8.5 Customer Segments

By Customer Segments is meant the different groups of people or organizations an enterprise aims to reach and serve. Customers make the heart of any business model, and without them no company can be profitable.

To better serve their customers, companies commonly group them into segments distinguished by common needs, common behaviors, or other attributes. Companies make a conscious decision as to which segments to serve and which segments to ignore, thus allowing them to focus on matters that vitally affect their business. Customers require separate segments if they:

1. Need and justify a distinct offer 2. Are reached through different Distribution Channels 3. Require different types of relationships 4. Have substantially different profitabilities 5. Are willing to pay for different aspects of the offer

Koch and Nieuwenhuizen recommend a simple weighting table. {2}

Question	Yes Score	No Score
Are the competitors in the two products or areas the same?	-30	+30
Are the relative market shares (RMS) * of your firm and the leading competitors roughly the same in the two products or areas?	-50	+50
Are the customers the same in the two products or areas?	-20	+20
Are the customers' main purchase criteria and their order of importance roughly the same in the two products or areas?	-30	+30
Are the two products substitutes for each other?	-10	+10
Are the prices of the two products (for equivalent quality) or in the two areas roughly the same?	-20	+20
Is your firm's profitability roughly the same in the two products or areas?	-40	+40
Are the cost structures in the two products or areas similar (i.e. roughly the same proportion of cost in raw materials, in manufacturing, in marketing and selling, etc.)?	-10	+10
Do the products or areas share at least half of their costs (i.e. use common labor, machines, premises and management resources for at least half of their total costs)?	-30	+30
Are there logistical, practical or technological barriers between the two products or areas that only some competitors can surmount?	+20	-20
Is it possible to gain an economical advantage by specializing in one of the products/areas by gaining lower costs or higher prices in that product/area as a result of focusing on it?	+30	-30
Total

If the total is a positive number, the two products or areas should be treated as separate business segments.

*The relative market share is a company's market share divided by the market share of its largest competitor.

Customer Segment Groupings

1. Mass Markets, a Business Model which doesn't distinguish between different Customer Segments. Value Propositions, Distribution Channels, and Customer Relationships all apply to one large group of customers with broadly similar needs and problems. This type of business model is often found in charitable organizations, the consumer electronics sector and garden supply centers.

2. Niche Markets, a Business Model which caters for specific, specialized Customer Segments. Value Propositions, Distribution Channels, and Customer Relationships are all tailored to the specific requirements. This type of business model often found in supplier-buyer relationships, where multiple car-part manufacturers depend heavily on purchases from major automobile manufacturers.

3. Segmented Markets, a Business Model which recognizes market segments with slightly different needs and problems. A retail bank may distinguish between a large group of customers of modest resources, and affluent clients looking for asset management and taxation services. Similarly, Micro Precision Systems, which specializes in providing outsourced micromechanical design and manufacturing solutions, serves three different Customer Segments: the watch industry, the medical industry, and the industrial automation sector, each involving slightly different Value Propositions.

4. Diversified Markets, a Business Model which caters for two unrelated Customer Segments with very different needs and problems. Amazon.com decided in 2006, for example, to diversify its retail business by selling 'cloud computing' services (online storage space and on-demand server usage). By doing so it capitalized on the powerful IT infrastructure it had built up, but created an entirely different Customer Segment.

5. Multi-sided Markets, a Business Model which serves several interdependent Customer Segments. A credit card company, for example, needs both a large base of credit card holders and a large base of merchants who accept those credit cards. A free newspaper needs a large reader base to attract advertisers, and advertisers to finance production and distribution. Both segments are needed to make this business model work.

Relevant Case Studies

Google makes money from one customer segment (Google Ads) while subsidizing another two segments (Google search and AdSense).

Apple evolved into a company selling PCs, tablets, phones, music and software, all to different customer segments.

Seascape e-Art misinterpreted keyword research and supposed customer segments that did not exist.

Wal-mart aims its products at the price-conscious customer.

GlaxoSmithKline repositioned its Ropinirole drug for treatment of Parkinson's disease as an effective treatment for Restless Leg Sydrome.

Liquidation found customers for items surplus to demand.

Dell lost market share to HP and Apple by not finding new market segments.

Proctor & Gamble found new market segments with its Tremor and Vocalpoint services.

Zappos targeted customers wanting quality shoes at a reasonable price.

Netflix focused on very small sector of the entertainment market.

Questions

1. What are customer segments?
2. Briefly describe five types of customer segment.
3. How can you recognize distinct customer segments?
4. Briefly illustrate the importance of customer segments with three case studies.
5. What ebusiness topics can help distinguish customer segments?

Sources and Further Reading

1. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers by Alexander Osterwalder and Yves Pigneur. Wiley 2010.
2. Simply Strategy: the Shortest Route to the Best Strategy by Richard Koch and Peter Nieuwenhuizen. FT Press January 2009.