Customer Segments in Business Model Canvas
Published: 25 June, 2022
Though every business model is different, and every company builds its value proposition is a unique way, one thing all business owners understand is the importance of finding and retaining customers. Marketing can be one of the largest expenses on a business’s balance sheet, so ensuring that you’re maximizing the impact of your marketing efforts is vital in securing long-term success. It helps to understand your customers, and to do that most efficiently, we recommend employing a customer segmentation strategy.
In this article, we discuss different types of customer segmentation and how they can be used to drive product management and find profitable customers.
As with so many of the topics we discuss here at the Digital Leadership website, customer segmentation is a very complicated topic. This article is intended to provide merely an overview of how you might approach different segments of customers and how the types of customer segmentation can be put to use.
Additional direction and inspiration are available in our book, How to Create Innovation. You can register to receive a free copy elsewhere on our website.
What are Customer Segments in Business Model Canvas?
In the Business Model Canvas, customer segments refer to the different groups of customers that a company targets with its products or services. The customer segments are one of the building blocks of the Business Model Canvas, and they play a critical role in shaping the organization’s strategy and value proposition.
To define customer segments, a company needs to consider factors such as demographics, geography, buying habits, and psychographics. For example, a company might segment its customers based on age, income, or lifestyle. The more specific and well-defined the customer segments are, the more effectively a company can tailor its products, services, and marketing strategies to meet the needs of each group.
Customer segmentation is the process through which you divide customers into categories based on particular characteristics. The intention is that, through the customer segmentation process, you can better market to specific segments of your audience.
Customer segmentation strategy often involves thinking about your customer groups in a number of ways:
- Geographic customer segmentation based on where they work or live
- Demographic customer segmentation based on racial, age, religious, socioeconomic status, or other similar characteristics
- Behavioral customer segmentation is based on choices your audience makes
Every business serves a particular collection of customer segments. Of course, we want our business to be attractive to as many potential customers as possible. If we could, we’d market to everyone! That’s not very likely or feasible, most of the time.
Instead, we work to understand members of our target market more completely so we can send more focused marketing messages and ensure that we’re meeting the needs of customers to the best of our ability.
Some of you may have heard this piece of wisdom: no business plan survives first customer contact. But why is that so actually? The ultimate prerequisite for coming up with a product or service that excites customers is to understand their real needs. We often don’t get this right, and this is why our theoretical business plans and PowerPoint presentations often miss customer and market reality. So, let’s figure out how we can gain a much better understanding of what our customers really want.
Firms often base their ideas and later solutions on their perceived understanding of their customer (segmentation) and their perceived wants. But, in reality, we don’t know the customer, particularly not in an innovation context which is by definition unknown. Thus, this approach to the problem is fundamentally flawed.
Because this goes against most of what we have been taught about understanding our customers, let’s dig into it a bit. Let’s start by discussing a Customer Persona – a typical representation of a customer segment, displaying its key characteristics.
A Persona is a typical representative of a larger Customer Segment. A description of a Persona should include visual material (photo of a typical segment representative and potentially photos of the typical “world” of this Persona), demographic, sociographic, and psychographic data. Importantly, Personas should represent reality and not just be invented and designed to your taste (a common problem, believe it or not!). Demographic data is typically the least useful since it will not help you understand how a person behaves. In creating a Persona, it is critical to discuss what the “design-relevant parameters” are. This will help you determine what information is relevant to your product.
When you build a customer persona, you’re inventing a semi-fictional person who might come into contact with your products or services. You can base personas on existing customers, perhaps even your best customers or you can build personas based on a target audience you hope to reach. In theory, you’re hoping to identify patterns among specific groups of potential customers in order to reach them better.
In writing a persona, you’d want to consider basic demographic information: age, race, gender, education, marital status, and other foundational information. Think in terms of a governmental census. What publicly available characteristics does it look for? Start your persona there.
Since we are all more complicated than our mere demographics, you also want the persona to include information about that person as a customer. For example, what does that person need done? What barriers exist between them and you? What are their goals? What can you do to help them reach those goals? What are some elements of customer behavior that seem to be common among the people you’re targeting?
