Reimagine Segmentation: Create Customer Rings

Customer rings

Customer segmentation is a powerful tool for businesses and entrepreneurs. 

Much like creating a business canvas, very few startups today skip doing a customer segmentation. When we surveyed more than 200 startups we found that more than 90% stated they had done customer segmentation. 

That’s good, right?

Sort of. Most customer segmentations do distinguish potential customer groups by identifying common characteristics or attributes within those groups. What is often missing is that these segmentations are rarely actionable. 

Some important action-oriented questions that is missed include: 

  • Does willingness-to-pay differ between groups? If so, how much?

  • How can our packaging or offer create different responses from our segments? 

  • What is the basis for different perceived quality between segments? 

Unfortunately, for many startups the framework and research supporting their segmentation is too broad and unfocused. 

Let’s take a look at how customer segmentation is traditionally done. 

 

A Breakdown Of Traditional Customer Segmentation

In traditional customer segmentation, companies create groups or clusters of their customers based on a selection of traits and descriptives to identify those groups of customers. 

Generally these segments are based on socio-demographics such as gender, geography and income. For more B2B companies, segments are created using high-level attributes such as company size, number of employees and number of locations. Helpful, but just scratching the surface. Some segmentations go further and identify psychographics such as behavior, needs, values, and preferences.

The ultimate goal for customer segmentation is to help the company to engage and sell their products more effectively and efficiently. When done right, effective segmentation is measurable by metrics such as: 

  • Sales velocity and conversion rates

  • Discount rates 

  • Customer inquiry and engagement rates 

  • Willingness-to-pay and price increases

While this basic framework for segmentation is a helpful starting point to get a general understanding of your customers, this is not enough.

What’s Wrong With The Old Way?

Too many times, companies in the early stages of their business do a broad assessment of their customer and then move on. When segmentations are not created with the intent of using them (for pricing, marketing, sales, etc.) they become useless.

These segments are usually too broad and descriptive. Segmentations should be designed to be actionable and prescriptive for a company’s go-to-market strategy. At the early stages of a company, specificity and focus is critical. Unfortunately, many customer segmentations exercises often fall short to help make these critical decisions.  

Being too broad can also be expensive. Why? Defining your customer segments with non-actionable generalities exhaust your time and resources while also giving you too many inconsistencies and inaccuracies. It is too common to hear companies that have created a customer segmentation, but when they go-to-market struggling to focus on a specific customer. 

Being too broad with your customer segmentation allows for too much leeway and causes a larger deviation from your actual customer. This unintended deviation costs your marketing and sales money as they throw good money trying to reach customers that are not within your actual segment or the segment your business should be targeting right now. 

Another missed opportunity in traditional customer segmentation is the focus on change and adjustment. Over time, companies inevitably change and develop. What sometimes is forgotten is that their customers change as well. 

Many times companies progress and not re-analyze their customer segments. As this occurs, companies begin to market their products towards new groups who don’t really care or even want what they offer. Only going through one round of customer segmentation can be detrimental which is why it is important to adapt and update segmentation over time.

Introduction to Customer Rings

While the initial segmentation steps are useful, pitfalls make it difficult to develop a go-to-market strategy that actually works. An alternative approach is to assess your segments as customer rings.  

Customer Rings Approach

Customer rings are micro-segments that look at customer segments in terms of layers. Customer rings start with traditional customer descriptives, but go further by identifying customer preferences, perceptions, value drivers, and for more advanced companies, willingness-to-pay.  

The customer rings approach consists of three main principles.

Your customer segments are layers

Customer rings are layers. Like a tree trunk, the core is the foundation your business is built on. The core circle are your loyalists. These are the initial customers who go beyond function and features, and believe in mission and inspiration. 

As you move further away from the core, these segments are likely to have different requirements, urgencies, product alternatives, and potentially more price sensitivity. 

The further you move towards the outermost ring, the closer you are to  the weakest and most vulnerable and sensitive rings. You can ‘protect’ these outer-rings by marketing your product to meet their needs.

Each ring layer are hyper-specific 

Each company is made up of not only 3 or 4 customer types, but a series of 10 or more customer groups. Customers today are expecting more customization and tailored experiences, making generalized groups less effective. 

Think of your customer rings in sub-segments and get hyper-specific. We advise our clients to take every segment that was originally researched and split each segment a further down into four additional separate rings. So if your company has 3 customer segments to start, then the goal is to break this down further so you have up to 12 customer rings. Ensure sufficient time is spent on customer research and behavior attributes. 

