Customer Segments in Business Model Canvas

Though every business model is different, and each company crafts its value proposition uniquely, one common goal for all business owners is the importance of finding and retaining customers. Marketing can often constitute a significant expense on a business’s balance sheet, making it essential to maximize the impact of marketing efforts to ensure long-term success. Understanding your customers plays a crucial role in achieving this, and to do so efficiently, we highly recommend implementing a customer segmentation strategy.

By employing a customer segmentation strategy, businesses can identify distinct groups within their customer base based on shared characteristics, preferences, and behaviors. This allows companies to tailor their marketing messages, products, and services to each segment’s specific needs, enhancing customer engagement and satisfaction.

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Related: https://digitalleadership.com/unite-articles/extended-business-model-canvas/

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.

To attain a comprehensive understanding of your enterprise’s customer segment and delve deeper into the intricacies of the Business Model Canvas (BMC), we invite you to download our comprehensive book, How to Create Innovation. Through this insightful guide, you will gain in-depth knowledge and practical insights that will enable you to optimize your strategies and propel your business toward sustained success. Don’t miss out on the opportunity to equip yourself with the knowledge and tools necessary for achieving unparalleled growth and prosperity.

What are Customer Segments in Business Model Canvas?

In the Business Model Canvas, customer segments represent distinct groups of customers that a company aims to cater to with its products or services. These segments are fundamental elements of the canvas, and they significantly influence 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.

We at Digital Leadership specialize in Business Model Strategy services that assist businesses in updating and adapting their existing business models. With our expert guidance, organizations can seize the opportunities presented by online platforms effectively. By leveraging these platforms, businesses can expand their customer segments and extend their market reach to empower them to offer innovative products and services that cater to the constantly evolving demands of customers.

Customer Segments

What are customer segments?

Customer segments are distinct groups of customers that companies identify and target based on shared characteristics, needs, or behaviors. Through market segmentation, businesses categorize their customer base more effectively. Defining customer segments helps tailor products, services, and marketing strategies to address each group’s unique requirements and preferences, driving business growth and maximizing customer satisfaction.

Customer segments Types

Business Model	Description	Example
Mass Market Business Model	Focuses on a broad customer base with relatively similar needs and problems. Value propositions, distribution channels, and customer relationships are tailored to cater to the entire mass market.	The consumer electronics sector offers products to diverse customers.
Niche Market Business Model	Targets specific, specialized customer segments with distinct requirements. Value propositions, distribution channels, and customer relationships are customized to meet the unique needs of the niche market.	Car part manufacturers serving major automobile manufacturers.
Segmented Business Model	Distinguishes between market segments with slightly different needs and problems. Each segment has similar but varying needs, requiring tailored value propositions, distribution channels, and customer relationships.	Banks like Credit Suisse serve different customer groups based on asset levels.
Diversified Business Model	Serves two unrelated customer segments with very different needs and problems. Requires distinct value propositions to cater to the unique needs of each segment.	Amazon.com diversifying into “cloud computing” services alongside its retail business.
Multi-sided Platform Business Model	Serves two or more interdependent customer segments. The success of this model relies on fostering value exchange and interaction between the interconnected segments.	Credit card companies need both cardholders and merchants to accept those cards.

Customer Segmentation

Customer segmentation is a process used to categorize a customer base into separate groups with similar characteristics. By doing so, businesses can efficiently target these specific groups with customized products, services, and marketing strategies, resulting in more effective and personalized interactions with their customers.

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.

What are the Types of Customer Segmentation?

