your organization. |
Business Ecosystem | A Business Ecosystem is a network of interconnected organizations, stakeholders, and resources that collaborate and compete to create and capture value. Business ecosystems involve complex relationships and interdependencies between participants, such as suppliers, partners, customers, and competitors, that influence industry dynamics and market outcomes. By understanding and leveraging business ecosystems, organizations can identify strategic partners, seize new opportunities, and navigate competitive landscapes effectively. | Consider Business Ecosystems when analyzing industry dynamics and market opportunities within your organization. Use it to identify key stakeholders, ecosystem partners, and value chain relationships that influence your organization’s competitiveness and growth prospects. Implement Business Ecosystems as a framework for building strategic alliances, fostering collaboration, and creating value within interconnected business networks within your organization. |
Frugal Innovation | Frugal Innovation is an approach to innovation that focuses on creating affordable and accessible solutions to address the needs of resource-constrained consumers and markets. It involves simplifying products, processes, or business models to reduce costs while maintaining quality and functionality. By adopting frugal innovation principles, organizations can reach new customer segments, penetrate emerging markets, and drive inclusive growth and sustainability. | Consider Frugal Innovation when developing products or services for price-sensitive or underserved markets. Use it to design simple, affordable solutions that address basic needs and preferences of target consumers while optimizing resource utilization. Implement Frugal Innovation as a framework for expanding market reach, driving affordability, and fostering sustainable growth within your organization. |
Open Innovation | Open Innovation is a collaborative approach to innovation that involves sourcing ideas, technologies, and expertise from external partners, such as customers, suppliers, universities, and competitors. It involves leveraging external knowledge and resources to complement internal capabilities and accelerate innovation processes. By embracing open innovation principles, organizations can access diverse perspectives, stimulate creativity, and drive breakthrough innovations more effectively. | Consider Open Innovation when seeking to access external expertise, insights, and resources to drive innovation within your organization. Use it to establish partnerships, collaborations, and ecosystems that facilitate knowledge exchange, idea generation, and technology transfer. Implement Open Innovation as a framework for leveraging external networks, crowdsourcing, and collaborative platforms to accelerate innovation and enhance competitiveness within your organization. |
Agile Business Model Canvas | The Agile Business Model Canvas is an adaptation of the traditional Business Model Canvas that incorporates agile principles and practices into the strategic planning process. It involves iterative development, continuous feedback, and flexible adaptation to changing market conditions and customer needs. By adopting the Agile Business Model Canvas, organizations can respond quickly to market dynamics, experiment with new ideas, and iterate on business models effectively. | Consider the Agile Business Model Canvas when operating in fast-paced and uncertain environments. Use it to visualize and iterate on your business model, test assumptions, and adapt strategies based on real-time feedback and market insights. Implement the Agile Business Model Canvas as a framework for fostering agility, responsiveness, and innovation within your organization to drive sustainable growth and competitiveness. |
Alternatives to the Business Model Canvas
FourWeekMBA Squared Triangle Business Model
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FourWeekMBA VTDF Framework For Tech Business Models
This framework is well suited for all these cases where technology plays a key role in enhancing the value proposition for the users and customers. In short, when the company you’re building, analyzing, or looking at is a tech or platform business model, the template below is perfect for the job.
Download The VTDF Framework Template Here
FourWeekMBA VBDE Framework For Blockchain Business Models
This framework is well suited to analyze and understand blockchain-based business models. Here, the underlying blockchain protocol, and the token economics behind it play a key role in aligning incentives and also in creating disincentives for the community of developers, individual contributors, entrepreneurs, and investors that enable the whole business model. The blockchain-based model is similar to a platform-based business model, but with an important twist, decentralization should be the key element enabling both decision-making and how incentives are distributed across the network.
Download The VBDE Framework Template Here