Customer Segments & Market Type

Customer Segments: Defines the different groups of people or organizations an enterprise aims to reach and serve. A Business model may have one or several large or small Customer Segments.

There are four type of markets that you can enter. Market types are defined as the type of environment the product/service will be entering when distributed.

1. Existing Market - The customers and needs are known.

We can literally go and ask them what they need and want. The competitors are many and there is a severe threat of just fitting in as new brands enter the market place.

An existing market is just like it sounds — it has customers, competitors, there are products serving the market and you can measure the size of the opportunity (number of current customers, total revenue, growth rate, etc.)

They will tell you:

• what the basis of competition is (speed, convenience, performance, price, etc.
• how satisfied they are with the current incumbents
• what it would take to get their businessYou gauge demand in an existing market by whether customers have told you that they will switch, the cost they have told you it will take to acquire them and the amount of capital you can spend to do so.

2. Resegmented Market - The customers are based on a hypothesis because you are not starting over completely.

However, they are certainly not known for sure. Customers are looking for a better fit and you may have the solution to their problems. You have a great responsibility of re-educating customers to help them understand why your solution is better than the others previously offered. An example would be Southwest offering limited services but at an extremely affordable price.

Some existing markets may be monopolies or duopolies with incumbents holding dominant share. Unless you are attacking these markets with a multiple of the incumbents’ sales and market budget, a frontal attack is most often suicidal. So in this type of existing market a company needs is to find a way to resegment the existing market – that is to find some characteristic of customers in an existing market that incumbents are not addressing.

It may be that a segment of the market has special needs, unaddressed by the incumbents. It may be that there is a segment of the market that would be satisfied with a “good enough” version of the product at a lower price. So entry as a low-cost provider may be an option. You win in a resegmented market when the product features differentiate your startup from the existing market incumbents because of your understanding of specific customer needs (not your opinion) in this niche. With a resegmented market strategy, getting out of the building and talking to existing customers of incumbents and understanding their unmet needs is essential.

They will tell you:

• what needs the incumbents are not fulfilling
• how important the incumbents’ feature set is
• how satisfied they are with the current incumbents
• what it would take to get their business

You gauge market demand in resegmented markets by getting out of your office and meeting potential customers face-to-face to test whether anyone other than you believes that you are solving a unique problem or fulfilling a need. In a resegmented market, you have to prove through customer interaction that the market is demanding something unique.

3. New Market - The customers are unknown.

A new market is just like it sounds — it has no customers, no competitors, there are no products currently serving the market and you cannot measure the size of the opportunity. (There’s no way to measure the number of current customers, total revenue, growth rate, etc.) Most importantly for startups in a new market: Getting out of the building and asking customers what they want is futile. You’re the visionary, not them. But this doesn’t mean you get to sit inside your building and spend years building your product without talking to people. What you ask them is radically different than in an existing or resegemented market. Getting out of the building and talking to future customers is essential.

Your goal is to understand:

• the day in the life of the customer today
• the day in the life of the customer after your product arrived
• what other changes need to happen (cultural, buying habitats, technology shifts, economic, etc.) to make your business succeed

4. Clone Market - Customers are possibly known, but you are looking to localize the offering.

A clone market is where entrepreneurs in one country or region copy an existing market, i.e., a successful business model from another country (typically the U.S.) Often the country cloning a market has cultural, language or regulatory barriers and a local market greater than 100 million people. The “knowns” in a clone market are an existing business model that works and a market that exists in the U.S. The unknowns are whether the same set of business behaviors will be true in the host country.

You gauge demand in a clone market by Customer Discovery, just like with existing and resegmented markets. You get out of your office and meet potential customers face-to-face to test whether anyone other than you believes that you are solving a problem or fulfilling a need. If potential customers agree that it is a problem they want solved, then you can go to the next step and test your proposed solution and see their level of interest/enthusiasm.

Mass Market

Business models focused on mass markets don’t distinguish between different Customer Segments. The Value Propositions, Distribution Channels, and Customer Relationships all focus on one large group of customers with broadly similar needs and problems.

Example: Consumer Electronics, such as TVs or iPods

Niche Market

Business models targeting niche markets cater to specific, specialized Customer Segments. The Value Propositions, Distribution Channels, and Customer Relationships are all tailored to the specific requirements of a niche market. Such business models are often found in supplier-buyer relationships.

Example: Who would buy the ugliest car/bike in the world? A small niche of people living in dense urban areas that need a better mechanism for transporting their goods than a car. The ELF accomplishes this.

Segmented

Some business models distinguish between market segments with slightly different needs and problems. The retail arm of a bank like Credit Suisse, for example, may distinguish between a large group of customers, each possessing assets of up to U.S. $100,000, and a smaller group of affluent clients, each of whose net worth exceeds U.S. $500,000. Both segments have similar but varying needs and problems. This has implications for the other building blocks of Credit Suisse’s business model, such as the Value Proposition, Distribution Channels, Customer Relationships, and Revenue Streams.

Micro Precision Systems, which specializes in providing outsourced micromechanical design and manufacturing solutions. It serves three different Customer Segments – the watch industry, the medical industry, and the industrial automation sector-and offers each slightly different value propositions.

Example: UPS has two segments it targets. The first is commercial users in need of freight, rail and airplane travel. The second is residential shippers who most commonly receive their packages via the road.

Diversified

An organization with diversified customer business model serves two unrelated Customer Segments with very different needs and problems. For example, in 2006 Amazon.com decided to diversify its retail business buy selling “cloud computing” services: online storage space and on-demand server usage. If you have ever been on Amazon.com you have used the software they are selling on the cloud. Essentially, Amazon had created a great product for themselves and decided to let others use it for a fee. Thus it started catering to a totally different Customer Segment – Web Companies – with a totally different Value Proposition. The strategic rationale behind this diversification can be found in Amazon.com’s powerful IT infrstructure, which can be shared by its retail sales operations and the new cloud computing service unit.

Multi-Sided Platform

Some organizations serve two or more interdependent Customer Segments. A credit card company, for example, needs a large base of credit card holders and a large base of merchants who accept those credit cards. Similarly, an enterprise offering a free newspaper needs a large reader base to attract advertisers. On the other hand, it also needs advertisers to finance production and distribution. Both segments are required to make the business model work.

Example: Google make money by getting advertisers to pay for search advertising. People will not pay for search advertising unless a lot of people are searching specifically for what their product/service offers. That is why Google has produced search, Android, sites, drive, calendar, YouTube, etc. All of these generate users who will see search results.

Vocabulary

• Customer Segment

Student Activity

Find a partner you have not worked with.

Choose two companies, in a field that interests both of you, to start researching through the business model canvas. You will be completing a detailed research project for these companies.

At the end of the project, you will be presenting together to determine which company is the best.