The TBD customer segmentation model
You must segment to differentiate
As covered in the previous post, differentiation only makes sense in the context of a given customer, the progress they desire, and their alternatives for achieving that progress. This means that strong product differentiation depends on good segmentation.
Product strategy generally inherits strategic positioning from the overarching business strategy, rather than generating it. (The exception is when you are truly doing a 0-1 product, such as in a disruptive startup or a Horizon 3 effort in an existing business.) This strategic positioning broadly determines where your product will play in the market.
Based on that positioning, you need to zoom in and segment customers much more specifically in order to make good differentiation choices. Essentially, the broad ‘where’ question really becomes a ‘who’ question. Said differently, the heart of the "where to play" choice in product strategy is customer segmentation.
What is a "customer segment," anyway?
My favorite definition of a customer segment comes from my friend Alan Albert: a group of customers who share the same perception of value in a given context.
To create such a segment, you must deeply understand the needs, values, and motives of your target customer. This is how you know exactly which customer needs the product must meet. This clarity is what unlocks your ability to make powerful ABC differentiation choices as discussed in the previous post.
How do you make a customer segmentation framework?
There are many ways you can segment your customers: demographics, firmographics, psychographics, and behaviors are the traditional approaches. I think doing something like a needs-, worldview-, or a value-based segmentation approach is the strongest choice here.
Having a distinctive view of the market creates enormous value for your company. What unlocks this value is your creativity about the dimensions on which you'll segment customers. If you’re making a 2x2, what are the axes? Go beyond generic segmentation approaches. You want to create your own segmentation model that is built for your specific product and context, rather than using the same generic segmentation approaches everyone else is using.
Customer segmentation is ultimately choosing who the product is for, and just as importantly, NOT for. This is about deciding who your product will serve and who it will shun. Your goal is to list of three types of customers. My model for this is “TBD”:
Targets: these are the top customer segments you are explicitly designing the product for. This is who the product is really for.
Beneficiaries: these are customers who may benefit, i.e. adjacent segments, but you aren't explicitly designing for these customers. If they want to buy/use the product and get benefit from it, that's welcome. You may deliberately expand the product into these adjacent segments in the future.
Distractions: just as important is saying who the product is NOT for, i.e. non-targets. If these customers show up, we'd like to redirect them to alternatives rather than confusing our product. Better to have a focused, opinionated product that turns away some customers than a frankenproduct that doesn't really deliver for anyone. This is especially critical for b2b enterprise products, which face constant pressure to add one-off, customer-specific features.
Aim to make a prioritized list of customer segments, with clarity on non-targets. You should have 1-3 ranked Targets, a short list of Beneficiaries, and a longer list of Distractions.