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1. Customer Segments
The Customer Segments Building Block defines the different groups of people or
organizations an enterprise aims to reach and serve.
Customers comprise the heart of any business model. Without (profitable) customers, no
company can survive for long. In order to better satisfy customers, a company may group them
into distinct segments with common needs, common behaviors, or other attributes. A business
model may define one or several large or small Customer Segments.
An organization must make a conscious decision about which segments to serve and which
segments to ignore.
Once this decision is made, a business model can be carefully designed around a strong
understanding of specific customer needs.
Customer groups represent separate segments if:
• Their needs require and justify a distinct offer
• They are reached through different Distribution Channels
• They require different types of relationships
• They have substantially different profitabilities
• They are willing to pay for different aspects of the offer
There are different types of Customer Segments. Here are some examples:
Mass market
Business models focused on mass markets don’t distinguish between different Customer
Segments.
The Value Propositions, Distribution Channels, and Customer Relationships all focus on one
large group
of customers with broadly similar needs and problems.
This type of business model is often found in the consumer electronics sector.
Niche market
Business models targeting niche markets cater to specific, specialized Customer Segments. The
Value
Propositions, Distribution Channels, and Customer Relationships are all tailored to the specific
requirements of a niche market. Such business models are often found in supplier-buyer
relationships.
For example, many car part manufacturers depend heavily on purchases from major
automobile manufacturers.
Segmented
Some business models distinguish between market segments with slightly different needs and
problems. The retail arm of a bank like Credit Suisse, for example, may distinguish between a
large group of customers, each possessing assets of up to U.S. $100,000, and a smaller group of
affluent clients, each of whose net worth exceeds U.S. $500,000. Both segments have similar
but varying needs and problems. This has implications for the other building blocks of Credit
Suisse’s business model, such as the Value Proposition, Distribution Channels, Customer
Relationships, and Revenue streams. Consider Micro Precision Systems, which specializes in
providing outsourced micromechanical design and manufacturing solutions. It serves three
different Customer Segments—the watch industry, the medical industry, and the industrial
automation sector—and offers each slightly different Value Propositions.
Diversified
An organization with a diversified customer business model serves two unrelated Customer
Segments with very different needs and problems. For example, in 2006 Amazon.com decided
to diversify its retail business by selling “cloud computing” services: online storage space and
on-demand server usage. Thus it started catering to a totally different Customer Segment—
Web companies—with a totally different Value Proposition. The strategic rationale behind this
diversification can be found in Amazon.com’s powerful IT infrastructure, which can be shared
by its retail sales operations and the new cloud computing service unit.
Multi-sided platforms (or multi-sided markets)
Some organizations serve two or more interdependent Customer Segments. A credit card
company, for example, needs a large base of credit card holders and a large base of merchants
who accept those credit cards. Similarly, an enterprise offering a free newspaper needs a large
reader base to attract advertisers. On the other hand, it also needs advertisers to finance
production and distribution. Both segments are required to make the business model work.
2. Value Propositions
The Value Propositions Building Block describes the bundle of products and
services that create value for a specific Customer Segment
What value do we deliver to the customer? Which one of our customer’s problems are we
helping to solve? Which customer needs are we satisfying? What bundles of products and
services are we offering to each Customer Segment?
The Value Proposition is the reason why customers turn to one company over another. It solves
a customer problem or satisfies a customer need. Each Value Proposition consists of a selected
bundle of products and/or services that caters to the requirements of a specific Customer
Segment. In this sense, the Value Proposition is an aggregation, or bundle, of benefits that a
company offers customers. Some Value Propositions may be innovative and represent a new or
disruptive offer. Others may be similar to existing market offers, but with added features and
attributes.
A Value Proposition creates value for a Customer Segment through a distinct mix of elements catering to
that segment’s needs. Values may be quantitative (e.g. price, speed of service) or qualitative (e.g.
design, customer experience). Elements from the following non-exhaustive list can contribute to
customer value creation.
Newness
Some Value Propositions satisfy an entirely new set of needs that customers previously didn’t perceive
because there was no similar offering. This is often, but not always, technology related. Cell phones, for
instance, created a whole new industry around mobile telecommunication. On the other hand, products
such as ethical investment funds have little to do with new technology.
Performance
Improving product or service performance has traditionally been a common way to create value. The PC
sector has traditionally relied on this factor by bringing more powerful machines to market. But
improved performance has its limits. In recent years, for example, faster PCs, more disk storage space,
and better graphics have failed to produce corresponding growth in customer demand.
Customization
Tailoring products and services to the specific needs of individual customers or Customer Segments
creates value. In recent years, the concepts of mass customization and customer co-creation have
gained importance. This approach allows for customized products and services, while still taking
advantage of economies of scale.
“Getting the job done”
Value can be created simply by helping a customer get certain jobs done. Rolls-Royce understands this
very well: its airline customers rely entirely on RollsRoyce to manufacture and service their jet engines.
This arrangement allows customers to focus on running their airlines. In return, the airlines pay Rolls-
Royce a fee for every hour an engine runs.
Design
Design is an important but difficult element to measure. A product may stand out because of superior
design. In the fashion and consumer electronics industries, design can be a particularly important part of
the Value Proposition.
Brand/status
Customers may find value in the simple act of using and displaying a specific brand. Wearing a Rolex
watch signifies wealth, for example. On the other end of the spectrum, skateboarders may wear the
latest “underground” brands to show that they are “in.”
Price
Offering similar value at a lower price is a common way to satisfy the needs of price-sensitive Customer
Segments. But low-price Value Propositions have important implications for the rest of a business
model. No frills airlines, such as Southwest, easyJet, and Ryanair have designed entire business models
specifically to enable low cost air travel. Another example of a price-based Value Proposition can be
seen in the Nano, a new car designed and manufactured by the Indian conglomerate Tata. Its
surprisingly low price makes the automobile affordable to a whole new segment of the Indian
population. Increasingly, free offers are starting to permeate various industries. Free offers range from
free newspapers to free e-mail, free mobile phone services, and more.
Cost reduction
Helping customers reduce costs is an important way to create value. Salesforce.com, for example, sells a
hosted Customer Relationship management (CRM) application. This relieves buyers from the expense
and trouble of having to buy, install, and manage CRM software themselves.
Risk reduction
Customers value reducing the risks they incur when purchasing products or services. For a used car
buyer, a one-year service guarantee reduces the risk of post-purchase breakdowns and repairs. A
service-level guarantee partially reduces the risk undertaken by a purchaser of outsourced IT services.
Accessibility
Making products and services available to customers who previously lacked access to them is another
way to create value. This can result from business model innovation, new technologies, or a
combination of both. NetJets, for instance, popularized the concept of fractional private jet ownership.
Using an innovative business model, NetJets offers individuals and corporations access to private jets, a
service previously unaffordable to most customers. Mutual funds provide another example of value
creation through increased accessibility. This innovative financial product made it possible even for
those with modest wealth to build diversified investment portfolios.
Convenience/usability
Making things more convenient or easier to use can create substantial value. With iPod and iTunes,
Apple offered customers unprecedented convenience searching, buying, downloading, and listening to
digital music. It now dominates the market.
3. Channels
