It is so easy to make the mistake of not knowing who your customers are, but just as easy to over segment your customers. A friend of mine is building an iPhone app to help people keep track of their shopping lists and allow them to order groceries to be delivered to anywhere in the world. He formed a startup with a few of his friends and they are currently hacking away. I dropped by their place recently to see how things were going, and the conversation we had revealed something interesting:
Me: 'So how is everything going with the app?'
My friend: 'Good, good. Almost done with version 1. Might raise a bit more funding.'
Me: 'Nice. So, help me understand, who are your customers?'
My friend: 'Well, anybody who goes shopping for food I guess.'
Me: 'So my grandma? My little sister who is in college?'
My friend: 'Ummm. Well, who ever will pay. Maybe your mom, maybe Shaws will buy us, maybe both. Take it as it comes man. It's startup world. '
I could tell right away that my buddy had made the classic mistake that so many startups make everyday. He did not dedicate much time to figuring out what kind of customers they plan to serve. Specifically, the size of their customers, the problems their customers face and the features that will help them with those problems. All of these factors will vary dramatically between customer segments, which is why it's important to choose one segment and go after it.
I love to refer to Mark Suster and the way he uses elephants, rabbits, and dogs in an exercise to visualize your customer without overdoing the research.
Elephants - Will Push You Around
Elephants are the Microsofts, the Googles, the Apples which will pay you millions of dollars for your product. It's the dream to land one of these companies as a customer when you're a startup. If you kill one elephant they can feed you for a very long time.
In the case of my buddy, the elephant customer is Shaws Supermarkets. He dreams of Shaws knocking on his door sometime with fistfuls of cash. In the case of Mark Suster's early startup, they were obsessed with landing Merrill Lynch, Dell and Cisco as their customers. Here is what happened once they finally landed two of those customers:
I watched the first two of these customers consume significant portions of our internal programming resources. Elephant hunting does work for some companies. Some products are designed for large organizations from day 1. But I believe that if you go down this road you will struggle to simultaneously serve the SMB market. The needs are too different, as are the sales channels and marketing messages. If you want to hunt elephants, optimize your tools for just that.
Rabbits - Need Volume
Rabbits are the other extreme example that Suster brings up in his article. These are the price conscious consumers who wont pay you much for your product. There are tons of cheapos out there, they seems to be easy to find and catch. Yet you need a seriously huge volume of them to make any profit.
Rabbit hunting is the equivalent of having a low-end, cheap version of your product that you sell at a deep discount, thinking you'll make up for it in volume. In my buddy's case it's the idea that he'll build a huge base of free users and then try to convert a small share of those users to a low monthly fee everytime they go shopping. Volume is key if you're hunting rabbits:
Sometimes it is acceptable for companies to focus on low-level entry customers ' Rabbits. Obviously, if you're going to build a massively scaled business like Twitter, Facebook or Zynga you're going for huge volumes and the small transaction value model can work. I'm told that this model has worked well for Zoho in the small business sector. But unless you're a very large volume business and focused on transactions, rabbits are deceptive.
Deer - The Best Size To Hunt
Deer are in the middle between the elephants and rabbits. They're not so big that they can make demands that steer you away from your company strategy, but they're big enough that you don't need to catch millions to make some money. You can catch a deer and if their demands are too high you can let them go and find another customer of the same size that has less demands. They're the perfect size to hunt:
When you're a start-up, it is far easier to cut your teeth on companies that are easy to serve, not as demanding yet can afford to pay you fair prices for your product. If their demands are too high you can easily move on to the next customer. They allow you to stay focused on your defined company strategy without having to compromise.
Pick One Size and Go After It
My buddy wanted to go for all three. He wanted Shaws (elephant) as a customer, he wanted my mom (deer) as a customer, and my little sister (rabbit) as a customer. The problem with this line of thinking is that you can't have everyone as your customer. You've got to pick one type and go after it. Remember to narrow down who your customer is before starting to implement the product. Do so by asking the following questions:
Who is the customer?
Figure out the characteristics of your customer. Do you want to go after an elephant? A deer? Dig deeper than the size of the animal. Get as specific as possible; Neil Davidson does a great job of answering this question:
It's not 'everybody'. 'It's not 'all 30 year old geeks'. It's Jess. She's thirty years old and works in the IT department of a bank. She lives with three cats. She hates ice cream. Or whatever. Make your customer concrete. Give her life.
Why will your customer pay you for what you're selling?
What is it about the size and type of customer you're hunting that would make them knock on your door with fistfuls of cash? What problem are you solving for them? How did they accomplish this problem before? How will you change that with your product?