Think about the ways of segmenting customers that we mentioned earlier, and brainstorm geographic segmentation, behavioral segmentation, and demographic segmentation.
Create these buyer personas for different groups of possible customers: current customers, your important customers, different customer segments you think you can reach. Once you understand customers on a more human level, then you can make the most of your marketing efforts.
What are the Types of Customer Segments?
Researchers have identified five types of customer segmentation. They each focus on a different element of a person’s identity, and you should keep them in mind when building customer personas.
The five types of customer segments are:
- Behavioral Segmentation
- Psychographic Segmentation
- Demographic Segmentation
- Geographic Segmentation
- Firmographic Segmentation
In behavioral segmentation, we group customers by the choices they make. That could refer to how they engage with our product, the sales channels they prefer, their purchasing habits, and other repeated behaviors customers seem to share.
In psychographic segmentation, we focus on a customer’s lifestyle. Personal habits, beliefs, attitudes, social status, and interests are important here, especially as they pertain to our product or service. You might be able to understand customer loyalty–or lack of it–better through understanding what your various types of customer values.
When we use demographic segmentation, we profile easily recognizable traits of potential customers. Marriage status, race, age, politics, occupation: these are all important demographic data points. Demographic segmentation analysis should be used carefully; it can be easy to let stereotypes of certain groups cloud our judgment and results in poor, sometimes embarrassing, marketing efforts.
Geographic segmentation sorts potential customers by location. Sometimes, a customer base is very location-specific. You can’t successfully market a service unavailable in a customer’s area. The geography of a customer base can tell you a lot about their interests, concerns, and needs.
Finally, think of firmographic segmentation as a sort of demographic analysis of a company or group of investors. They may be non-profit, a small retail enterprise, a governmental agency, or any of a number of types of companies or businesses. Think about each one as a person, an individual with all of the potential market segmentation that we’ve already mentioned.
Customer segmentation is meant to help us better understand the needs of our customers, how we can meet those needs, and how we can best convey our abilities through our marketing efforts. In the wrong hands, a customer segmentation strategy results in making assumptions about potential customers that are unfairly biased and, ultimately, unhealthy for our business. Customer data must be evaluated truthfully, and with the company’s best interests in mind.
Ensure that your marketing team is using rigorous, fair data collection processes so that you’re not needlessly chasing potential customers away. In the right hands, customer segmentation helps refine your core product offering to maximize the economic value you bring to your customers as well as identify the best customer segments with the maximum lifetime value.
Considering Customer Segments and their Jobs to be Done
It is worth emphasizing that a major element of customer segmentation is the consideration of consumer needs. Your business benefits from understanding Jobs to be Done – the term widely applied to refer to the challenge a customer faces when he or she turns to our companies for a solution.
When the Digital Leadership experts segment customers, we spend as many resources as necessary to understand the Jobs to be Done for each target audience. This is an essential element of customer segmentation analysis.
Jobs to be Done can be described a number of ways, but we like to focus on two varieties of jobs, the functional jobs and the emotional jobs.
A customer’s functional Job to be Done would require you to provide a product or service that makes your customer’s value proposition possible and helps them reach their goal.
When we segment customers based on their functional jobs, we shouldn’t specifically mention our products or services. So, though we may be a company that publishes a handbook for kids that teaches how to stick to a budget, our customer’s functional Job to be Done would read something like this:
I need to teach my kids how to handle money responsibly.
The handbook helps parents accomplish that goal. Marketing campaigns designed for that handbook would focus on how effectively it helps parents reach their goals.
Emotional Jobs to be Done help the customer feel or be perceived a certain way. While it’s true that even these solutions have a functional element, the addition of an overtly emotional component greatly modifies the marketing campaigns designed around these services and products.
Once again, when we are documenting these emotional Jobs to be Done, we keep our company specifics out of the Job statement. For example:
I need my customers to think our company is environmentally-friendly.