This can be great practice for your company to go deeper, and define your customers even more specifically. While the starting point may be an initial set of hypotheses, the end result of any set of customer rings must be research-driven.  

Each ring is actionable

Each progressive customer ring is a step. They are customers that not only must be targeted, but where products, packages, and pricing are designed to their needs and value. 

Each customer ring has their own value drivers, so you are building offers for each targeted ring. The prices you use do not only go from high to low, but different pricing models (e.g. subscriptions) can be used to align with that customer ring. 

Some founders may question whether the rings are “big enough” or may be missing potential opportunities. It is important to recognize that winning the earlier rings are hard enough. Studies find that a startup does not start to move into the growth stage until they have won 2% to 5% of their prospective target market. 

In our own experience with thousands of startups, we see that chasing opportunities creates lost focus, and less wins and validation for initial customer segment hypotheses. Hyper-focus, clear action items and accelerated wins is the winning combination. 

Benefits of Using A Customer Rings Approach

One of the key benefits of using the customer rings approach is that it is actionable. 

For example, companies that are actively going-to-market and acquiring customers, willingness-to-pay and price drivers must be a core dimension of any customer segment. 

In a study we conducted, we found that more than 90% of companies have created a customer segmentation, but less than one-third know their customer’s willingness to pay. 

That raises an vital question of how well we know the customers we want to attract and what offer makes the most sense to win them as customers. A key insight for any customer segmentation. 

By using our customer rings approach helps you understand not only to identify the customer, but begin to identify what drives value for that segment.

There are four primary goals for your customer rings that will create stronger customer segmentation. Customer rings are: 

  • Measurable and quantifiable;

  • Describe detailed shared attributes of your unique customer; 

  • Make it easier to target ring-specific customers; and 

  • Drive higher impact business outcomes (e.g. conversion, retention, and profitability).

Final Thoughts 

Your goal is to reach customers who find the most value in what you offer as effectively and efficiently as possible.  While traditional segmentation is a helpful first step, customer rings enhance the power of segmentation. 

Rings are designed to be tight and focused. If more granular rings are quickly acquired, then you can move to the next layer and craft the go-to-market accordingly. If you run into challenges making meaningful headway into a specific ring, then it should give you room to make necessary adjustments without the noise of different ring layers. 

Customer rings help you to embrace diversity and the uniqueness customers identify with. This  focus and targeted actions to drive positive results your company requires.

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Love Your Customers. Talk To Them.

What is pricing?

It’s a question we often ask when we are invited to speak or host a workshop. It’s not a trick question. And contrary to the responses we get, it’s not that complicated. 

Pricing is the pursuit of understanding people; your customers. These customers who will support your company, brand and product. The people who get the value you offer. That understanding is the foundation from where you will price your product or service. Unfortunately, many companies do not know who their customers are. They have surface level information about who they would like their customers to be, but do not know who they are.  

This is a lost opportunity, especially for companies still in their early stages. They might not realize it, but they’re trying to boil the ocean. This is expensive, time consuming, and for too many companies fatal.  By digging in and learning who your real customers are, you can help create empathy and connection in way that builds long-term value and identify growth opportunities many miss out.  

What is vital is the work to learn not just who they are, but to learning what they value early on in the relationship. This takes a conversation. Yet many companies we come across rarely if ever, talk to their customers. In more extreme cases, some companies have NEVER talked to their users. NEVER. 

The real struggle is not that customer insight is undervalued by these companies, but a struggle with what to ask; how to have the conversation. When we’re not sure what to ask and why, we’re left being reactive to what information we’re able to get and not zeroing in on insights pushing the relationship forward. 

For those still on the fence on whether it is worth the effort to dig in on customer insight research, here are three benefits that will help you reconsider. 

 

Price better 

If you have heard of value-based pricing, you will know that the basis of this pricing approach is to create prices based on the value – real or perceived – your customers get from your product or service. One popular examples of value-based pricing is Apple and the premium price they can charge due to the value they offer customers through their product’s technology and brand association. But it’s not just upmarket where value-based pricing works. More ‘value’ brands like Warby Parker have successfully used price as part of their growth strategy. Instead of going higher for their modern and cool eyewear brand, they went lower for their digital-first customers willing to buy glasses online. 

In both examples, what helps these companies price effectively is they are pricing for their customers. Despite their massive success, they still win the loyalty – and spend – by specific customer segments. In the case of Apple’s flagship product, the iPhone, they have held a largely second position in global smartphone market and often less than 20% of the market. In the case of Warby Parker, while well known, in the market of online eyeglasses, they are far from the market leader Zenni Opitical who hold a 50% market share. 

