Markets vs customer driven business model design

September 3rd, 2011 by Patrick Stähler

Do you have to be market-oriented or is this again one of the buzz words that hides more than its reveals? Or should you be customer driven? Let’s take a look at the two words and concepts and see why Alex and I have chosen not the term market but customers for our canvases.

I just return from a workshop for entrepreneurs in Wolfsburg, the birthplace of Volkswagen. We used the business model canvas to focus the entrepreneurs and their coaches on the core building blocks of a business models.

Interestingly, most participants of the workshop always talked about markets, that we need to be more market oriented, that we have to conquer new markets. But is this true?

Customers pay your bill not "markets"

Markets, top-down approach

Markets are the sum of customers that spent money and therefore have shown a demand in the market. But a market is abstract and impersonal. You can not sell your product to a market. There is no Mrs Market to write a bill to and that is exactly the problem for entrepreneurs. You might be in a great, growing and profitable market but that does not mean you have one single customer who pays your bills.

Markets is a top-down approach very well suited for analyst and consultants. The market is great for analysis but not good to sell something to.

Customers, bottom-up approach

Let’s take a look at customers. As a business you need an individual client that is willing to pay for the service or product you offer. You need to address somebody who is willing to buy something from you. A market can not buy something from you, regardless how great the market is. A market does not create revenue or sales for you. It is your customer who buys from you, who provides you with the cash-flow you need to run your business.

And you need not one customer but enough to make a living from. That is also important for entrepreneurs. Do you have enough potential customers? How many customers do you need for breakeven? Is this figure realistic? How many customers do you need for a very happy life? But first, you have to excite the potential customers so that they become paying customers.

The customer driven approach to business model design is bottom up vs. the top-down approach of the market. And even in mature and declining markets you can make a good living if you have the right business model.

Please, write business plans for customers

So, please write your business plan around customers and how you will excite them with your offer. It is the value proposition that makes the difference and, of course, the value architecture to fulfill the value proposition. It is great to start with a product idea but it is the value proposition that counts. Think about the job you solve for your customers.

Customer centric business cases

And please, write your business case accordingly. A VC told me recently that he checks all business cases he wants to invest for a little dirty secrete. He makes a small crosscheck between sales figures and sales & distribution costs.

First, he tries to understand the buying cycle of customers. That is how long it takes a customer from the first sales pitch to the final sales and payment. Most of the time, that takes much long than entrepreneurs expect.

The second calculation is how many customer do you have to pitch to in order to get an opportunity and later the lead. He is doing the classical sales funnel. What is in the pipeline and how long does it take a bid to go through your pipeline.

And than his little trick comes in to place. He calculates than how many sales guys you need in order to fill the pipeline with the needed leads to achieve the sales you have used in your business case on the top line. And than he compares this to the sales costs. And most of the time there is a huge mismatch between the sales figure (too high) and the sales costs (too low) and the number of sales you want to hire (too low).

For this successful VC this shows him that you are not customer driven and not sales driven but a victim of the wrong assumption of what a market is. For a business you have to find customers that are willing to pay. So think about customers in the future, not markets.

14 Responses to “Markets vs customer driven business model design”

  1. ccz1 Says:

    I understand your point.
    .
    I use to say to my customers “Don’t trust statistics, statistics are ghosts – statistics say that the market want orage balls, you supply orange balls and no one want them. Half of the customers wanted yellow balls and the other half wanted red balls. Look customers in the face, watch their iris in the eyes.”
    .
    But the problem is to think of customers one at a time and not looking for patterns. A potential problem is trying to customize an offer to every customer without a common value proposition organizing the effort.
    .
    I believe that many people use the market-word instead of customer-driven to stress the fact that they don’t work for every customer.

  2. Erwin Says:

    Wouldn’t you need both? It is the customer that makes the use and purchase decisions, but you need to understand the (potential) total market size to assess whether it is worthwhile pursuing the initiative.

