Choosing customers and maintaining the discipline of a narrow market focus are critical behaviours for any venture backed business.
Many SaaS businesses believe that a wide application of their solution is one of their greatest assets. Their solution can scale across multiple industries, sizes of organisations and geographies and this is a good thing. Ultimately, perhaps that is the case. But in the short term almost definitely not.
The reality is that any business, no matter what size, has finite resources, and those resources need to be pointed at the markets with the greatest yield. Especially with early stage venture funded businesses a scarcity mind-set is very useful – you have a pre-determined amount of time and resources to achieve certain goals, and your customer choices must reflect that.
The ability to choose customers and stay ruthlessly focused is one of the most important skills to drive success from round to round; customers with:
- the most acute problem
- the closest product/market fit
- who we can reach and engage within the time period and
- that allow us to reach our Series A, Series B goals, Series C goals.
Being focused on a narrow customer set means that you have to be pretty ruthless. It can sometimes feel counter intuitive as you have to actually say ‘no’ to certain potential customers if they stray from your customer set. But if you start making exceptions that deviate too much from the customer set you are not going to have enough time/money to capture your target group. Nicholas d’Adhemar, Apperio.
The goals and the resources available at each stage are different, and therefore your customer choices need to reflect that, for example: –
- Seed stage = validation (of problem and product); choose the smallest number of customers to help you prove what you need to prove in the shortest amount of time.
- Series A = repeatability and revenue expansion; customer choices need to demonstrate your ability to repeat sell within a single segment and to expand revenue post sale.
- Series B = evidence of early scale; focus moves to demonstrating ability to grow within constraints while providing the underlying economic viability, for example payback within 12 months, doubling revenue and positive revenue expansion.
- Series C = going for capital efficient growth; post growth round may see a further narrowing of focus onto a customer type or segment but a significant increase of tempo as the company cranks the handle with a repeatable business model.
The customer choices need to reflect these goals and be constantly evolving based on success or failure.
The ICP can be the key to unlocking the killer value proposition that drives real growth. Too many value proposition are based on our perception of the world and try to solve too many problems for too many people. The ICP reflects the customers view of the world and why your solution will be important to them, enabling a laser focus on the organisations that are most likely to benefit from what you do. Bryan Richter, Notion Expert.
Step by step guide to establishing the ideal customer
Below are a few steps that you can take to help guide the process. NB this is more focused on early stage, but can be easily adapted for later stage companies.
1. Build a market universe
- List all the target segments you could realistically address. Be as granular as you like.
- If selling an enterprise product, you may choose to list out target named accounts.
2. Develop a size estimate for your solution for each segment
- If you don’t know for sure come up with a proxy by which you can calculate it.
- This could be on number of users, transactions, consumption.
3. Product–market fit
- Agree upon a maximum of five key attributes of your solution that correlate with the customer problem you solve.
- Talk to customers if you have them, potential prospects, lost prospects, partners, industry experts etc.
- Score each segment / customer in your universe against these criteria.
- 0 is no fit, 5 is a great fit.
- Don’t overthink it, just do it for each segment and each criteria.
- Then create an average score of those criteria for each segment and you have a priority in terms of market fit.
4. Propensity to buy
- Agree upon a maximum of five attributes that reflect your ability to reach / engage those segments.
- You can use a number of different criteria, but in the many times we’ve done this we have nearly always focused on 1) a repeatable solution, 2) referenceability, 3) accessibility, 4) Willingness to work with a company at your stage, 5) Ability to make a decision within your required timescale.
- And again score each segment / customer against each criteria. O = inaccessible and 5 = highly accessible. So we have a set of priorities based upon accessibility.
Sometimes behavioural fit is a good lens through which to test the attractiveness of a segment. Some firms simply match our style and culture better than others. You can’t quite put your finger on it, but like a blind date that’s obviously going nowhere, you just know. Cultural compatibility may seem like a luxury, especially when prospects are hard to find, but it’s surprising how often you can save a lot of time and effort by filtering-out incompatible segments. Richard Nockolds, Notion Expert.
5. Then simply combine those two scores
- Attractiveness + Accessibility and rank to reveal your prioritised segments / customers, plus of course the potential addressable value.
This may seem a daunting task, but is in fact surprisingly straightforward and hugely empowering across the organisation.
With this simple process you will created you the basis of the information you need to create your go to market strategy, define your propositions and provide input into your product roadmap.
Everyone says at the end of defining an ICP, you feel like your focus has become ‘uncomfortably narrow’. In fact, once you’ve done it and put it into practice, you find the result is more like ‘liberatingly narrow’. Your communications become 10x more powerful and you find it easier and quicker to figure out if or how you can help someone. At the beginning you feel like your market is shrinking with every choice you make. Once you put the ICP into practice, you realise all you’ve done is give yourself a highly focused jumping off point to drive the direction of the company. Jon Hawes, Panaseer.
You can download a copy of a simple spreadsheet to manage this process here:
Posted by Stephen Millard, Chief Platform Officer, Notion Capital.