Why smart segmentation is the best route to growth when cash is low

Joanne Thompson is a founding partner at Spring Partners

Google and Amazon have a lot to answer for. Routinely held up as global, multi-category success stories, it’s easy to forget that they started in niches with laser focus on their core business. Amazon’s mastery of e-commerce was born out of its bookseller beachhead. This made it resilient and lean as others fell around them. It didn’t start big. Google, in particular, is known for its moonshots and ‘thousand flowers blooming’ approach but it is easier to take risky expansion bets from a position of strength, and they got there by doing one thing - search - incredibly well, and building an advertising monopoly.

The problem is that in the rush to become the next category king, startups risk doing too much too soon to deliver on the vision. Conventional wisdom puts running out of money as one of the primary reasons startups fail. But whilst this may be technically true, it's misleading and unhelpful. Running out of money is an outcome, not a driver, of failure.

This issue has come into sharp focus in recent months, with many tech firms laying off staff they fought hard to attract and retain during the post-pandemic tech boom and many companies withdrawing from countries they recently entered, in order to prioritise profit over growth and lengthen their runways.?

Part of this is macroeconomic. Access to capital has become much harder, with turbulence in global capital markets filtering down to startup and scaleup funding, particularly in the UK, prompting some criticisms of the government's levels of investment and perceived lack of industrial strategy.

While it is true that these external factors make it harder for startups to survive and for scaleups to thrive, businesses can build more resilience to reduce the impacts of a turbulent macroeconomic climate with a relentless focus on their own strategy and execution - the things that are in their control. One of the main factors in a start-ups control is which customers they focus on.

All too often who the customer is, is seen as a marketing responsibility, but a truly customer centric approach works best when the whole company is aligned around it - from top to bottom.

This is because the best place to start is gearing every aspect of the operation toward serving the most profitable customers. This may sound obvious, but any business or founder with a growth mindset and big ambition will naturally look beyond their core market.

But if the current market is attractive enough, in terms of size and profitability, resources will go further there. More of the same may feel underwhelming, but it’s lower risk, the business is already capably and profitably serving these customers, and focusing resources and operations on the core business? makes you more likely to win. So why not seek to dominate? that market, and maximise it, before looking sideways?

The challenge is identifying who your best customers are, and this is not always easy.

It’s not necessarily the fastest-growth group of customers, as there may be other, bigger, better-equipped competitors chasing it. It may not be the closest or easiest group to your core, as it may lack growth potential, or be a misfit for the vision and future aspirations. And it may not be the largest potential market, either, if there are smaller niche segments better suited to your business model, big enough and more profitable.

The best type of customer for your business can be determined by looking through two lenses; which are the most attractive customers from a commercial perspective, and in which are your company best placed to win??

To determine which customers to focus on we recommend our clients build and prioritise the different segments of customers their business serves. To do this we take our clients through a 3 step process: building the segments, prioritising which ones to focus on and then gearing their whole organisation to best meet their needs.

1. Building your segments

Building the customer segments that your business serves is about determining the key identifiers that separate out your customers into mutually exclusive, comprehensively exhaustive groups, each of which have different needs from your product. This isn’t necessarily about using traditional demographic segments such as age, gender or location - but about undersing the attributes and behaviours that your customers have that matter to your business, and segmenting based on those. This is about determining what makes a customer ‘successful’ on your platform and then working out a proxy metric to attribute that.??

Example:?

Company: B2C Marketplace for selling new and second hand goods

Client challenge: The client currently targeted all types of customers to sell their goods on the marketplace but going forward realised they need to be more targeted about who they focused on

Identified segments:?

• We worked with the client to segment their sellers into 8 mutually exclusive segments that could be prioritised
• Through a large quantitative survey we found 3 identifiers that could be used to segment customers:1) Volume of sales: This was used as a proxy for if the seller was using the platform ad-hoc, as a hobby or if they were making a career out of it?2) Average selling price: This was used to help determine if they were selling new or second hand products3) Category: Types of products they were selling e.g. fashion, homeware etc

Client result:?

• The client went on to reduce the number of categories of products sold on their marketplace. Initially this reduced GMV by 5%, but the focus it gave the business meant that growth reached its fastest rate by the end of the year.?

2. Prioritise your segments

Once you have your segments you need to prioritise the ones you are going to focus on, and this becomes about defining the attractiveness and ability to win criteria for your business.?

For our clients we always say attractiveness needs to take a lens of both size of opportunity, (e.g. market size and growth potential), but also profitability for your business from that segment - which can come from internal transaction and behavioural data.?

Ability to win is then about really understanding both how you are positioned within the market - namely strategic fit and competitive position, but also which types of customers historically do well in your business.?

Putting each segment in a standard 2x2 matrix using these parameters helps identify which to focus on, where to gamble, what to park and where to hedge;

3. Determine how best to serve your segments

The final step is then about serving these prioritised customer segments to best meet their needs.?

A well done segmentation should give you renewed focus across the whole company and enable you to confidently prioritise and make decisions across commercial, product and marketing.?

We recommend to our clients that before embarking on a segmentation they make a checklist of the actionable outcomes they’d like to achieve from the process, to keep them focused throughout.?

The overall aim is to achieve complete clarity on what our most attractive customers look like, identity those customers within our existing user base and the wider market, and gear the business around serving those customers by looking through three lenses;?

First, commercial. Focus the outbound sales teams on closing these leads, above all others. When those clients are won, ensure they are prioritised above all others by the customer service and customer success teams, and finally, build internal incentives to achieve this - whether that is adjusting the bonus structure or rewarding retention.

The second lens is marketing. Refine the go-to-market approach, and assess whether there are faster or more effective channels to that customer. Ensure that the marketing budget is trained on that audience, through paid and unpaid media. Review the brand strategy and tone of voice, so it is absolutely clear who the business is speaking to.

The final lens is product. Consider the existing feature set and product roadmap and the extent to which each feature directly addresses the needs of the core customer, and whether there are other features that could be prioritised to meet this audience’s immediate needs.

In times of plenty, where access to capital was easy - startups could develop an iterative, agile, reactive approach to growth; test, learn, pivot. But a thousand flowers blooming approach increases the risk of failure by burning cash on the wrong things. Simple target customer segmentation needn’t just be a quick answer to extend runways and manage investors cash more prudently through difficult times, but an evergreen model for scaling a successful profitable business.

Smart segmentation has the potential to transform businesses, especially during challenging times. If you've found value in this piece, let's take this conversation forward.

?? Comment below with your experiences or challenges around segmentation. Have questions or insights? We're here to engage, learn, and grow together.

Considering a strategy overhaul? Reach out directly and let's explore how Spring Partners can guide your business to profitable growth through precise segmentation.