In the Business Model Canvas, the Customer Segments building block details the different groups of people the organization hopes to reach and serve. Customer segmentation is one of the key building blocks, as it’s the foundation of a business model, and it enables it to go through its first stages of traction.

Understanding customer segments in the Business Model Canvas

Customer segmentation is the first and most important building block of the Business Model Canvas – and for good reason. The business that can accurately identify its customer segments will remain viable for longer, avoiding the long and slow demise of a competitor that develops and releases irrelevant products.

Creating customer segments begins with dividing a customer base into various groups according to commonalities in gender, needs, interests, financial position, social position, geographic position, age, jobs-to-be-done, and purchasing habits, among many other things. Note that the customer in this context may be an individual or another business.

To establish a lucrative revenue stream, the business must match one or more customer segments to its value proposition. To do this, it must consider a range of scenarios and assess the trade-offs between each. 

Customer segment types

In this section, we’ll delve into some common customer segment types:

1. Mass market – these segments describe broad swathes of the population with a common problem or need. Television targets mass-market segments because there is relatively little differentiation in consumer needs.
2. Segmented – here, customer segments have small but appreciable differences. An eCommerce company may distinguish between those with a store membership and those without. Each segment is defined by separate value propositions, customer relationships, and distribution channels.
3. Diversified – where an organization targets multiple segments with contrasting needs and limited overlap. For example, Amazon sells books to individuals and cloud services to businesses. 
4. Niche market – as the name suggests, a niche customer segment is defined by specific characteristics and a highly tailored product. Niche markets are common in buyer-supplier relationships.
5. Multi-sided platforms – where multiple customer segments are related or dependent in some way, businesses target all of them. eBay targets buyers and sellers because each is critical to the success of its platform. Credit card companies target consumers and retail stores to ensure their cards will be accepted as a form of payment.

Creating customer segments

As hinted at earlier, there are many criteria with which to segment customers. Each should ultimately help the business better identify its target audience.

With that in mind, the business should consider these pointers:

• Reach – how will the business reach its customers? Might it be prohibitively expensive to reach them in person?
• Market size – does the segment reflect at least 10% of the total addressable market? Is the total market size large enough to be profitable?
• Value – does the customer segment hold values or beliefs that align with the company mission and vision?
• Depth of pain – the business must also understand customer pain to determine how motivated they are to find a solution. The more extreme the pain, the higher the motivation. 
• Budget – are customers willing to pay for the potential solution? Do they have the capacity to pay? To some extent, willingness is also determined by the depth of pain. Again, consumers with larger problems tend to be more motivated to spend.

Key takeaways:

• In the Business Model Canvas, the Customer Segments building block details the different groups of people the organization hopes to reach and serve.
• Common customer segment types include mass market, segmented, diversified, niche market, and multi-sided platforms. 
• There are many criteria with which to create customer segments, including age, gender, geographic location, and purchasing habits. Regardless of the criteria chosen, however, businesses should consider reach, market size, customer value, depth of pain, and customer spending power.

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