    Note that the BMG Canvas is a bit ambiguous in this respect, as its refers to customer segments, which is quite similar to market segments. I prefer Osterwalder’s original ontology in this respect referring to target customer.

  3. Charlie Says:

    I don’t quite follow you, and I find that the text is too general. The market is the sum of actors that may influence your business model. Segmentation of portfolio, i.e. Industrial-, conglomerates and family owned businesses can each be a customer, but can surely be referred to as the Market? Actions from competitors, political regulations, raw material markets, financial markets, etc,create the landscape that influence the scope within which a certain business model has its constraints. Hence, the reasoning cannot be diminished by a specific definition of terminology.

  4. ccz1 Says:

    Perhaps a more nicer way of saying would be:
    .
    Think global (market), act local (customer)

  5. Marijn Mulders Says:

    Years ago we changed over from push to pull strategy. Looking a market needs and try to find a large segment to adapt and sell your product or service. That means that every competitor in this market is offering the same. Companies want to distinguish themselves and you can only do that by focussing on the individual needs of the customer. So if products and services are the same a company will emphasize more on the way they act towards customers based on their or their own culture or even better to adapt to the culture of a customer. That makes it impossible to be market driven.

  6. Patrick Stähler Says:

    Thanks for all your comments and insights. I know that I polarize with this approach. With this post, I try to point at the dominant logic, we all have, that there are clearly defined markets out there where we have clearly defined industries out there that serve these markets. By accepting this view, we miss lot’s of opportunities for business model innovation.

    As Alex has pointed out recently, the industry and with this the market might be the wrong unit of analysis for finding innovation. Take a look at http://goo.gl/NOEZN for a discussion on the right units of analysis.

    Of course, I totally agree with you that there needs to be enough customers to make up a market. However, and that is important, this must not be a market as defined by some traditional means. I propose a more bottom up approach.

  7. Erwin Says:

    mu gut feeling say that there is a difference between industry (push approach) and markets (demand approach), in particular if we define markets based upon jobs-to-be-done.

  8. Patrick Stähler Says:

    For all who like the discussion, a vivid discussion is going on at a linkedin group on business model generation http://lnkd.in/QfGzXd

    @Erwin, that is a good differentiation between markets (push) and demand (pull).

  9. Guido Says:

    Hi Patrick, what a coincident. Wasn’t aware that you are into Business Modell innovation. I just prepared a series of lectures on customer orientation when I saw your FB post.

    I had plans to letting students work with the “canvas” but will now have a discussion on a insightfull paper of Gummesson on Balanced Centricity. I like their “Nordic School” i.e. network perspective and service dominant logic. Look forward to seeing you again one day.

  10. Guido Says:

    PS: what if you would go to the extrem and reword all your text from a true customer’s perspective? E.g. its not the company to target the customer but the customer is selecting the company to give value to the company’s product by using it? The customer allowing the product to deliver its service? Rather than a customer market, isn’t it a market of companies that a customer can choose from? …

  11. Patrick Stähler Says:

    Guido, an excellent fresh point of view. I just use this method for a project with students. We want to know everything about the supply process of mail-ordered goods. Traditionally, that is called delivery but from a customer perspective that is a supply process.

  12. Alan Needham Says:

    I completely agree with the concept that you must target the customer rather than the market. If you clearly define who your target customer is, you can more clearly define their characteristics which makes it easier to put your products or services in front of them. Your market is made up of these individual customers whose needs you better understand than if you approached them from the top down.

  13. Keith TenBrook Says:

    The distinction between market and customer can be helpful for drawing attention to the need to address the sales effort, and who will be the early customers that will respond to your value proposition. However, knowing that there is a market that has a size that can create a business that is more sustainable is also valuable.

    In the pitches I have seen, usually both are present. The case is made for the customer targets that can establish a reasonable sales cycle along with a market with the need that will sustain growth for years to come.

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