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Recognizing Customer Segments: Definition & Process

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  • 0:04 Understanding Customer…
  • 0:56 Distinct Offers
  • 1:48 Channels of Distribution
  • 2:18 Vendor-Consumer Relationships
  • 3:12 Affordability &…
  • 4:24 Lesson Summary
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Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Selecting an appropriate customer segment is a critical component of the value proposition. This lesson explores the relationship between a value proposition and a customer segment.

Understanding Customer Segments

''The way to get startup ideas is not to try to think of startup ideas. It's to look for problems.'' This statement, made by the business author Paul Graham, embodies the importance of selecting the correct customer segment. His statement about looking for problems is an excellent way of understanding a customer segment. When a business follows Graham's advice and begins looking for a problem, the population with the identified problem is the jumping off point for determining a customer segment.

Although this is a starting point, it is not the entire process. In many cases, the initial group of individuals sharing the common problem is too large for the startup to take on as a whole. Consequently, the goal of the startup is to whittle down the large group into a smaller cohort of individuals whose specific problems the startup can most effectively resolve.

Distinct Offers

In the earliest stages of reducing the size of the segment, startups should use the guideline of a distinct offer. From within the large pool of potential customers, each customer who has the need for a distinct solution should make up the first segmented group. If a startup was attempting to solve the problem of excessive traffic delays during rush hour, the startup should choose a segment based on their need for a solution that will require a unique value proposition.

In an example like this, some of the distinct groups include individuals who ride the subway, drive their own vehicle, or ride a bike. Each of these subgroups would require a unique proposition, and a startup seeking to identify a customer segment should capture and provide value only to an underserved group rather than the entire population of potential customers.

Channels of Distribution

Choosing what kind of solution to offer customers with a problem can also be considered based on channels of distribution. If a startup aimed to introduce new technology into the insurance market, the large segment of customers with insurance could be divided into customers who buy insurance online versus customers who buy insurance from a local agent. The startup's choice regarding which product to develop will be quite different if they are targeting online consumers or in-person customers.

Vendor-Consumer Relationships

The product or service proposed by a startup can also target a customer segment based on the nature of the vendor/customer relationship. A relatively new company, Appleton Clinics, developed an excellent business model by segmenting the large group of consumers who need healthcare into consumers who do not require a traditional relationship with their physician. Appleton charges a flat monthly fee for access to healthcare as opposed to the traditional fee-for-service model.

When Appleton's founders were considering their business model, their research indicated to them that patients with commercial insurance would not find value in a one-patient one-doctor system. Appleton decided on a customer segment based on the difference between people who need a dedicated physician versus a customer segment composed of people who still needed healthcare but did not require a one-on-one patient relationship.

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