Back To CourseBusiness Writing: Help & Review
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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.
''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.
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.
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.
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.
A startup considering the launch of a new product or service could also subdivide the large group using revenue or profitability as a condition. When a casino in Las Vegas is determining what kinds of games they will put on the floor, they will pare down a large group based on profitability. One need only walk briefly through a casino to observe this principle in practice. High-stakes rooms are lavish and sharp. The casino has segmented high-value gamblers from the larger set of people who gamble. The expensive fixtures and atmosphere of a high-stakes room are methods used by the casino to target a very small subset of gamblers.
Finally, a startup can create customer segments based on willingness to pay for some or all of a product. A company that offers extended warranties on newly purchased automobiles has launched such a product because the company first identified a specific segment of customers who would have a need for this type of product. It wouldn't be smart for a startup to choose to form an extended warranty company for mechanics, but it is smart to offer it as a peace-of-mind product for an elderly widow who cannot perform even basic maintenance.
Before launching a startup, it is important to identify a potential customer group that is articulating a problem that the business intends to fix. However, this problem group is usually too large for the startup to take on as a whole. Instead, the startup considers its specific core competencies and looks to reduce the large pool of potential customers to a smaller cohort that is perfectly aligned with the product or service the startup intends to offer.
One way that a startup can decrease the size of the potential customer pool is to concentrate on a customer segment for which it can make a distinct offer. Before deciding on the nature of the product or service to launch, a startup should ensure that its value proposition focuses on a potential customer group to which it can offer unique value. Sometimes, a startup is not offering a unique product, but it is offering it through a different distribution channel.
In some instances, an idea for a startup is a proposal to change the nature of the vendor/customer relationship. A startup using this methodology would align its idea for a new relationship model with a customer segment that is interested in moving away from the current relationship conditions.
Revenue and profitability can also help a startup determine the type of customer it will design its product to satisfy. Finally, a willingness to pay is a consideration for startups when making decisions about their products or services. Startups should design products that add enough value that customers will actually be willing to pay for the innovation.
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Back To CourseBusiness Writing: Help & Review
10 chapters | 87 lessons