Having a clearly defined market is one of the most important components to any startup’s success. Without a clear market in mind, product development, marketing tactics, and sales strategy become disjointed and unfocused. In fact, many successful founders have gone as far as to say that focus on a single, specific market is the key indicator of a startup’s potential for success. With a clear market in mind, deciding which product features to build (or not build) becomes easy, developing and targeting marketing personas is simplified, and devising an effective sales strategy is possible. That being said, there’s a lot of pressure to get it right.
The problem is, many founders only go as far as to define their Total Addressable Market (TAM). They consider: what is the entire audience of potential customers who could use my product or service? From here, they dive headfirst into creating and releasing a minimum viable product (MVP), scaling up marketing efforts, and laying out a sales strategy. But a TAM is much too broad and unfocused to guide your startup’s development and sales efforts. Instead, a more effective approach is to use your TAM to develop an Ideal Customer Profile (ICP). Your ICP is a small subsection of your TAM that challenges you to focus on only those who would be best to sell to, instead of focusing on everyone you could sell to.
While many early-stage founders might cringe at the idea of reducing their potential market size, developing an ICP can benefit your startup in many ways. A smaller target market size means your product development team can refine features with razor sharp focus. Your marketing team can create highly-specific messaging to appeal to a narrow audience. And your sales reps will target less prospects, but the ones they do target will have a pre-defined need and use case for your product or service.
This guide will take an in-depth look on how to carve out a market niche, develop and define an ICP, and test and optimize your new ICP.
What is an ICP?
An ideal customer profile (ICP) is a pre-defined set of demographic, technographic, and situational characteristics which indicate a potential customer has a high likelihood of purchasing your product or service. Essentially, it’s the type of customer who would receive the maximum value from your product or service.
How can an ICP help you?
Having a clearly defined ICP can benefit your company in many ways. For starters, when you have a clearly defined target customer it makes developing a customer acquisition strategy easier. Sales and marketing teams can unite to create a strategic acquisition plan. Another benefit of having an ICP guide your sales efforts is that your sales team won’t waste time on unqualified prospects. When sales reps focus on prospects who match the ICP, the sales pipeline will become smaller but conversions will increase. Simply put: when you target only the best customers, you close more deals. Not to mention using an ICP can also help reduce churn. When you attract the right type of customer in the first place, they’re more likely to stick around after the sale. Also, your product development team can keep the ICP in mind when discussing additional features or other add-ons. Customer acquisition, product development, and customer retention are all areas an ICP can help you improve.
Finding Your Niche
A crucial component of creating an ICP is honing in on a highly-specific target market. This can be a challenge because many startups focus on a large total addressable market (TAM). But when you sell to everyone, you’re really selling to no one. This is why carving out a niche in the market is particularly important. Honing in on a single niche will the lay the groundwork for more focused sales and marketing strategies.
To hone in on your niche, you can start by considering what makes an account your ideal customer.
What makes an account the best customer for YOU?
- Low cost of acquisition (CAC)
- High lifetime value (LTV)
- Clear value prop and realization of product or service value
- Low customer support need
- Chance for upsells, cross-sells, and/or expansion over time
- Brand advocate
- Provide referrals
Your “best” customers will not only happily pay for your product or service, but may also become brand advocates, provide referrals, and/or benefit you in other ways.
What makes you the best product/service for a customer?
- Help them make more money
- Help them cut costs
- Help them increase productivity
- Help address pain points
- Help them become more successful
While your product or service may benefit customers is many ways, it’s important to hone in a single, clear value proposition.
Once you’ve given some thought to who your best customers might be, you can begin the process of developing an ICP. The best way to do this is to start with your TAM and refine from there.
Developing Your ICP
- Consider Your Capabilities
It’s important to consider what type of customers you can best serve. For example, if you can’t support multiple versions of your product, enterprise customers might not be for you. Or, if your product relies on team functionality to provide value, single-users would not be part of your ICP. Consider what type of customer best matches your capacity to serve.