Segmenting customers entails dividing them into groups based on various profiles, including demographic, geographic, and psychographic characteristics. These profiles serve as valuable tools for businesses to better identify and comprehend their target audience. Some typical segmentation criteria include:

When implementing a customer segmentation strategy, it typically involves considering your customer groups through various perspectives:

1. Demographic Segmentation: This involves dividing customers by demographic factors like gender, education, family size, or marital status. An example would be a skincare brand offering different product lines for men and women
2. Behavioral Segmentation: This approach categorizes customers based on their purchasing behavior or usage patterns. For instance, frequent buyers, occasional customers, and first-time purchasers could each represent separate segments.
3. Geographic Segmentation: Companies may divide their customer base based on geographic locations, such as urban, suburban, or rural areas. This helps tailor marketing strategies to regional preferences and cultural differences.
4. Psychographic Segmentation: Segments based on personality traits, values, attitudes, and interests. A travel agency might target adventurous thrill-seekers and relaxation-focused vacationers with different travel packages.
5. Lifestyle Segmentation: Companies may target customers with specific lifestyles, values, or interests. For example, fitness-oriented companies might create segments for health enthusiasts and gym-goers.
6. Age-Based Segmentation: A company may target different age groups with products or services tailored to their specific preferences and needs. For example, a toy manufacturer might have segments for toddlers, young children, and teenagers.
7. Income-Based Segmentation: Businesses may create segments based on income levels to offer products or services that align with varying spending capacities. Luxury brands often target high-income segments, while discount retailers focus on budget-conscious customers.
8. Usage-Based Segmentation: Companies can segment customers based on their usage frequency or intensity. For instance, a software company may offer different subscription tiers for light users and power users.
9. Customer Needs Segmentation: Businesses may identify segments based on specific needs or problems they aim to address. An electronics company could have segments for gamers, business professionals, and creative designers.
10. B2B Segmentation: In business-to-business markets, companies can segment customers based on industry, company size, or specific business requirements to offer tailored solutions and services.

When determining customer segments, it is crucial to focus on criteria that truly help identify and serve customers better. Consider the following factors:

1. Depth of Pain (Need): The severity of a customer’s pain or need influences their openness to your solution.
2. Budget: Assess whether customers are willing to pay for your solution, how many are potential customers, and the amount they are willing to spend. Higher pain points often lead to a greater willingness to spend.
3. Reach: Evaluate how you can effectively reach your customers. Determine whether it is cost-effective to deliver in person or use alternative methods.
4. Market Size: Analyze the size of the market segment you aim to target. Ensure that the share of this market represents a substantial portion of your overall market.
5. Value: Consider whether serving this segment aligns with your company’s mission and values.

Effective Customer Segmentation Strategies

1. Every business has specific customer segments and aims to attract as many potential customers as possible, but targeting everyone is often impractical.
2. Understanding the target market is crucial for tailoring marketing messages and meeting customer needs effectively.
3. No business plan survives first customer contact because the ultimate prerequisite for creating a successful product or service is understanding the real needs of customers. Many times, we fail to grasp these needs accurately, leading to theoretical business plans and presentations that miss the mark on customer and market reality. To excel in business, it is essential to gain a much better understanding of what our customers truly want.
4. Firms often base their ideas on their perceived understanding of their customer (segmentation), which can lead to flawed approaches, especially in innovative contexts where customer behavior is unknown. 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.
5. Introducing the concept of a “Customer Persona” as a typical representation of a customer segment, incorporating visual, demographic, sociographic, and psychographic data. 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!)
6. Demographic data is informative but may not provide insights into actual behaviors. Effective Personas require discussing “design-relevant parameters” to understand customer information relevant to the product or service.
7. Accurate and well-defined Personas help businesses better understand customer needs and preferences, aligning their offerings with real-world demands.
8. Building a customer persona involves considering both demographic and customer-specific information, such as goals, barriers, and common behaviors among the targeted groups.
9. Various ways of segmenting customers are mentioned, including geographic, behavioral, and demographic segmentation.
10. Businesses are encouraged to create buyer personas for different customer groups, including current customers, important customers, and potential customer segments, to optimize marketing efforts and meet customer needs effectively.

