Defining your Customer Segments correctly

If you do not correctly define your customer segments and users then the rest of your analysis on what problems they have and how to reach out i.e. "market to" these customers becomes flawed.

How startups usually define customer segments

Let's say you are building a SaaS product targetting businesses i.e. the enterprise market. The initial instinct of startups is to define customer segments as follows:

  1. Startups
  2. Small Business
  3. Large Business (Fortune 500)

The issue with this approach is that you are unable to really visualize who actually your customer is.

You will also incorrectly believe that if Angel List has upwards of 300K startups listed than that's your real TAM (Total Available Market) for the first customer segment.

How startups should actually define customer segments

The correct way would be to think about how customers will benefit from your product or solution. There are different benefits that different customers would be interested in. Some business would be interested in having "Enhanced visibility" in their operations, some would be interested in "Reduced costs" of operation and others maybe interested in "Increased revenue" by being able to give better service to their customers because of improved operations. Note that it is a SaaS product which solves problems and addresses pain points related to operational challenges of businesses but the end benefit that a business and the SaaS startups's customer seeks is different for different segments.

So a startup should define their customer segments as follows:

  1. Seeking enhanced visibility in operations
  2. Want to reduce costs of operations
  3. Want increase in revenue per customer

Yes, each of these customer segments can then be further divided into sub-customer segments based on different applicable market channels. E.g. some customer segments can be targeted by writing helpful blog posts and others you need to reach out them via LinkedIn or email and then meet in person.