What these examples can teach us is that if we know who are customers are, what they value and why, we can make more informed pricing decisions that align with who those customers are. If we take a boil the ocean approach, it becomes increasingly difficult to gauge whether the value proposition or any element of value, is resonating with customers and the market. For many entrepreneurs, this noise causes them to turn to price – often through price decreases and discounts – when they did not have to otherwise. 

 

Target your market more effectively 

While the goal of many companies is to be product of choice for all customers, the reality is only a segment and often sub-segments of customers are going to value your product. More so early on in the life of your company. 

That means, rather than trying to create a general proposition for all customers, it can be more effective to target specific customer segments and in stages. To execute this type of go-to-market strategy, you have to know more than customer demographics and data offered by your competitors. You need know about your customers. 

Knowing your customers means you can not only identify them – demographics – but you understand where and how they derive value. You understand why they making seemingly irrational buying decisions. Why they seem to be willing to pass up offers to save money, save time, be happier if all they have to do is buy your product or use your service. By getting to this level of understanding will help you target your market more effectively and take a lot of the guesswork out of how your company is going to market. 

 

Improve customer engagement

We hear it all the time from companies with a loyal, if not die-hard followings, “Our users/customers get it.” This is not by chance.

Companies who know their customers can create channels to better engage with them. This can range from marketing communication to customer service. It is far more difficult if the base you are trying to service is identified as just ‘customer’. Customers expect more from companies they buy from, and with more personalized services and messaging, knowing your customer is even more important. 

There is also a more passive benefit improving customer engagement. The more you can better engage with your customers, the more you can learn ways to improve your product, your service, future opportunities is different markets.  Just like our customers who take cues from reliable sources they trust, the same can be true of the signals your market is sending to your company. The first line should be from customers you know and trust. 

 

Final thoughts

We often overestimate our understanding of our customers and this makes decisions across pricing, go-to-market and customer engagement sub-optimal. Many times we take cues from our competitors and conclude equivalence. Other times we make generalizations or assumptions about a group of customers and make conclusion from that.

Too often both loses out of the important fact is you need to take ownership of your customers which starts by knowing who they are and what makes them tick. By doing the work to research our customers, which includes actually talking with them, we can close the gap in the vital business decisions that need to be made each day. 

This is not easy, but the time and money saved and the new opportunities create will help this an investment worth making.  


 

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Paradox Of The Market Share Strategy

Entrepreneurs want to bring their solutions to the greatest number of customers and people possible. Commercially they want this scale to grow, capture efficiencies of scale, and ultimately achieve economic profit.

To achieve the original vision, many entrepreneurs embrace a market share strategy to establish a foothold in the market and scale. This strategy is designed to quickly acquire new customers and users; usually winning customers away from incumbents within the market.

To execute this strategy, entrepreneurs use price early and often. With few other tools to leverage, companies use lower prices, discounts and promotions to entice customers to either switch or at least try the product or service. Once the company either captures enough scale or wins sufficient market share, then the company will attempt to move upmarket through its offering and pricing.

The paradox is that making that transition from a volume to a value play is extremely difficult. The reality is very few companies successfully make that leap, and only after significant investment and time.

One of the objectives of capturing market share or outright leadership in a market is to own their pricing destiny. As former PayPal co-founder Peter Thiel explains in his book “From Zero To One”:

“Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices.”

None of this is to suggest that acquiring and growing market share should not be a strategic objective of a company. The purpose is to point out that companies pursuing market share give away the one thing they are trying to acquire via market share – greater influence on pricing.

If you do choose to implement this strategy, here are four considerations to help guide you and your company’s decision-making:

 

1. Market Share Strategy Is Common With Entrepreneurs and Startups. Differentiation is critical.

How does an entrepreneur inch closer to dominating market share? According to Thiel it is about dominating a small market rather than trying to penetrate a large established market. Put it another way, it is better for a company to be a big fish in a little pond, and make the pond bigger over time, rather than trying to eat up big fish in the ocean.

At the heart of this thinking, is that if you want to win market share, then do so where the pressures of competition are lower; where you can control you value proposition and pricing.

To make this assessment, entrepreneurs need to properly assess the market they are in and want to be in, and the customers they need to win. Unfortunately, many companies have not done this work.

For these companies, scale means competing in an out-sized market and capturing even a small percentage because in absolute terms it can be huge. So entrepreneurs will try to “buy” market share by selling at a low or lower price. While not exactly a price war, you’re one step closer.

