Monday, May 17, 2010

What is a Customer?

1st in a series on Customer Segmentation

Recently, I've been helping a couple of clients to profile and segment their target customers.  This is fundamental to developing a successful business development strategy.  It's also a core component of developing product/market fit for a startup.

In spite of the many methodologies developed over the years, customer segmentation still has an element of art about it.  It involves the use of inductive reasoning to infer from customer interviews and various other data sources what the meaningful differentiators are between customer segments.  What complicates this is that customer segmentation can be done on a wide variety of dimensions:  psychographic, demographic, geographic, socio-economic, etc.  But more on this in a later post.

The first step in performing customer segmentation is developing one or more customer profiles which describes who the customer is, what distinguishes that customer from a different type, and other information relevant to connecting what a company has to offer with what the customer wants to achieve.  I will talk more about constructing customer profiles starting with next week's post.

However, in helping clients - particularly startups - construct customer profiles, I often need to first clear up a subtle but critical misunderstanding about what constitutes a customer.

Common but erroneous definition of a customer:  Someone who wants your product.

Correct definition of a customer:  Someone who wants your product and can pay for it.

Let's take a look at both elements.

Someone Who Wants Your Product...
Want is something the prospective customer controls.  But with respect to buying behavior, want come in three flavors with three likely outcomes:
  • Acute pain - This can either by negative in terms of a problem that must be fixed or positive in terms of an opportunity that is being thwarted.  The customer is consciously aware of this pain and is willing to pay to relieve it.  The likelihood of a customer taking action is high.
  • Latent pain - This is tougher.  This can either again be negative or positive, but in this case, the customer may not be aware that they have a problem.  For example, the customer may be losing money due to duplication of processes in different departments but unaware of it because its not being tracked, or some other reason.  This is often the basis of enterprise software sales.  In this case, the role of the seller becomes converting this latent pain into acute pain by making the customer aware of it in some meaningful context.  This is the essence of salesmanship.  The likelihood of action is low until the latent pain is converted into acute pain.
  • Want - This is something the customer might like to have but the presence or absence of this particular feature is unlikely to sway the buying decision nor is the customer likely to pay much for it.  As an illustration, many years ago, I was negotiating to buy a car and the salesperson tried to convince me that the pinstripes on the car were a $300 feature.  So I told him to take it off, knowing full well this wasn't going to happen.  In the end, the pinstripes stayed on the car while the $300 got knocked off the invoice.  The likelihood of action fulfilling a want is slim.
...and Can Pay For It
While a desire for your product is a necessary condition for a customer, it is by itself insufficient.  For example, I would love to buy a Tesla Roadster, but have no intention of paying $100,000+ for it.  But if someone in Tesla's marketing department were putting together a target customer profile based strictly on a demographic profile, I might seem to be a good fit.  (I'll let you speculate as to what that profile might look like.)  Should Tesla count me as a target customer?  Only if they want to waste a lot of money trying to reach me.

So, as my teenage son would say, "duh, isn't it obvious that a customer should be someone who wants and can pay for your product?"  Yet I see regular, ample evidence that this point is not understood.  For example, take a look at the market opportunity section in five startup business plans.  At least three of them will have an estimate of the Total Available Market (TAM) that reads something like this:  "There are 150 million smart phone users in the United States that download at least one application per year.  This means given a download price of $24.99, the TAM for our virtual nose-picker app is $3.75 billion!" (Incidentally, if you're having difficulties seeing the attribution errors here, see this post.)

I also routinely see companies waste sales and marketing dollars trying to reach prospects who might want but don't have money to buy their products.  It's amazing how few salespeople actually ask their prospective customers whether they have money in the budget for the product solution they are offering until they are well into the sales process.

Perhaps a rewording is in order.  Customer:  Someone who can pay for your product and wants it.

Next week:  Developing a Customer Profile

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