This article is an excerpt from the Shortform book guide to "Business Model Generation" by Alexander Osterwalder and Yves Pigneur. Shortform has the world's best summaries and analyses of books you should be reading.
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Why is it important to define the customer groups your business intends to target? What are the different types of customer groups?
It’s important to identify and validate your customer groups before you develop your business model. There are five main types of customer groups: 1) mass market, 2) niche market, 3) subdivided market, 4) diversified market, and 5) multi-sided market.
We’ll take a look at how to target each of these groups below.
Defining Your Customer Groups
Define the different groups of customers your business intends to target—Osterwalder and Pigneur refer to this element as “Customer Segments.” You may serve one group of customers or several groups of customers depending on the needs you intend to fulfill. The authors state that your customers represent different groups if you need to:
- Create different products and services to meet their needs
- Reach them through different channels of distribution
- Develop different types of relationships with them
- Adapt your pricing structures to accommodate their needs
Once you’ve categorized your customers into distinct groups based on their needs or the way they interact with you, you can target these groups by designing your business model around their specific customer needs.
Osterwalder and Pigneur argue that you need to approach each of your customer groups in specific ways when planning your business model. They provide the following examples of different types of customer groups:
Mass Market
For Mass Markets, the focus is on one large customer base with similar needs. Therefore, it isn’t necessary to distinguish between different customer groups when planning each of the other elements in your business model. For example, Colgate doesn’t need to differentiate its customers since toothpaste is an essential, widely-used personal care product. Therefore, Colgate can align all of its business model elements towards appealing to and engaging as many people as possible.
(Shortform note: Two popular techniques used by mass marketers include the shotgun approach, which attempts to reach a large audience through the use of mass media (television, radio, and so on), and guerilla marketing, which relies upon unconventional tactics to surprise an audience.)
Niche Market
For Niche Markets, business models need to cater to specific customer groups and tailor each of the other elements to effectively target these specialized needs. For example, Lush targets customers who care about vegetarian products (no animal testing) and eco-friendly practices. Therefore, they align all of their business model elements to ensure the business focuses on environmentally friendly methods.
(Shortform note: Products once catered towards niche markets are becoming more mainstream. This is particularly relevant in the healthcare industry due to increased levels of awareness regarding personal wellbeing and environmental sustainability.)
Subdivided Market
For Subdivided Markets, business models offer slightly different products and services to accommodate the needs of each of their customers. The way that they position each different product and service defines how they approach each of the elements. For example, an estate agent’s customers all want to buy or rent property. The estate agent can segment these customers into groups based on their income and on whether they wish to buy or rent. The higher the customer is willing to pay, the more emphasis the estate agent may have to put on developing customer relationships. This in turn affects the overall costs involved in targeting individual customer groups.
(Shortform note: There are four ways to approach segmentation: demographic, geographic, psychographic, and behavioral. Each way offers its own unique purpose—you’ll need to consider which way(s) will help you to meet your specific goals. For example, there may be little value in segmenting customers according to their geographic location if you sell and distribute your products and services solely through online channels.)
Diversified Market
Businesses that cater to two or more unrelated customer groups with different needs, have to base their business models around distinct products and services. All of the elements need to accommodate these distinct products and services. For example, Johnson & Johnson provides healthcare products and services to consumers. However, they also provide medical devices and equipment for hospitals. Johnson & Johnson has to target both of these customer groups separately to effectively cater to them.
(Shortform note: Diversification may seem like a promising way to increase the value you offer and create revenue. However, many companies have tried and failed to diversify. For example, did you know that Coca-Cola began a wine business in 1977? To increase your chances of success, experts agree that it’s important to have a strategy in place to manage how you approach your diversification decision-making process.)
Multi-Sided Market
Businesses that serve interdependent customer groups need to create products and services of equal value for each customer group. For the business model to function, each element needs to accommodate the full range of products and services on offer to both parties. For example, online marketplaces need to accommodate both buyers and sellers to operate efficiently—they can’t serve one group without the other group’s active participation.
(Shortform note: A multi-sided market increases in value the more people use it. The term for this is “network effect.” Network effects can be both direct and indirect. Direct network effects are when the value of the service goes up in proportion to how many users it has. For example, for a marketplace, more suppliers create more buyers, which leads to more suppliers, and so on. Indirect network effects come from the addition of new user groups. For example, for a marketplace, the addition of Paypal to facilitate transactions adds more value for both buyers and sellers.)
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- The nine elements that make up any successful business model
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