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.
|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.
- 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.
- 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.
Alternatives to the Business Model Canvas
This framework has been thought for any type of business model, 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.
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 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.