Skip to 0 minutes and 7 secondsSo you think you have a great business idea? But how do you know which customers will like it and why they like it? To get an overview of your potential customers and their needs, you need to divide your market into identifiable market segments. This is also called segmentation. Segmentation is important because not all customers will react in a similar way to your value offer. Therefore, in this video, I will elaborate on why it is important for any startup to think about segmentation as the first necessary step in identifying a target market for your product or service. Those are a lot of words. So let me give you an example. Do you see any differences in use?

Skip to 0 minutes and 51 secondsWhile each user is indeed using a drilling equipment, both vary in the context, purpose, and way of using the equipment. The domestic user may require a lower need for performance for the job and is using a drilling machine likely less often than the construction worker, who has probably a higher demand for performance and usage intensity. Therefore, both users are likely to respond differently to a value proposition of drilling equipment. So how can you as an entrepreneur find out about differences in customer needs? There are four basic questions to be asked where, when, and how, and why do customers want to use products or services? Where refers to the place where customers want to use the product or service.

Skip to 1 minute and 43 secondsTake, for example, the construction worker who uses the equipment on a construction site and this, in a specific context. When indicates the occasion of use and frequency. The domestic user may need to drill only a few times a year whereas the construction worker likely multiple times a day. How indicates the way users use the equipment. Given the level of experience and frequency of use, the domestic user may find simplicity of use more important than the construction worker. Answering this question is important to identify the specific user requirements which are in turn important for product or service design. Why is probably the most important question to ask, because here we can reveal the true motives behind the needs.

Skip to 2 minutes and 35 secondsThe domestic user, for instance, just wants to drill a hole in the wall and insert a screw, whereas the construction worker, if asked, tells us that he needs to drill multiple holes with different dimensions within a specific amount of time. So why disclose the true purpose of use? And a search goes a lot further than identifying customer needs only. Finding answers to these questions is important for entrepreneurs because they are very revealing in understanding how it is that customer needs vary. Once identified, we can start to find similarities of needs that can be grouped into a potential market segment of customers who are then likely to respond in a similar way to your value proposition.

Skip to 3 minutes and 24 secondsSo in order to establish a clear picture of your potential market segment, you first need to ask where, when, how, and why potential target customers want to use your product or service. Once market segments are identified, you will have done the groundwork for selecting a suitable target market.

How to structure observations of customer behavior

In this video we introduce a value-in-use perspective to better understand what customers need.

Shift of focus to context and practices

Value-in-use is about what customers truly value when using your product or service. Entrepreneurs may benefit from this way of thinking about customer value because it shifts the focus to context and practices of use rather than to product or service attributes as in traditional marketing approaches. Developing products/services based on a thorough understanding of value-in-use likely yields better market success and decisions since they are better aligned with the true needs and practical problems of potential customers.

Mapping potential market segments

However, one must be aware of the fact that customer value or experience is an elusive term and can be very fluid and dynamic (Helkulla, Kelleher & Pihlström, 2012). This might complicate the capture of value-in-use for certain groups of customers and the exploration of viable potential customer segments. In this pursuit, it is therefore important to ask four basic questions: where, how, when, and why customers use certain technologies/products/services. These questions form the basis for collecting the data necessary to map potential market segments. Ideally entrepreneurs structure their observations of customer behavior along these four questions, for instance using the table below.

  Where How When Why
Customer 1        
Customer 2        
Customer 3        
Customer 4        

By repeating this exercise various times among different potential customers, entrepreneurs are able to identify similarities and differences in answers which then would lead to the identification of different segments in their market.

References:

Helkkula, A., Kelleher, C., & Pihlström, M. (2012). Characterizing value as an experience: implications for service researchers and managers. Journal of Service Research, 15(1), 59-75.

Vargo, S. L., & Lusch, R. F. (2004). Evolving to a new dominant logic for marketing. Journal of Marketing, 68(1), 1-17.

Woodruff, R. B. (1997). Customer value: the next source for competitive advantage. Journal of the Academy of Marketing Science, 25(2), 139.

Share this video:

This video is from the free online course:

Technology Entrepreneurship: How to Start a New Venture

University of Twente

Get a taste of this course

Find out what this course is like by previewing some of the course steps before you join: