Finding Your Focus Pt. 2: The Target Customer

In our last post we talked about the super simple concept of focus and why it often tends to get away from SaaS companies. If you find yourself struggling with focus, the first step is to create a clear definition of your target customer.

If you’re a relatively young startup with not much to lose, this can be a fun and energizing exercise. If you’re a more mature company that has developed business across a wide variety of different customer types, this exercise can be easily influenced by the urge to not affect current revenue flow, even if some of that revenue flow is coming from suboptimal customer types. If this is the case for you, the good news is that you likely have a wealth of data from your current customer base that can (hopefully) be leveraged to find your customer sweet spot. And, if you don’t already have the data, you likely have enough customers to start collecting the data and have usable insights relatively quickly. For younger companies with a smaller customer base, the earlier you start collecting the right data, the more rapidly you’ll be able to validate and optimize your target market.

The goal is to define a target group of identifiable customers / prospects who are unique and distinct in their needs, and a group that is large enough to be an interesting financial opportunity for the business.

In this example, we’ll target the case where a company has built up a significant (but very diverse) customer population and doesn’t have a clear picture of which subgroup to focus on moving forward.

Developing Your Target Profile Hypothesis

The hard part about having a lot of data is that you need to know what data is the right data. You may have a ton of customer data, but only a small fraction of that data is actually critical in defining the optimal vs. suboptimal customer.

So, how do you develop a good theory on what data is most important? The best approach is often by having conversations with your customer facing teams and other long tenured team members who may have experience with customer success (e.g., CEO, founders / co-founders, etc.).  Simply asking them to describe the “perfect” customer (and the ones to stay away from) based on their experience supporting customers, will give you some amazing insights. You’ll end up with lots of notes and will need to spend time identifying and extracting the patterns of feedback mentioned. It may take several iterations to come up with a rubric of profile attributes that feels right.

From here you’ll likely have a good idea about some of the customer attributes that most influence success. Some examples might be size, geography, customer type (B2B vs. B2C), customer population, industry, “product” type (service, physical product, media, education, etc.), end user roles, and sophistication level. It’s important to have at least a few attributes that can be assessed without needing a conversation with a prospect. For instance, size, industry and product type are all attributes that can be proxied up front using various online tools. This makes outbound marketing and sales easier and more efficient. It will also help you estimate your total addressable market. More on that later.

Gathering The Data

Once you have a good understanding and a handful of attributes that seem to identify your target customer, there may be some attributes that aren’t yet readily available in your database. For instance, if “industry” has been defined as a critical attribute and you haven’t been collecting “industry” for your customers, you’ll want to go through a process of backfilling this data for existing customers and ensuring that it’s collected for all new customers going forward. If possible, it’s also a good idea to gather critical profile data for prospects as well.

Try to keep your profile to between 3 and 5 attributes. Depending on how much data you currently have (and don’t have), this process of data gathering may take a little while. But, it’s essential so you can validate and optimize your target customer definition.

Validating (and Tweaking) Your Hypothesis

Once you have the essential customer profile data available and accessible, you’re ready to start validating and optimizing your target customer profile. Do this by looking at key product success KPIs through the lens of your critical customer attributes. The idea is to evaluate whether certain types of customers (defined by your attributes) are more or less successful with your product. At this point, you’ll probably even have a theory on which customer group, defined by the critical attributes, are most likely to be successful. For instance, if geography, product type and company size are the main attributes, you may have reason to believe that U.S. based, Home Services companies with less than 50 employees are the bullseye.

In some cases, your hypotheses may be right on and in some cases this exercise will surface insights that lead to modifying your target profile. As a starting point, here’s a set of product success KPIs to look at based on the customer attributes you’ve identified:

Churn & Renewal Rates – The best measure of product satisfaction is whether they buy again. Look at this from both a monthly and annual perspective, and from both a customer count and revenue perspective.

NPS – Are certain customer segments more or less likely to recommend your product to others? If possible, collect this feedback in a distributed, automated and ongoing manner that provides readings across a past 90, 180 and 12 month basis.

Your Top Product Success KPI – This one’s up to you. What’s the product KPI unique to your business that best measures the value customers are deriving from your product on an ongoing basis? Which segments are typically most successful?

Sales Close Rates – Although not a measure of actual product success, it’s good context to know if the up front product value proposition is resonating more or less with certain customer segments.

Revenue & Customer Count – Similar to sales close rate, this can be a tainted insight but good for context. Just because you have a sizable customer base within a particular segment, it doesn’t necessarily mean that this is where your focus should be going forward.

Again, this validation process will likely prove out some initial theories and also provide insights that may change your definition of the target customer. Take your time to make the appropriate iterations and optimizations as you learn from the data.

Assessing The Market Opportunity

As a final step, once you’ve landed on a target customer profile that you feel good about, you’ll want to stress test your target profile from a market opportunity standpoint. That is, beyond the product success data you’ve looked at, is it an interesting and attractive enough customer segment to pursue that allows you to fulfill your future business goals? Is your target too narrowly focused or still too broad?

This financial opportunity is sometimes known as TAM (total addressable market) or SAM (serviceable available market). The goal is to validate that the target customer segment you’ve defined has enough of an addressable population with enough propensity to spend on your product that it offers you a reasonable chance to meet your future financial goals. The key word here is “approximate”. You’re not trying to get this exactly correct, but trying to validate that there is “enough” of an opportunity to be interesting within an acceptable degree of error.

As mentioned up above, this is where it’s important to have a few target profile attributes that can be leveraged easily for approximation using accessible internal or external data. For instance, market population stats based on attributes like “industry” and “company size” are fairly easy to gather. Market population stats based on “user sophistication level” are much more difficult to get because “sophistication level” is a subjective measure.

Try to use market data sources that are reflective of your company’s serviceability. For instance, if you’re not set up to sell outside the U.S., make sure to use market data that’s U.S. specific and not global.

Keep in mind that it boils down to both population and spend. So, once you have a target customer population approximated you’ll also need to approximate the typical budget spend of the population on a product like yours to get the overall financial opportunity. And, once you have that, you’ll need to come up with a reasonable target market share based on both your company’s resources and the current competitive landscape. A 1% market share of a $10B market segment is a big number. But, if you have thousands of competitors all scrapping for the same slice of budget, even 1% will be very difficult to achieve. Conversely, 20% market share is probably the ceiling in any market worth pursuing so you need to be sure that the overall segment size is big enough, even if there’s not much competition (yet).

With a target customer profile in place, the next step is to hone in on your “functional focus”. In other words, within your target segment, what customer problems will you target and how will you solve them in your product? We’ll cover this in our next post.