Tag Archives: customer segmentation

How to pick and choose early users / customer for your #napkinStage startup?

The first few customers (or users) usually set the tone for your startup. They are the ones with either acute pain or the burning problem, and the earliest of early adopters. Usually, I have found that most entrepreneurs get their early customers because of the relationship they have with them OR they solve a really pressing problem for their customers.

When I talk to most entrepreneurs, one of the first things I recommend to them is to segment their potential customers.

The discipline of finding the factors that differentiate one set of your potential customers from another based on a set of characteristics is customer segmentation.

There are 3 important questions you will need to answer about your customer segmentation strategy before you recruit potential customers.

Most entrepreneurs, at the napkinStage end up getting customers who they know, but sometimes may not have the pain point as much. Else they end up getting customers who have the pain or are unwilling to try anything “not proven”.

When you have been out trying to get early paying customers, you will realize quickly that customers have one of several reasons for not buying or wanting to try your solution.

1. They are risk averse, and not early adopters, so while they have the pain, they use their existing  manual or alternative techniques to solve the problem.

2. They are able to deal with the pain, since they get a sense of job security knowing that they know how to solve the problem, and no product, machine or algorithm can replace them.

3. They believe the ROI from solving the pain will be negligible and their time and money is better spent elsewhere.

4. They want more mature solutions so they can handle their “special situation”, which is unique enough that no early product can customize it and be less expensive at the same time.

5. They believe the solution will weaken their position since it will solve the problem that exposes their “value-add” to the company.

6. They are not emotionally vested in either you or your startup, so they are not willing to take the leap of faith to try an early version of the product.

7. They actually dont believe your solution will solve the problem and are willing to wait and see some more proof until a point that it does.

These and many other excuses / reasons are the ones I have heard of consistently when I have been trying to get early customers for most of my startups.

If your potential customers sees a big benefit to:

a) their personal agenda (promotion, makes them look good, etc)

b) their position in the company and finally

c) their company’s standing in the market.

Picking your early customers though, is almost always a combination of personal relationships, built over time and solving a problem they have that is so intense that they are willing to try anything to get rid of it.

The 3 most important questions you will need to answer about customer segmentation

Customer segmentation for entrepreneurs is a tool to reduce distractions, focus your product roadmap towards your Minimum Viable product and create personas that can help your marketing, sales and development efforts.

I am often asked 3 questions associated with customer segments, which I thought I’d address in this post. I am going to use an example of a company building a new age mobile Patient Records Management solution (or EMR – Electronic Medical Records) for the tablet as an example.

1. What are the steps to a good segmentation strategy?

The first thing you need to do to ensure a good segmentation approach is to write down your ideal customer attributes. You dont need any framework to do this, just a list of attributes will suffice. Your attributes need to be specific, numerical and descriptive.

(I) Specific means, you will have to outline their environment. What are they using currently? How specific is their problem? Do they have alternatives? If your target is doctors in our above example,. that’s too large a segment. Instead there are different types of doctors:

a) Those that practice independently vs. those that are attached to a hospital

b) Those that are general physicians vs. those that are specialists.

c) Those that see < 10 patients a day vs. those that see more, etc.

(II) Numerical means there has to be a set number of customers that fall into this segment. It has to be a number much less than your entire target market, and not more than 2.5% of 2.5% of your target market. Why 2.5% of 2.5%? That’s usually the second question.

(III) Descriptive means, you have to outline their current day-in-the-life scenario without your product. Explain how they are currently solving the problem (if it does exist) and how they are solving it without your product. It cannot be that they are not solving it. They may be used pen and paper to keep medical records, but a system does exist.

2. How many customers is enough to build a segment for? Is there a minimum number?

Innovators - theory of diffusion
Innovators – theory of diffusion

According to the theory of diffusion, we have 2.5% of customers who are innovators. These are your earliest of early customers and your initial targets. What I have found with most of the startups I am helping is that 2.5% of those innovators are truly the engaged, early influencers who will be willing to have the discretionary time and budget to try truly innovative products and then be willing to evangelize them to the rest of the innovators.

To be clear, you dont need all of the 312 to be your early customers. These are your early segment of potential customers. Typically 10% of them being early customers tends to show “traction” for an investor.

