You have finished the first version of your product. Congratulations! Now it’s time to start selling to customers and generating all important revenue. At this stage you are probably eager for any and all customers that are interested in your product.
Before you start selling, it is important to understand what kinds of customers you want to pursue. While any paying customer can be considered a good customer, you don’t yet have the resources to sell everyone on everything that you do. Focus is critical and to focus, you need to segment your potential customers.
A simple way to segment your customers is as follows:
In this simplistic customer segmentation, we have three types of customers: Big, Medium and Small. Note that while the potential revenue for a Big customer is much higher than Small customers, there are many more Small customers than Big customers. The labels Big, Medium and Small will have different meaning depending on your business. Big might refer to the size of the company (large enterprise) or complexity of the customer needs (custom solutions). The important factor in this segmentation is the inverse relationship between potential customer value and number of potential customers.
While you might be able to pursue Small, Medium or Big customers, you are probably not capable of pursuing all at the same time. The sales strategy for each segment will be different:
- Big Customers require large amounts of time in sales and account management by dedicated salespeople. The sales cycle (total time to close the sale) may be measured in quarters.
- Small Customers require self service products and strong marketing. Since revenue per customer is low you cannot afford to have a salesperson talk to all of them. So, you need to rely on customers finding you and signing up entirely on their own.
- Medium Customers require a combination of an outbound sales force and strong marketing to reach them cost effectively.
Your target customer segment will dictate your sales strategy and hence your business strategy for the near term. It is important that you choose your segment wisely since it is easy to fall into some common traps:
- The Over-Reach: You focus on Fortune 500 customers because you want brand name reference customers for your company, but you only have 6-9 months of runway. That’s not long enough to both complete the sale to companies of that size and raise additional funding, since the sales cycle for large enterprises can be 12-18 months.
- Going Too Big: You focus on consumers but you have a complex product that they can’t understand without someone explaining it to them. You spend a lot on marketing in hopes of reaching tens of millions of consumers but can’t convert any of them, burning through all your capital.
- Too Much TLC: You focus on a small customer segment with the goal of providing perfect customer service and spend a lot of time with each customer. Unfortunately, the segment isn’t large enough to support your business model and your deep customer service prevents you from growing your customer base fast enough.
Remember that the example customer segmentation here is simplistic and you should decide on the appropriate segmentation for your potential customers. Whatever you choose, make sure the segmentation reflects the market data you have available and not just your gut instinct. There is nothing worse than choosing to pursue Big customers, only to find out they don’t exist.
It may feel like you are giving up a big opportunity when you segment potential customers and only focus on some of them. That is only true in the short term, while your resources are limited. If you are successful with your first few customer segments, you can eventually grow to tackling all potential customers.
Great post — especially the part about common traps. I think “TLC for small customers” is the most common mistake that I see. Lots of startups seem to get stuck trying to do biz dev and hand-holding for accounts that might pay $20-$100/month.
Another great post. Man, you right great stuff:) This post reminds of a great article about being a deer hunter not an elephant hunter as a startup, even if ultimately you want to end up bagging elephants: http://www.bothsidesofthetable.com/2009/09/16/most-startups-should-be-deer-hunters/
Um, you write great stuff. Weird auto-correct:(