Selecting the Customer

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“Do what you do so well that they will want to see it again and bring their friends.” — Walt Disney

Whether you are a “one-person band” or a large organization, your customers are why you are in business. 

By having clarity on the customer segments, the customer needs, and the potential profitability of each segment, you can choose more effective segments to serve for a more sustainable business.

Serving everyone is serving no one. 

Customer segmentation helps you target a specific set of customers and serve them exceptionally well

“Who is the customer?” is a strategic question.  It forces you to figure out who’s in and who’s out.

In the book, Managing the Design Factory, Donald G. Reinertsen writes about how to segment customers effectively.

You Need to Know the Value and the Cost

To choose a customer to focus on, you have to weight market opportunity, technical opportunity, value, and differentiation across a set of customer segments or niches. 

The problem is, there are many ways to segment markets.

To segment a market effectively, there are a couple of best practices.  One practice is to divide the market up based on profitability.  You might find that some markets simply won’t sustain your business. 

Another practice is to make sure both marketing and engineering are involved in segmenting a market.  Marketing can determine the price customers are willing to pay, but engineering will help determine the cost.  To segment effectively, you need to know both the value and the cost.  

If you’re a one-person band, this means figuring out your development and production costs, compared to the price your customer will pay.

Divide the Market into Segments

Chunk the market up by profitability. 

Reinertsen writes:

“The choice to serve less than 100 percent of the customers is called market segmentation.  This is simply the act of dividing up the market with the goal of finding a group of customers that is more profitable to serve than another group.  This difference in profit can result because the customers are willing to pay a higher price, or because the customers can be served more cost effectively.”

Look for a Profit Difference Between the Segments

Marketing and engineering need to work together so that you know both the price customers will pay and the cost of development.   Then you can know the real difference in profit between the segments. 

Reinertsen writes:

“Of course, there are an infinite numbers of ways to segment any market.  Fortunately there is a very simple test to tell if you have a good segmentation scheme: look for a profit difference between the segments.  This raises an interesting problem for the product developer: Can the marketing staff segment the market by themselves?  Unfortunately not.  Doing good segmentation demands a knowledge of both value and cost.  Marketing can determine the value by trying to assess what price customers are willing to pay for the product.  However, it is still necessary to know the cost of serving each group of customers to assess the segmentation scheme.  This means that both manufacturing and engineering people must be involved to segment a market.”

A Target Customer and a Rough Definition of Needs

An outcome of segmentation should be a definition of the customer needs for that segment. 

Reinertsen writes:

“The results of the market segmentation step should be a definition of the target customer and a rough definition of customer needs that will be satisfied.  These needs are normally described by stating the functions that the product will perform rather than the features that the product will have.  At this stage, you should have a rough idea of the size of the revenue stream that the product could generate and the gross margins that might be achieved.”

How you slice your customer pie can make all the difference in your success. 

By taking a look at the profitability (price and cost) and the actual customer needs, you can choose the most effective segment for sustainable business and for leveraging the blend of market opportunity, technical opportunity, value, and your differentiation.

Photo by modern_carpentry.

10 COMMENTS

  1. Hi JD – This is a great explanation and it also show the importance of different departments working together to deliver what the customers want.

    And your article is also useful to small business owners. So many people seem clueless about how much to charge their customers and don’t know how to figure out their costs, or figure out what a particular market will pay.

    I’m writing a post on “adding value” this week and I’ll make sure I point readers in the direction of your article.

  2. JD: Great advice. I think it is so easy to fall into the trap of getting really excited about a business idea and then just jumping in. The reality is that you do need to do a lot of research and your due diligence and market segmentation is definitely a good approach. Thanks for all the great information and the approach.

  3. Hi JD I like the segments that you put here clearly. Being specific about the customer needs is critical. Nicel insight here.

  4. @ Cath — Thank you. I think segmenting customers is still a tough exercise, even with some basic rules, like having one customer in mind, and remembering that you aren’t your customer, etc. The think that really sunk in for me is differntiating by profitability. I can see how this one part can dramatically shape your strategy. I know Drucker and Gerber made some points here — I’ll have to revisit.

    Come to think of it — the pizza does look good.

    @ Sibyl — Thank you. I’m really a fan of following the passion, but the problem is it has to be balanced with profit and growth. I’ve seen too many people follow their heart and end up making bad trade-offs because they didn’t find the right arena or tribe for their value.

    @ Baker — Thank you. It can seem so simple, and yet it can also be a tough question — such as, “Who’s it for?” and “Who’s asking for what you do?” This is especially true in today’s world as we shift from a push to a pull economy. Demand generation is tough. Finding the appetites is key.

  5. […] Reading Selecting The Customer What Customers Want – It’s Simple Are You Really Worth That Much? Is It Worth Giving […]

  6. I put up pizza on my blog post recently too…it attracted quite a few comments…the strawberries were a good market indicator too!

    Good stuff being served up….

    This is a subject that I do not do well in….it is hard work for me

  7. @ Patricia — Strawberries will always have a sweet spot for me, and when I was a kid, I thought I could eat pizza everyday for the rest of my life. I haven’t tested that, but I have eaten pizza like it’s going out of style.

  8. Hi JD .. it is that focus on your customer and their needs, satisfying all aspects of their requirement for your service or product .. especially at the beginning, when perhaps you’re testing the waters and can gain advice from your new customers .. but the segmenting is exactly right as we can market towards specific segments.

    Thanks for these thoughts .. good to know – Hilary

  9. @ Hilary — I’ve always struggled with how to segment. My goal was to help everybody lead a better life and make a better world. A few of my friends pointed out my best bet was to focus on leaders of all levels (whether it’s leading yourself or leading a team or leading an organization.) I like the idea that we can segment by persona or domain, but I’m still testing the waters.

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