I need to feel more confident as a public speaker.
How does your product or service meet these potential needs? Clearly, it depends on what you’re selling, but we can imagine any number of ways to meet these needs with an almost infinite number of customer personas who might be an imagined customers. When we segment customers, we understand them at a level deeper.
Finding the right approach, and matching the right product or service with the right person who needs you, is a big part of what makes customer segmentation important. It leads to business success and true customer satisfaction.
A few final words about Jobs to be Done. What if it’s not a job at all, and rather the elimination of anxiety that we’re really selling? What does a life insurance agent actually offer?
To whatever extent you can, in addition to customer satisfaction, consider your customers’ fears. Or rather, consider how you can help alleviate them.
We don’t advocate inventing fears in order to make a buck, but if in your market segmentation activities you find some common fears or anxieties, you may want to make sure your marketing channels make the message clear that you can help customers feel more secure.
That could be a very valuable, and profitable, element of product management and the customer journey.
Customers Value Proposition
While a simple reorganization around Jobs to be Done and customer segmentation will not resolve all culture and communication problems, it is a step in the right direction. It creates an organization that is clearly aligned towards customers and customer value – something that traditional organizational approaches often get wrong.
The basis of any successful innovation venture is finding a strong Problem/Solution Fit: the identification of an important but unmet customer need that can be fulfilled with our solution. So, we need to think in terms of customer value as opposed to a business case. To structure those terms, customer segmentation grants us insight into customer needs.
Connecting The Dots: The UNITE Business Model Framework
How to Create Innovation includes a number of canvases that focus on value creation and finding the right business model to meet your customer segment and customer needs. The framework is built to inspire drastic changes that help you find a competitive advantage. Our hope is that your company grows through business model innovation, and so we again encourage you to look deeper into our website and the book.
Here is a summary of the key ingredients of the framework:
The centerpiece is the Business Model Canvas, which covers the six main areas of a Business Model (the Operating, Value, Service, Experience, Cost, and Revenue Models).
The eXtended Business Model Canvas adds the immediate business context, including Business Drivers, customers, and the team, as well as the Unfair Advantage.
A Business Model can be broken out into its numerous aspects. Depending on what challenges you face, you can zoom in on your area of interest using an appropriate tool or canvas:
- Your Business Intention and objectives as well as your Massive Transformative Purpose summarize your drivers and give direction to what you do.
- The Value Proposition Canvas details the central components of your offering (the product or service).
- To dig into your Customer Segments, work with data-driven Personas.
- The JTBD Customer Job Statement and Job Map frame the JTBD of your customers.
- The Business Model Environment puts your Business Model in a market context composed of emerging trends and disruptive forces.
- The Innovation Culture Canvas helps you understand and consciously shape a culture that supports innovation.
- The Innovation team structure enables you to draft a team structure for your innovation initiative.
- Using learning and growth metrics, you can measure progress at the initial stages of development. These metrics help you focus on what really matters instead of creating a detailed business plan that will not really help you. Later on, you can expand the financial aspect of the Revenue and Cost Models with a full business case.
- The Operating Model Canvas helps you think through the Operating Model.
Frequently Asked Questions:
What are the types of value propositions?
A Value Proposition is a statement of how a business delivers a product or a service of value to a customer. A good Value Proposition explains why the company or a specific product is better than what was previously available.
There are four Types of Value:
How do you write a Value Proposition?
While every Value Proposition is different, the most effective statements include the following pieces:
- Strong headline: catch customers’ attention using active verbs that resonate
- Descriptive sub-headline: explain how your service or product completes one of your customer’s jobs
- Understanding of problem: more in-depth, show your expertise by concisely describing the customer’s challenge
- Clear benefits and solutions: make the connection between your customers’ needs and the products or services you offer
What are the elements of a Value Proposition?
There are three main elements of a complete Value Proposition:
- Target Market: a profile of the ideal customer for the company’s product or service
- Specific Value: the reason why a customer should choose the company’s product or service
- Customer Outreach: how the company will contact or notify customers about the product or service