Lets say the total number of doctors in the US is 500K. Then your Innovators are 12.5K. Of them, 2.5% should be the first segment, which is about  312. That’s the ideal target for you to have as a start.

3. What if most of the target customers dont have the pain point or dont want the product? Does that mean the segment is incorrect or there is no market need for this segment?

If you have targeted 312 doctors who are primary physicians (segment by practice type), in the Texas area (segment by location) who work in a multi-use work location (segment by work area) and are currently using paper based medical records (segment by current product usage) theny you now have a segment of customers who you want to go after.

Google Adwords Segments
Google Adwords Segments

A trick that I have seen most people use is to segment based on Google Adwords segments (see diagram above) or segment by Facebook targeting options.

Facebook Targeting Options
Facebook Targeting Options

Once you have your segment at 2.5% of 2.5%, then you are doing a combination of ads, conversions, focus groups and interviews to understand if they have the pain point.

If you end up finding out that customers dont have the pain point or the conversion rates on your ads is low it is indicative of either poor targeting, poor messaging (your message did not resonate), incorrect framing of the problem or lack of the problem in the first place.

What I have found in my experience with over 300 startups is that the number one problem is poor targeting, followed by lack of the problem existing for the prospect in the first place.

What is customer segmentation and why is it important for the #startup #entrepreneur?

One of the first things you will realize as an entrepreneur is that you will need to be absolutely clear about your customer’s problems and envision your product solving their most important pain point. This realization results in an appreciation for the “micro” problem for a “small set of customers” to begin with.

That in essence is customer segmentation.

The discipline of finding the factors that differentiate one set of your potential customers from another based on a set of characteristics.

First, segmentation is a discipline.

The output of that discipline is a) a way to make it easier to identify your customers via a known name or persona b) a means to target them more effectively and c) a language to explain their problems / pain points and d) an ontology to express your solution to help them solve the problem.

Second, you will have to find factors that help you differentiate customers.

The idea behind the factors it to help you focus on those customers who have the highest pain, and hence the most propensity to buy, or the most desire to solve the pain and eliminate (during that period) than those that dont have the need immediately.

Third is to identify and document the characteristics that help you find the patterns or a set of questions to help guide your segmentation.

The best way I have found you can document the characteristics is to write down a set of interview questions that can help you during a discussion with potential customers. Others have used the buyer persona canvas or a simple tool to document thinking, feeling, seeing into maps.

Buyer Persona Canvas
Buyer Persona Canvas
Persona Map VP Sales
Persona Map VP Sales]

The empathy map is more relevant for design, but it can be made very relevant for you to leverage as a founder to understand the sales cycle, buying process, marketing criteria or service design.

Lets take an example. Assume that you are building a CRM system for SMB, to help them track their sales and allow sales reps to directly provide a quote and contract using just their mobile phone.

Most entrepreneur’s state that all SMB are their customers. This is usually done to prove that the market is very large and hence deserves attention.

The goal of the segmentation exercise is to make the market extremely small (a set of customer you can get in front of, collect feedback and test your hypothesis in as short a time as possible).

In most B2B scenarios there are 3 major and many minor characteristics that define segments of customers.

1. Size of the customer: Some people define size by revenues, others by # of employees, still others by # of sales people within the organization, still others by # of quotes the company delivers in a year, etc.

2. Industry vertical: In industries where speed to quoting and contract delivery makes a difference in the sales process, your solution might be more valuable, (e.g. some insurance verticals) than others were the contract process involves multiple rounds of competitive bids.

3. Title of the buyer: Titles (VP of Sales, Director of sales, Sales Manager, etc.) are usually an indicator of spending authority. In our case the VP of sales at a small company in the insurance brokerage is likely to have the ability to try and purchase the solution to help his sales professionals be more productive, than a Sales manager, who, is likely going to focus on trying the solution to offer feedback, but may not have the authority to buy. They will end up being a user, but not the economic buyer.

It used to be that location was the 4th characteristic, but with the Internet, is highly possible that your customers are in a different location (physically) than you are.

For B2C companies, most segmentation is done by demographics or psychographics. The 3 most frequently used characteristics are age, gender and income. There are many others as well, but these are the primary. I will share the B2C example in the next post.