The Right Segment?

Four simple tests to pick the right customer segment for your products.

TL;dr;

One. Will this segment grow 10x?

Two. Will our product help customers achieve a goal or milestone?

Three. How do we find the right customer?

Four. Are we a nice to have or an essential in our customer lives?

As makers and builders we build first and find customers for what we have built, later.

What if we picked a customer segment first? And build later?

Is there such a thing as the right customer segment? A preferred segment that can help us reach profitability, or product market fit, or both, faster?

Here are four simple tests that can help founder teams filter for better segments faster.

One. Segment growth.

I have built products twice for banks and insurance holding companies. Pre-2008 (the Great Financial crisis), 9 of my customers got acquired or merged. In the market where we worked, 28 commercial banks were licensed to operate. 9 banking clients out of 28 represented the single largest share by any vendor in the risk tech space. As our clients merged, we went from a 30% market share to zero within 3 years.

A few years later the same thing happened with insurance holding companies. Mergers wiped out a very profitable consulting practice focused on valuing illiquid securities for insurance companies. This time our share was much smaller but it hurt just as much as the banks in 2008.

You can achieve hypergrowth by accelerating product adoption curve, simplifying onboarding process or by using purchase incentives. But a selected customer segment can also help a founder by growing 10x over your planning horizon.

Ask yourself a simple question. Will demand or growth within or from this segment hit 10x in the next 10 years? If the answer is yes, move to the next question. If the answer is no, re-evaluate.

I am often asked if this filter is as applicable to non-venture funded, bootstrapped businesses?

The filter is not about revenues or valuations growing 10x. It is about demand growing 10x because the customer segment is growing.

For an engagement last year we looked at segment growing at a tepid 10% per decade. Not really front page news. Then we asked ourselves a different question. Is there any sub segment here that is likely to grow 10x? A niche sub-segment was growing at a much faster clip.

If you don’t see growth within your first option, change your focus and lens and look again. Ask yourself a different question. If this isn’t growing, what will?

Growing demand serviced profitably with positive net margins is good for any business. Venture funded or not.

A rising tide lifts all boats.

Two. Outcomes, goals, objectives.

Will our product help achieve a clear outcome, goal or objective for our customers? Is what we built a nice to have or as essential as breathing?

Helping customers achieve goals, objectives and milestones on a regular and periodic basis helps improve retention and reduce churn. It also increases life time value (LTV) for a customer. Outcomes also help quantify value creation for customers and define a baseline price for access and usage. All important inputs to getting pricing models right.

Before you can grow exponentially, you need to build a foundation of consistent, steady growth. A clear link to outcomes desired by customers helps you build that foundation.

Our risk tech product helped customers meet quarterly regulatory reporting deadlines. Our computational finance training platform helped customers build models they needed to answer questions at work. A tech product development course I teach at a local school is popular because after the course students do well in product management interviews with local tech startups.

Outcomes can be linked to personal growth, increasing income, avoiding penalties, opening doors, finding opportunities, brighter futures or relieving pain.

Three. How do we find and filter customers?

Do you know what your customers look like? Can you find and reach them? When you do, will they speak to you? If they do speak to you, what will you say to them?

Sometimes finding customers isn’t the challenge. It is filtering them.

In a much smaller niche training business we run years after the risk tech business was sold we have a simple rule.

Given the cost of training we deliver, find customers who understand value of our training. If value isn’t established, pricing and delivery will not work.

High value training is a collaborative effort. We work closely with learning and development teams to curate content. The curation team includes representation from business, learning teams and trainers. Training that receives great reviews is always curated and designed for a specific audience. The audience knows what it wants. The learning team focuses on delivering what the audience wants. The trainer works with both to craft a memorable experience.

Why? Delivery that results in “wow” reviews is always designed. It is never an accident. Great reviews lead to customer retention and repeat business. But great reviews are not possible without crafted training. Crafted training is a collaborative effort that requires everyone to do their homework.

Our first customer filter is a simple one. How specific is the training requirement? Our second? How much time will we spend with the business to customize delivery? Our third? Does the client learning team know what they are doing? Our fourth? How homogenous are the learning needs of the audience? They can come from different backgrounds but they must desire the same experience. Our fifth is the most crucial. What is the intent? Is it really training, or anything but training?

An all-expenses paid corporate junket requires a different design than a Vulcan mind melds for decoding exotic regulatory compliance reporting.

Did you notice pricing isn’t within the five filters? If we get the first five filters right, we get the price we ask for. If one of the filter fails, we know neither pricing, nor delivery will work for this relationship.

Most of our training relationships have been in place for over a decade. Consistent, repeat business. They know what we do, we know what they want.

Remember bankers looking for training is a better descriptor than everyone looking for training. But all banks and all bankers are not alike. All training is not alike. When given a choice between competencies that everyone has versus competencies that very few have, pick the very few. They price and convert better.

Four. What is our role in customer lives?

I have spoken about this earlier. Here is a quick summary. Will customers use our product on a daily basis? Or once a month, quarter or year? Will they use it once and discard it? What will make them come back to us again?

Regulatory reporting business is a repeat business. The repetition frequency is often monthly or quarterly. Compare this with a treasury system that does hundreds of deals every day. Repetition frequency is every few minutes, every day.

Which one is better? Which customer is likely to stay with you longer? Which one is a nice to have? Which one is as essential as breathing air?

Compare both to training. Training is a nice to have. Unless its linked to regulatory compliance. Then it becomes essential.

Essentials are better than nice to have. Where does higher LTV comes from? It comes from repeat purchases and retention. Essentials rather than nice to haves.

Four rules. Why bother?

We don’t get infinite shots as founders. Every business that we build, hit or miss, takes something from us. There is only so much one can give in a life time.

If we don’t have infinite shots, make the ones we do take, count.

When picking target customer segments ask yourself four simple questions.

One. Will this segment grow 10x?

Two. Will our product help achieve a goal, objective or milestone?

Three. How will we find and filter for the right customer?

Four. Will we be a nice to have or an essential in our customer lives?

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