Customer Persona

1. Definition: A Persona is a representative of a larger Customer Segment, providing insights into the characteristics and behaviors of a specific customer group.
2. Description Components:
   • Visual Material: Include photos of a typical segment representative and their environment to visually depict the Persona.
   • Demographic Data: Consider basic information like age, race, gender, education, and marital status, similar to a governmental census.
   • Sociographic Data: Understand the social and cultural characteristics, interests, and lifestyle of the Persona.
   • Psychographic Data: Explore the Persona’s attitudes, beliefs, values, and motivations.
   • Design-Relevant Parameters: Discuss relevant parameters that provide valuable information for understanding the customer and developing your product.
3. Representing Reality: Ensure that Personas are based on real customer data and behaviors, avoiding the temptation to invent them based on personal preferences.
4. Importance of Behavior: Recognize that demographic data alone does not reveal customer behavior, which is crucial for effective marketing and product development.
5. Building Customer Personas:
   • Semi-Fictional Representation: Personas are semi-fictional, allowing businesses to create a clear picture of potential customers.
   • Sources: Base Personas on existing customers, including best customers, or create them for a target audience.
   • Pattern Identification: Use Personas to identify patterns among specific groups of potential customers, improving targeting strategies.
6. Understanding Customers’ Needs:
   • In-Depth Insight: Go beyond demographics and delve into customer-specific information, such as their needs, goals, and challenges.
   • Addressing Barriers: Identify barriers that might prevent the Persona from engaging with your products or services.
   • Goal-Oriented Approach: Understand the Persona’s goals and aspirations to align your offerings with their desires.
7. Behavior Analysis:
   • Common Customer Behavior: Analyze common behavior patterns among the targeted customer groups.
   • Segmenting Customers: Consider different segmentation approaches, such as geographic, behavioral, and demographic segmentation.
8. Creating Buyer Personas:
   • Different Customer Groups: Develop buyer personas for different customer groups, including current customers, important customers, and potential customer segments.
   • Comprehensive Understanding: By creating detailed Personas, businesses can gain a deeper understanding of their customers, leading to more effective marketing efforts.
9. Optimizing Marketing Efforts:
   • Human-Centric Approach: Understanding customers on a more human level enables businesses to tailor marketing messages and strategies to meet real-world demands.
   • Meeting Customer Needs: Utilize insights from customer Personas to ensure that your products or services align with customers’ actual requirements.

Related: https://digitalleadership.com/unite-articles/value-proposition-canvas/

Considering Customer Segments and Their Jobs to be Done

When considering customer segments and the Business Model Canvas, understanding their Jobs to be Done becomes particularly relevant. 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 in a number of ways, but we like to focus on two varieties of jobs, functional jobs and emotional jobs.

Customer Jobs to be Done	Marketing Focus
Functional Jobs	Provide a product or service that helps customers achieve specific goals or tasks without explicitly mentioning the company’s offerings. For example: “I need to teach my kids how to handle money responsibly.” Marketing campaigns should highlight how the product or service effectively helps customers reach their goals.
Emotional Jobs	Address the emotional needs and desires of customers to feel or be perceived in a certain way, beyond just functional benefits. For example: “I need my customers to think our company is environmentally friendly.” or “I need to feel more confident as a public speaker.” Marketing should focus on how the product or service meets emotional needs and creates the desired perception.
Customer Fears	In the context of Jobs to be Done, it’s essential to recognize that customers’ needs may not always be about accomplishing a specific task or goal; rather, it can be about alleviating anxiety or addressing fears. For example, when considering what a life insurance agent offers, it’s not merely about a functional task but about providing peace of mind and financial security for the customer and their loved ones. As businesses focus on customer satisfaction, it’s crucial to understand and empathize with customers’ fears and concerns. While it is not ethical to create or exploit fears for profit, market segmentation activities may reveal common anxieties that customers have. In such cases, businesses can ensure that their marketing messages clearly convey how their products or services can help alleviate these fears and provide a sense of security. Addressing customers’ anxieties can be a valuable aspect of product management and the customer journey, contributing to long-term customer loyalty and business profitability. By understanding and empathizing with customers on a deeper level, companies can build stronger relationships and cater to their genuine needs.

