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 businessmodel, and it enables it to go through its first stages of traction.
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.
This framework has been thought for any type of businessmodel, be it digital or not. It’s a framework to start mind mapping the key components of your business or how it might look as it grows. Here, as usual, what matters is not the framework itself (let’s prevent to fall trap of the Maslow’s Hammer), what matters is to have a framework that enables you to hold the key components of your business in your mind, and execute fast to prevent running the business on too many untested assumptions, especially about what customers really want. Any framework that helps us test fast, it’s welcomed in our business strategy.
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.
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.
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 businessmodel. 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.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable business model.
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.
The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