- Consider Pain Points
Hone in on the main problem you’re solving. Identify which major pain points your product addresses. Consider what key characteristics indicate a customer has and is aware of the pain points your product solves.
- Consider CAC and LTV
What type of customers meet your CAC and LTV expectations?
- When Developing Your ICP, Focus On These Areas
An effective way to develop key traits of your ICP is to look at your current customers. When looking at your current customers identify your “best” customers by considering:
- Which of my customers have the highest LTV?
- Which of my customers have been with us the longest?
- Which of my customers had the shortest sales cycle/was an easy sell?
- Which of my customers are low maintenance and a pleasure to do business with?
- Which of my customers have advocated for my brand by providing a testimonial, giving referrals, mentioning us on social media, and more?
Churned customers can be an invaluable source of information. If you’re not already, try conducting exit interviews for leaving customers in order to get as much information as possible. When analyzing your churned customers consider:
- Why were they a bad fit for your product/service?
- Why did the value prop of your product/service not align with their needs?
- How were they acquired as a customer?
- How much support did they require during their time as a customer?
- What was the deciding factor as to why they opted not to move forward with your product/service?
Direct Competitor’s Customers
If you don’t have an existing customer base, analyzing your direct competitor’s customer base can be helpful when developing an ICP.
Defining Your ICP
There are three major parts to any complete ICP: demographics, technographics, and sales triggers. Demographics cover traits like location, industry, company size, etc. Technographics take into consideration the technology solutions a company uses to power its operations. This is particularly important if you offer a product or service that integrates with other technology solutions. The last category is sales triggers, or situational characteristics. These traits are timely and related to events or situations which prompt a prospect to be ready and willing to buy. Some common sales triggers include:
- Company Expansion
- Company Relocation
- New Product/Service Announcement
- Job Postings/Hiring
- Additional Funding/IPO
- Press Coverage
- Good or Bad Financial Quarter
- Increase in Costs/Expenses
While demographics and technographics pinpoint prospects who might be a good fit, sales triggers help indicate those who are most likely to convert. Together, a combination of all three types of characteristics makes up your ICP.
Whether you’re considering your current customers, churned customers, or competitor’s customers, you should aim to identify overlapping characteristics that fall into the categories of demographics, technographics, and sales triggers. When defining sales triggers it’s especially helpful to consider: at the point of sale, what was the final deciding factor for their conversion?
When your sales reps target only those with a pre-identified need and use case for your product or service, they waste less time on prospects who will never convert. This means your team will sell more efficiently and have higher conversion rates.
The demographic, technographic, and sales trigger characteristics will make up your ICP. Here’s an example ICP:
Testing and Optimizing Your ICP
When developing an ICP it’s important to understand that it isn’t a static metric. Your ICP is fluid and can, and probably will, change over time. That being said, it’s important to test your ICP so you can refine and optimize it. Here’s a method to test your new ICP:
Set a timeframe for the ICP test-period: Determine how long you will test your ICP before evaluating its accuracy. A period of four to six months works well.
- Set a goal to work towards: In order to measure the effectiveness of your ICP you should set a goal to work towards. Some example goals might be increasing MRR by a certain amount, generating a certain amount of new leads, or reducing churn by a specific percentage.
- Monitor success towards that goal: After setting a goal, specify metrics you’ll use to track success towards that goal.
- Analyze success and refine: At the end of the timeframe you established in step one, determine your progress towards meeting your goal. Then decide if you should take steps to refine the ICP before moving forward.
After developing your ICP, you should take steps to implement it across your organization:
- Develop buyer personas: Develop personas for the key purchase decision-makers your sales and marketing teams will be targeting.
- Align all teams: Ensure the ICP is clearly communicated across your sales, marketing, customer success, and product teams.
- Find customers that align with the ICP: Use a prospect database to research and identify customers that match your ICP.
- Continue to refine your ICP over time: Use the testing methodology outlined above to test and optimize your ICP over time.