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 with 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.

The Value Proposition Canvas, integrated into the Business Model Canvas, serves as a potent tool for businesses to craft and enhance their value proposition through a profound comprehension of their customers’ needs, challenges, and desires. By utilizing this tool, businesses can develop compelling and customer-focused value propositions that precisely cater to distinct customer segments. You can download it now.

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:

Business Models

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.

Detailed Models

A Business Model can be broken out into 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.

Conclusion

Customer segmentation in the Business Model Canvas is a fundamental aspect of building a successful business model. By identifying and understanding different customer segments, businesses can tailor their products, services, and marketing strategies to meet the unique needs and preferences of each group. The Value Proposition Canvas further complements this process by helping businesses design compelling value propositions that address specific customer Jobs to be Done, both functionally and emotionally. Considering customer segments and their Jobs to be Done is a crucial element of customer segmentation analysis. By understanding the challenges and needs customers face, businesses can create products and services that align with their value proposition and help customers achieve their goals. Emotional Jobs to be Done adds an extra layer to marketing campaigns, appealing to customers’ feelings and perceptions to strengthen brand loyalty and engagement.

Frequently Asked Questions:

1- What are the 6 Areas of Segmentation?

The six key areas of segmentation are part of the Business Model Canvas and play a critical role in shaping an organization’s strategy and value proposition. These areas include:

• Customer Segments: Identifying different customer groups that the company targets with its products or services.
• Value Proposition: Defining the unique value the company offers to each customer segment, addressing their specific needs.
• Channels: Outlining the distribution channels through which the company delivers its products or services to customers.
• Customer Relationships: Describing the type of relationship the company establishes with each customer segment.
• Revenue Streams: Identifying the various sources of revenue and how customers will pay for the products or services.
• Key Resources: Listing the essential assets, capabilities, and infrastructure required to deliver the value proposition.

2- What are Customer Segmentation real-life Examples?

Customer segmentation is a common practice used by businesses across various industries to better understand their customers and tailor their marketing efforts. Here are some real-life examples of customer segmentation:

• E-commerce Retailer:
  An online clothing retailer segments its customers based on their shopping behavior and preferences. They create different customer groups, such as frequent shoppers, occasional buyers, and discount seekers. For each segment, the retailer tailors their marketing messages and promotions accordingly. Frequent shoppers may receive personalized recommendations, while discount seekers receive notifications about sales and discounts.
  
• Mobile Network Provider:
  A telecommunications company segments its customers based on their usage patterns and needs. They identify different groups, such as heavy data users, business customers, and international travelers. The network provider offers specialized data plans for heavy users, tailored business packages, and international roaming services for travelers.
  
• Hotel Chain:
  A hotel chain segments its customers based on their travel purposes and preferences. They identify segments such as business travelers, family vacationers, and luxury travelers. The hotel chain offers business amenities and meeting facilities for business travelers, family-friendly services and activities for families, and upscale accommodations and personalized services for luxury travelers.
  
• Automobile Manufacturer:
  An automobile manufacturer segments its customers based on their preferences and lifestyles. They create segments for eco-conscious consumers, performance enthusiasts, and budget-conscious buyers. The manufacturer offers eco-friendly hybrid or electric vehicles for eco-conscious consumers, sporty models with enhanced performance features for enthusiasts, and budget-friendly compact cars for price-sensitive customers.
  
• Fitness Club:
  A fitness club segments its customers based on their fitness goals and interests. They identify segments such as weight loss seekers, strength trainers, and group fitness enthusiasts. The fitness club offers customized workout plans, personal training sessions, and a variety of group exercise classes tailored to the preferences of each segment.

3- 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:

• Functional
• Monetary
• Social
• Psychological.

4- 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 the problem: More in-depth, show your expertise by concisely describing the customer’s challenge
• Clear benefits and solutions: Make the connection between your customer’s needs and the products or services you offer

5- 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