What Is Customer Segmentation?
At OpenView Venture Partners, we spend a lot of time working with our portfolio companies to help them focus on their best customer segments. This is the first step in creating a market dominating growth strategy and dramatically improves a company’s growth, competitive advantage, and economic model.
A firm should select its buyers with great care. Not every customer is a good customer. A buyer who is too costly to service, too demanding, or too powerful may be bad for business.” — Micheal Porter
What Is Customer Segmentation and How Do You Define a Customer Segment?
At the expansion stage, it is time for companies to figure out what customer segments they want to dominate. But, what is a customer segment? A customer segment is a group (cluster) of potential customers who have:
Similar enough needs that a single whole product can competitively satisfy them. In other words, your product will be the best product for all of them.
- Similar enough buying characteristics so that a single go-to-market strategy can competitively and economically turn them into customers. You should be able to expect that their responses to messaging, marketing channels, sales channels, influencers, and ecosystem partners will be similar.
Market segmentation is part of a proactive market focus strategy, which allows the company to design its output to create a competitive advantage and better profitability aimed at the most attractive specific target segment (a group of target prospects that have similar needs and buying characteristics). Segmentation is a proactive management concept which focuses resources on the company’s most important targets, but still allows a company to react to inbound prospects outside of the target segments by accepting their business.
4 Business Benefits of Customer Segmentation
Companies segment their markets in order to:
- More easily understand their market. With a deeper understanding they can penetrate the best specific market segments by offering a more competitive product and a more competitive go-to-market strategy.
- Grow market share by growing the market share faster in a specific segment.
- Increase the value received from markets by offering a better value proposition or an easier buying or onboarding process to a specific segment.
- Increase their operating leverage by putting more (homogenous) volume through a specific efficient methodology and operating unit.
Whole product strategies and go-to-market strategies aim at target customer segments. If the targets are not well known, the departments will still execute, but each department will be aimed at one or more theoretical targets and will have a lower likelihood of successfully penetrating the market. On the other hand, if the target segment is well researched and known but not quite right, the aim will still be close. In general, any segmentation is better than no segmentation, as it allows a company to focus its efforts on insights developed from specific target(s)! To help you determine how to find your best customer segments, see this post from Brandon Hickie that lays out 6 approaches. OpenView also published an eBook, Finding Your Best Customer, that describes a simple research process for expansion-stage companies to find their best customer segments.