Customer segments are the groups of people or companies that you are targeting to buy your product or service. This includes users who might not generate revenues, but which are necessary for the business model to work (e.g. users of Google’s free search engine are essential to their advertising-based business model, or doctors are usually an essential, but non revenue-generating part of a pharmaceutical company’s business model).
Segments are customer groupings based on similarities such as common needs, jobs-to-get-done, common behaviors, or other attribute such as geographical area, gender, age, interests, etc. Segmenting gives you the opportunity to better serve needs by customizing your solution for those specific needs. You must make a conscious decision about which segments to serve and which segments to ignore. Once this decision is made, your business model can be carefully designed around a strong understanding of specific customer needs and jobs-to-be-done. Customer groups represent separate segments if: - Their needs require and justify a distinct Value Proposition - They are reached through different Distribution Channels - They require different types of relationships - They have a substantially different profitability - They are willing to pay for different aspects of the Value Proposition
Questions to address in this section
- For whom are we creating value?
- Who are our most important customers, clients, or users?
Types of Customer Segments
There are different types of Customer Segments. Here are some examples:
- 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. This type of business model is often found in the consumer electronics sector.
- 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. For example, many car part manufacturers depend heavily on purchases from major automobile manufacturers.
- 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. Consider Micro Precision Systems, which specializes in providing outsourced micro mechanical 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.
- Diversified - An organization with a 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 by selling “cloud computing” services: online storage space and on-demand server usage. 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 infrastructure, which can be shared by its retail sales operations and the new cloud computing service unit.
- Multi-sided platforms (or multi-sided markets) - 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.