Advance Fundamentals

“Businesses’ sole purpose is to make a profit.”


“They are greedy, money-making machines.”

These are a few of the answers I have heard when asking the question, “What thoughts come to mind when you hear the word ‘business’?”

In a world where business scandals and corruption are highly publicized, you certainly can’t deny the diabolical characterization of a business by many. However, there are dangers in placing a blanket term to describe an incredibly sophisticated medium, especially given the ubiquitous role that businesses play in our lives.

Instead, I dare us to look at the existential essence of a business as the following: to provide value for its customers. Customers are the lifeblood of any business; without them, the business’ purpose fails to exist. Therefore, for any business to thrive, it is critical to understand the customers it serves.

But what exactly is “understanding your customers”? The remainder of this article aims to explore different lenses to understand one’s customers and, through them, determine ways to adapt to the ever-evolving business landscape.

Customer Segmentation: Who’s Using My Product/Service?

One of the fundamental ways to understand your customers is to identify the characteristics that define them. These characteristics may include:

• Age
• Gender
• Ethnicity
• Income
• Religion
• Education
• Geographic location

These traits can vary in their nature over time. For instance, gender, ethnicity, and religion are relatively static, whereas income, age, and education are more dynamic. Age progresses linearly, while income and geographic locations tend to be more fluid.

Consider the following illustrative diagram. Each demographic factor behaves differently over time and interacts with one another to define a person’s state at any given moment. These “states” can then be correlated against an existing framework of customer distribution. An illustrative example of this is the placement of a customer profile within a technology adoption curve.

It is important to note that this example is not a definitive representation but rather a methodological guideline; a person with the provided demographic traits may not necessarily be an early adopter.

To truly understand your customer, you must identify key demographic factors that define their behavioral traits, allowing you to better cater to their interests over time.

Continued use of this methodology will enable you to form a mental map of a customer profile and determine how they may be overlaid on top of a customer distribution that is most applicable to your business.

Value Perception: Why Are Customers Using My Product?

The next step to understanding your customer is to grasp why they value your product.

From one perspective, customers may value your product because it aligns with their perception of value according to Maslow’s hierarchy of needs (Article #1).

Alternatively, in a society where all forms of products and services seem ubiquitous, the hierarchy of start-up business value illustrates how value may be prioritized by different factors such as increased financial gain, time-saving, or the necessity of the product/service to conform to a legal mandate (e.g. regulatory policy, taxes).

Understanding these reasons allows you to better meet your customers’ needs and enhance their overall satisfaction with your product.

Feedback Loop: What Drives My Customers’ Behaviors?

The final piece of understanding your customer involves comprehending their behaviors, which can be segmented into three main areas.

The first area is behavior driven by psychological biases. These include biases like loss aversion, where customers purchase a product or service out of fear of losing its benefits, especially if they are ephemeral. The modern term “FOMO” (fear of missing out) falls into this category. Social proof bias is another example; if people within a customer’s immediate network use a certain product or service, the customer may be imperceptibly influenced to do the same. Books like Thinking, Fast and Slow by Daniel Kahneman and Poor Charlie’s Almanack by Charlie Munger provide great references to other psychological biases that can influence customer behavior.

The second area are behaviors driven by major events. These can include key inflection points in one’s life, such as graduating, getting married, or experiencing grief. They may also encompass major events in sports or activities, as well as unforeseen events at a global level, like the COVID-19 pandemic or a solar eclipse.

The third area is behavior driven by fundamental models of economics. For instance, microeconomics illustrates that the relative demand for a good tends to be negatively correlated with its price. In short, demand for a good decreases as its price increases, and vice versa.
Furthermore, macroeconomic theory shows consumer behaviors at a macro level, highlighting complex relationships in the trade of services and products between countries based on their respective competitive advantages.

Understanding these driving factors allows you to better anticipate and respond to your customers’ needs and behaviors.

Closing Note

Understanding 1) who your customers are, 2) why they purchase your product/service, and 3) what drives their behavior is critical for your business’s success and sustainability.

While it is impossible to distill how to understand your customer in a single article, it provides a high-level overview of the lenses you can use to understand the landscape.

It’s important to realize that you simply can’t be everything to everyone. To truly understand your customers, first identify exactly who they are by considering the demographics that represent them. Next, understand the value your product or service provides to your customers. Finally, recognize the factors that may influence your customers’ behaviors, whether they are driven by psychological biases, major life events, or economic frameworks and principles.

By taking these steps, you can better cater to your customers’ needs and build a more successful, sustainable business.

“To satisfy the customer is the mission and purpose of every business.”

Peter Drucker

Disclaimer: This article aims to provide a concise overview of Business based on the information available at the time of writing. Due to the inherent complexities and the dynamic nature of the business world, it may not capture every facet or the latest developments. Readers are encouraged to conduct further research for the most current insights and to consider this piece as a starting point rather than an exhaustive analysis. The views expressed are based on the author’s interpretation and do not necessarily reflect the full scope of the business’s strategies or outcomes.