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Entrepreneurship – from ideas to reality
Entrepreneurship – from ideas to reality

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1.5 Customer segments

Earlier you were asked to consider whether you are a typical customer. Customers come in all forms, and different customers will help you create value in different ways. This is important as your enterprise develops and grows – particularly with regards to listening to the ‘right customers’. Reinartz and Kumar (2002) suggested four customer segments. It is worth reflecting on these as you listen to your customers.

The customer Loyalty Model shown in a two by two matrix
(The Open University, 2018 )
Figure 2 The Loyalty Model
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This diagram is a two by two matrix, based on customer loyalty. The rows are labelled high profitability above and low profitability below. The columns are labelled short-term customers on the left and long-term customers on the right. This divides the matrix into four quarters. - Butterflies (short-term customers, high profitability). Good fit between company’s offerings and customer’s needs; high profit potential. Actions – aim to achieve transactional satisfaction, not attitudinal loyalty; milk the accounts only as long as they are active; key challenge is to cease investing soon enough. - Strangers (short-term customers, low profitability). Little fit between company’s offerings and customers’ needs; lowest profit potential. Actions – make no investment in these relationships; make profit on every transaction. - Barnacles (long-term customers, low profitability). Limited fit between company’s offerings and customers’ needs; low profit potential. Actions – measure both the size and share of wallet; if share of wallet is low, focus on up- and cross-selling; if size of wallet is small, impose strict cost controls. - True friends (long-term customers, high profitability). Good fit between company’s offerings and customer’s needs; highest profit potential. Actions – communicate consistently but not too often; build both attitudinal and behavioural loyalty; delight these customers to nurture, defend and retain them.

Figure 2 The Loyalty Model

In an ideal world you would get answers to the questions posed in Activity 2 in Section 1.4 that indicate people do find what you are offering valuable, that they would buy it, tell their friends and get one every day regardless of the cost. However, this is unlikely to be the case. Through asking customers what they think, you are seeking answers about the market, and the competition in it, which might well provide the kind of vital information that leads to a pivot (Session 3).

Next you will consider the market your business will enter.