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INVENTOR'S CHECKLIST
THE CUSTOMER

DO YOU KNOW YOUR MARKETS AND SEGMENTS?

"WHO WILL BUY MY SWEET RED ROSES?" - OLIVER TWIST

Starting this process many people think…“We already know our idea solves a problem, so therefore it is obvious that our customers are the people who have the problem”. While this is a useful starting point it is important to understand the difference between who your target market is (the people who have the problem) and who your customers are (the people who will pay for your solution).

YOU CAN LEAD A HORSE TO WATER, BUT YOU CANNOT MAKE IT DRINK

Many entrepreneurs often make assumptions about who their customers are. It is well known that horses drink water, so surely if you provide water to horses, they will drink it. However if the horse is not thirsty or if the water tastes bad, the horses won’t drink it.

You need to make your water taste good to the horses and know which horses like the taste of your water. You also need to ensure that you know how to find thirsty horses in order to get them to drink.

This module focuses on:
  • Identifying your market and customer segments.
  • Quantifying your customer base.
  • Prioritising your customer segments.

There is one fundamental difference between your market and your customers: a market may need the solution but customers buy the solution.

LEVEL OF CUSTOMERS

When we talk about customers, we often refer to:

MARKET

A broad landscape of buyers looking to solve different types of problems.

SEGMENT

This is an identifiable sub-group with members who share similar needs and interests and who naturally tend to reference each other when considering what to buy.

LEAD CUSTOMER

A representative member of the target segment (who is accessible to you now).

Potential customer levels for 'GPS enabled anti-theft bike locks':
  • MARKET: Shops selling bicycles
  • SEGMENTS: sports shops, specialist bicycle shops, general department stores, car garages, discount stores, hypermarkets
  • LEAD CUSTOMER: Halfords

IDENTIFYING YOUR TARGET MARKET(S) AND CUSTOMER SEGMENTS

In ‘Module 2: The Problem’, you will have started to identify the groups of people that experience the problems that you defined. This information will provide you with a starting point for undertaking this module.

THE DIFFERENCE BETWEEN YOUR MARKET AND CUSTOMERS

Imagine we had devised the idea to go around and find out if anything interesting was happening and then sell that information to people, in the form of ‘News’. While the vast majority of people are curious about what is going on, a simplistic assessment of the market potential might be that everyone is moderately interested in receiving the ‘news,’ so you might think the entire population is a potential customer. While the entire population is a potential market for the idea (to varying degrees) the assertion that everyone is a potential customer is far from accurate. There are a number of factors which might preclude people from being customers. The most obvious is price: if the news service costs money, a proportion of the population will be unwilling or unable to pay that price, and are therefore unlikely to be customers.

We might consider the medium by which the ‘news’ is to be delivered. If we are to imagine a hypothetical world without news, and the idea is to deliver the ‘News’ through a smartphone app, then the market for this idea would be restricted to those people who are smartphone users. If we further consider that the information being gathered is from a particular geographical area, then the likelihood is that the potential customers are only those who live in or are interested in news about that area.

Knowing that we are able to produce ‘News’ about a particular area, and provide it to smartphone users who are willing to pay for the news, it is important to understand the decision making process which customers undertake in buying into the service. It might be that the deciding factor for buying your service is the fact that it is available on the phone, and the content of all the different forms of ‘News’ is the same. On the other hand it might be that the value the customer places in your service is based on the quality of the content of your news, in which case, you would have to convince them of the quality of your news, before they would buy your service.

EXERCISE 1 - IDENTFY YOUR MARKET(S) AND CUSTOMER SEGMENTS

Exercise Template (Download)

Fill in the Market Tree template. Markets are represented by the big branches. The customer segments are represented by the small branches.

  • Start by identifying your market(s) – who has the problem that your idea solves?
  • Break this market down into customer segments – what are the different categories of people that will pay for your solution?

Use this as a mind mapping exercise. Think as broadly as you can about who your customer segments could potentially be.

When filling in the market tree, it can often take several attempts before you are confident that you have identified the market(s) and segments to your satisfaction. Working through this process can help give an insight into the various different segments and their attributes

The reason for breaking the market into segments is to allow you to start considering:
  • What features and benefits of your product or service are of greatest importance to the potential purchaser?
  • What competitive options might the different customers consider when buying your offering?
  • What different degrees of value might the different customer segments place on your offering?
  • How do the different customers make the decision to buy?

QUANTIFY YOUR CUSTOMER BASE

Having defined the market and customer segments, you will need to determine the size and value of this market using statistical data.

You may also want to research growth forecasts for this market. This will build on the research which you started to undertake as part of ‘Module 2: The Problem’.

Demonstrating that the chosen target market/customer segments is of a size and value worth pursuing is crucial in selling your idea. You will be able to get this kind of information from a variety of sources. A web search on Google may be a good starting point. You are most likely to find the data you require in market research reports and from official statistics provided by national statistics offices. You may also want to consult relevant trade journals and newspaper articles. Remember to carefully document the sources of information and ensure that the research you gather is from a reputable source (i.e. not Wikipedia!). The information gathered on your customers will support Module 6: The Market Approach.

As always, you may want to consult different sources of information on this. A list of suggested sources can be found at the end of this section.

EXERCISE 2 - QUANTIFY YOUR CUSTOMER BASE

Exercise Template (Download)

1. Identify the total potential size of each customer segment.

2. The next step is to make an assessment, based on the total potential size of your customer segments, as to what the realistic size of the market is for your business.

The following four considerations may help you in quantifying your market.
  • Total number of potential customer in each segment.
  • Total number of potential sales in the segment (assuming sales volumes might not reflect the number of customers).
  • Affordability – what is your likely price and how does it compare with competition in each segment or the status quo? This should provide a factor which can be applied to the total potential market.
  • Estimation of market penetration. It is all well and good saying that everyone is a potential customer for a product, but not even the most market dominant product is able to boast 100% of its customer segments as customers. The market penetration rate can be surprisingly low, and it is important to make a realistic assessment of how much of the target market you are likely to convert to customers.

As an example Apple, which is one of the most dominant presences in the Smartphone marketplace with its iPhone, managed to obtain just 13.2% of the smartphone OS sales in Quarter 2 of 2013.

As a start-up, unless there is specific reason to justify otherwise, it would be highly optimistic to assume a market penetration rate of more than 0.1% to 0.5% of the potential market.