The core assumptions and success factors are:

  • The company is aware of the actual willingness to pay of customers;
  • Customers understand and value the product on offer (and link to a monetary value;
  • The company can quickly achieve higher pricing benefits by executing on the unlocked value proposition via sales and marketing.

Truthfully these are large assumptions that even better companies struggle to achieve.

It is one way to gain traction without brand recognition and position the company for future growth. With the right execution of this strategy, but companies often find they’ve ignored the one thing that retains customers for the long-run: value.

 

2. Ruthlessly Manage Value

The market share strategy revolves around several objectives including establishing firm footing in a new market or pushing out existing competitors, gaining scale to drive efficiency, and establishing brand credibility for the future.

The hidden risk of this strategy is that firms create “anchor” prices, either through consistently low prices or frequent use of discounts or promotions.

Value can be diluted through aggressive, sometimes even blind, pricing strategies. Those initial low prices set customer expectations about what they should pay for your product, the value they receive, and how they perceive your brand.

The very best sales executives I have had an opportunity to work with shared the same advice when it comes to defending your value through price: “Never start a conversation with your customers about price. If you do, [customers] won’t hear anything else you have to say about your product’s value proposition.”

Defending value means understanding what that value is worth and patience. It is always easy to decrease price, but a long journey to win the value you deserve.

 

3. Effective Hedge: Customer Segmentation

Talk to a pricing consultant and you’ll find examples of companies embarking on this strategy and failing to translate any of the achieved scale into economic profit or value addition.

Customer segmentation can act as a vital hedge. Unfortunately few companies – particularly startups and entrepreneurs – apply it effectively.

One example is Blue Apron- a leading online meal kit provider. The company built a foothold in the meal kit market with aggressive prices, discounts and promotions. It is untold how much revenue ‘leakage’ Blue Apron is experiencing while implementing promotions and discounts to win customers to retain market share.

While Blue Apron did ultimately IPO, it continues to lose money and has since been displaced by incumbents (e.g. HelloFresh) as the market leader and is threaten by new competitors (e.g. Amazon) in its space.

Bed Bath and Beyond also tried to capture market share with low prices but has failed to convince consumers that the brand can provide more pricey luxury products. Many software as a service (SaaS) companies are using a “freemium” model and will likely face similar challenges. Even B2B companies offering products from workspaces to hardware start anchoring prices with discounts and other incentives. Companies who effectively segment their prospect customer base build corresponding packages and can create an effective “value blend” that drives sales.

 

4. Consequences Based Decision-Making

Seizing market share is only the first stage of this strategy. Figuring out what happens once you’ve established a foothold in the market is critical. Think in terms of consequences. What options are available after we make a certain decision? What options are available after that next step?

This approach is both resource intensive at the beginning and resource-intensive to maintain. This is particularly true in markets where customer switching costs are low.

Here are the questions you and your leadership team need to be asking:

  • How do we convert low-paying customers into high(er)-paying customers?
  • How can we defend price increases?
  • What about our value proposition justifies higher prices and how can we confirm that?
  • How will we respond if a competitor or new market entrant also adopts a market share strategy?
  • If we fail to convert customers to pay higher prices, how will that impact our growth prospects?

This approach should align with your company objectives and the value you offer.

 

Final Thoughts

The purpose of this discussion is not to dissuade you from using a market share strategy, but to encourage thoughtful, strategic objectives and planning to be prepared for what happens next.

There are opportunities with a market share strategy, but there is a very real risk of diluting hard-earned value before you have a chance to stake out your position in the market. As Blue Apron and other companies have seen, it’s more difficult and costly to move up the value chain than down. Taking the time to develop a thorough strategic plan for what happens after you seize market share can truly pay dividends in the future.

The market share strategy might be simple in theory but in practice, it can be very difficult to execute. The strategies that work in securing your market foothold (underselling your competitors, frequent discounts, etc.) actually make it more difficult to move up market. You may sell a lot of units as the low-cost option, but that perception may linger with customers long after you’ve decided to move up the value chain.

If you need help working through these issues, there are great pricing consulting and small business marketing consulting firms in Los Angeles that can help your company develop a foundation for future success.

 

Interested in learning more?
If you or your team is interested in having a hosted session on your pricing straetgy and monetization model, please contact us at:contact@helloadvisr.com 

Get our latest updates and insights by subscribing to our newsletter and following us on Facebook, Twitter and LinkedIn.