Business Models and Customer Segmentation

One of the most important steps in creating a business model for a start-up enterprise or for a new product line is the definition of the target customer segments. Typically the customer segment definition focuses on the needs or wants of particular groups of potential customers. But how does one find these needs or wants? The usual answer is, ask the potential customers through market research or surveys.

A better approach is presented by Anthony Ulwick in his book, What Customers Want (2005). This approach uses an outcome-oriented approach to define the jobs customers want or need to accomplish and to understand how potential customers will evaluate how any product or service offerings will help them get these jobs done. The term job refers to any task the customer has to accomplish, from driving a nail to driving the kids to school.

Asking the potential customers what their needs are often leads the innovators in the enterprise on the wrong track to produce products or services in an attempt to satisfy the perceived need. Some of the reasons for this misdirection are: Customers and innovators do not speak the same language, with customers making vague statements of what they need without providing the innovators the specific requirements necessary to guide their efforts; Customers typically do not know what innovations are possible and focus on surface features rather than fundamental design of products or services; And customers often do not really know what they need. This mismatch between the customer and innovator results in innovation errors, development of unwanted products, and poor market segmentation decisions.

The solution is move the focus from customer-expressed needs and wants to innovator-determination of the jobs customers are not doing well or not doing at all. This requires the innovator in the enterprise to become experts in the jobs potential customers need done well and use that expertise in development of the products and services to achieve that objective and create true customer value.

This approach to defining the objectives of the enterprise innovation efforts also changes the focus of market segmentation. Rather than the traditional artificial segmentation criteria of product type, price point, or other psycho-graphic and demographic characteristics, the outcome-oriented approach will segment customers by outcomes different customers are trying to achieve and making it easier to get a particular job done more effectively. This re-focusing of the market segments will expose new market opportunities in broader markets and new avenues for growth.

Dr. Robert Kovacev

CSUF Entrepreneurship Professor

 

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