How to choose the best customers for your business idea
The Sustainable Development Goals (SDGs) are a call for action and new approaches if we are to meet significant global challenges. This requires a necessary global shift that also opens up new market opportunities for start-ups and established companies worth USD 7-12 trillion by 2030. For most start-ups and established companies, initial market research suggest massive demands and market opportunities:
- Growth rates in developing countries of up to 7-8 percent
- Financial requirements for the humanitarian sector worth USD 30 billion, with only USD 16 billion funded by NGOs and donors
- UN organisations procuring goods worth USD 19 billion.
However, when trying to turn bold ambitions into sustainable business, start-ups and established companies find it challenging to grasp the market and identify the customer segments to target. We are still at the foot of a steep learning curve, but from the launched partnerships, initiated research activities and analysis in access2innovation we have learned a series of valuable lessons.
Choosing the best customers for your business idea: what to keep in mind
Critically analyse potential markets
As in any market, choosing the best customers for your business idea requires deep insight and understanding of the market you are entering. The first step is to be extremely aware of the different market segments, and critical towards the apparent market value and volumes that can easily distract from thorough analysis.
Take your own biases into account
Second, our experience is that is takes a while to realise that you as an entrepreneur are so biased by your own initial business concept, idea of technology, professional training and cultural heritage that if not managed these biases may easily misguide you when it comes to grasping the opportunities at hand.
Innovate and adapt to face uncertainty and risk
Third, most solutions and services that target specific markets require a fair bit of innovation and adaptation to meet the demands. This entails a process where companies apply a risk-management process, where management tries to foresee upcoming challenges and risks in order to mitigate these beforehand. The challenge when entering the markets and approaching new customers is that the process to a high extent can be characterized by uncertain; success depends on your ability to navigate in a constantly changing process that is characterized by a learning by doing process.
Invest in partnerships to understand market demands, test solutions or scale products
Working in partnerships with NGOs, researchers, government agencies and other companies has proven to be a valuable strategy for both small and larger corporations in order to mitigate the outlined uncertainty and open up new opportunities. Partnering can be helpful when it comes to understanding the market demands through deep dives with local partners; testing solutions and services with end-users and producers; or scaling the developed products and services in challenging value chains. Based on this reasoning the following customer segments should be considered:
Market segments to consider
The humanitarian customer
Humanitarian crises are becoming more and more complex. The crises last longer and affect more people. This is reflected by the global humanitarian appeal that in 2019 amounted to USD 16 billion. If current trends continue, by 2030 the cost of humanitarian assistance will have risen to USD 50 billion. By then, 62 percent of the world’s poor could be living in fragile and conflict-affected countries. This is a clear warning that humanitarian needs will become more significant.
Despite the possibilities, experience from access2innovation shows that engaging with the humanitarian market it is often time-consuming and complicated. The structuring of the UN procurement system allows limited room for innovation or introduction of new products. Companies often have valuable knowledge in crucial areas that are in need of sustainable and better solutions. Unfortunately, the UN system is characterised by a relatively high level of bureaucratic structures and procedures, which means that companies must spend a lot of resources preparing and adapting products in order to qualify for the humanitarian market.
Due to the UN’s annual budget allocation, new solutions that provide improved efficiency and quality compared to existing ones, but have a payback period above one year fail to meet the tenders’ requirements. This is the case despite the fact that these solutions would be cheaper, better and more efficient within 2-3 years.
Despite evident needs and substantial resources, the UN organisations can be difficult to collaborate with. Recent experiences indicate that civil society organizations are much easier to partner with as a testing ground before heading to the UN procurement divisions. Cooperation with humanitarian organisations can ensure collaboration with end users, access to local expertise, and adaptation of products to the needs of the humanitarian sector.
Grasping the B2C markets
In B2C markets you should be aware of the challenging business economics and cost structures in low income countries. The costs of serving the markets are high, as the BoP communities are scattered, leading to increased distribution and marketing costs. Combined with poor infrastructure and a small value of each transaction, this leads to troublesome conditions for utilising economies of scale.
This also means that if you focus on B2C, the “low price, low margin, high volume” business model is troublesome. Even though your business might focus on high impact and social responsibility, factors such as poverty alleviation must be balanced against business goals and economics in order to have an impact at all. You must design your product and choose your customers based on the business economics, not the other way around.
As discount rates in low-income countries are high, this can decrease the net present value significantly, hence affecting the investment model. If a business is based on high penetration rates it is recommendable to tap into a network with large reach or utilise an existing infrastructure for serving many consumers. For example, if the product or service in question is for industrial application, it could be good to network with a large industrial local company that has access to many B2C consumers or access to B2B customers.
Entering the B2B market
Global development and intensified competition within many sectors make it imperative for suppliers to be adaptive and respond efficiently to changing market demands, and to be creative in order to sustain and/or enhance their competitive position. One way of sustaining the competitive advantage is by investing in and developing close relationships with B2B customers, as this increases the switching costs.
Today B2B sales go beyond mere production or selling approaches and place emphasis on target customers and their needs in the marketplace. It is of great competitive advantage to be able to supply B2B customers with a holistic and integrated solution instead of only selling separate parts. Companies that can supply B2B customers with a solution that incorporates an understanding of how different technologies interact are often the most competitive.
However, it should also be acknowledged that in B2B markets in Africa, price is still a key factor, if not the key factor. B2B suppliers should be aware of this. The intense competition from cheap Indian and Chinese suppliers puts pressure on many western companies. It is also an indication of a lack of long-term planning from many local African companies, as they often operate on shorter terms and tend to buy the cheapest solutions that may only have a lifespan of a couple of years. What is most economically feasible in the short term is often not so in the long term. Therefore, suppliers should not only focus on integrated, holistic solutions but also on solutions that clearly prove to be most economically feasible in the long term, e.g. by reducing indirect costs such as energy and waste.
This approach has an external focus and concerns inter-organisational relationships, and the complexity of these relationships, which demands high levels of mutual understanding. Switching costs increase as the companies invest in the relationship and learn about each other, and as the buyer and supplier become more interdependent. The managerial task is to manage a broader and deeper interaction with customers, and also to manage interdependencies between businesses. You may face complex issues and unique decisions, and therefore fewer analytical tools are available. However, in the long term, experience has proven this to be the most successful approach to B2B relationships in Africa.
In sum, despite evident needs and substantial market opportunities, choosing the best customers for your business idea is a complex task, as each of the segments holds challenges that need to be addressed. Working across institutional sectors and building efficient partnerships has proven to be a viable strategy to navigate the challenges and opportunities of starting a business. This can lower your transaction costs and increase profits, helping provide much-needed solutions for a sustainable future.