Client segments key to success of your business

A woman talks on her mobile phone. Safaricom operates in the mass market space in that it does not differentiate its products. FILE 

By Scott Bellows

 

In Summary

• Investors often fail to fully ascertain their potential customers.

Back in 1989, a breakaway film starring Kevin Costner hit cinemas around the world and instantly became a classic. The famous line from Field of Dreams: “If you build it, they will come”, highlighted the need to have faith in one’s dreams.

However, while the movie made great content for Hollywood, it offered little to no use in everyday life. A more realistic tagline might entail: “If you garnish client feedback and define your customer segments, they will come”

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So, given our revisionist Hollywood history and since you know from the past two weeks how to identify a social challenge and gauge client needs in the social entrepreneurship series in Business Talk in preparation for the Jamii Social Business Plan Competition, we delve into finding and defining your first startup customer segment

Entrepreneurs often fail to fully ascertain their potential clients. Poor analysis causes catastrophes whereby entrepreneurs do the wrong thing for the wrong people.

Looking at Nairobi, different grocery stores now publicise that shoppers may go online, choose groceries, and receive the goods at home delivered by the supermarket.

The US tested exactly such a model between 1998 and 2001. Business schools around the world teach the rise and collapse of Webvan as the quintessential example of entrepreneurs getting the business basics wrong.

Investors, including this author who invested in the company, botched their diligence and provided Webvan with the equivalent of over Sh85 billion. The company went bankrupt in 2001 and investors lost everything.
 

What did we get wrong? Webvan infamously failed to segment and price its market properly, know that customers wanted to feel and touch produce for themselves, shoppers often only realise they want a product when they view it on a shelf, and sitting at home waiting all day for a home delivery becomes more inconvenient than actually heading to the store oneself.

So, let us utilise tools from Osterwalder and Pigneur’s phenomenal book Business Model Generation to segment your customers and avoid Webvan’s mistakes.

First, different customers hold different needs. In last week’s Business Talk, we delineated how to discover client needs. Now, bundle those needs into themes. Do you notice that different genders hold different needs?

More specifically, do different geographies, ages, income classes, social groups, ethnic groups contain different stated needs? What specific offer do the customers require in order to meet their needs?

In response, will you target a mass market? Safaricom, Coke, and Nokia operate in the mass market space in that they largely do not differentiate their products. The products fit all customers in general.

Alternatively, an entrepreneur may focus on a niche market. A very narrow and specific market targets specialised customers with unique needs. High-end Italian car manufacturer Lamborghini, for example, targets an extreme niche market.

Further, do you posses a product appealable to a massive client base with only slight alterations in order to sell to each segment?

You may segment your customers into different markets, like Barclays Bank of Kenya. Barclays offers products and even unique branches for the common, wealthy, and mega-rich customers. Each customer segment holds slightly different needs and problems.

 

Next, you might opt for a diversified business model whereby customer segments are completely different from each other.\

Mumias Sugar operates not only as a sugar refinery and distributor, but also segments into electricity generation among other product lines with entirely separate customers.

Experts often warn entrepreneurs against creating a segmented business too early in their startup process for fear of spreading resources too thin before proper capacity exists to handle multiple business lines.
 

Finally, entrepreneurs strive to hit the “sweet spot” of customer segmentation with the multi-sided platform option, also referred to as the multi-sided market model. Firms may serve two or more intertwined customer segments at the same time, like a credit card companies.

Credit cards charge interest and fees to the consumer, a transaction fee to the merchant or shop owner, as well as send advertisements for special partner offers to its customers. Inasmuch, credit card companies get revenue from three sources all from one product.

Client population

Understanding the different customer segmentation options, where does your startup business fall? Who do you intend to create value for? Which customers might prove most useful, most profitable, and most repeat sales?

Look at census data to determine the size of your chosen customer segment. Determine the lower and upper bounds of monthly income for someone to afford home delivery but before they afford full-time househelp.

Then, how many Kenyans fit in the income category? Then, among that figure, how many live within five kilometres of your stores? How many might have young children at home given the census breakdown of age, years between children, likely number of children at home, etc?

When you cross list all the above figures, you come up with a very specific quantifiable target client population.

Now, assume that you may successfully attract five per cent of that market. Would those customers satisfy enough demand that you may cover your costs given your anticipated margins?

In summary, understand your customer segment clearly before you make decisions on how to implement your business model.

If you plan to start a business, please go to the USIU website, shown below, and find the business model canvas PDF document from the book referenced above.

Prof Bellows serves as director of the New Economy Venture Accelerator at USIU’s Chandaria School of Business and Colorado State University and may be reached on: bscott@usiu.ac.ke or follow on Twitter: @ScottProfessor