J12 Commercial Excellence Playbook — the Ideal Customer Profile (ICP) Formula.
Part 3/10
One of the most common mistakes I have seen in my commercial roles is the often premature attempt to sell products across many industry verticals, geographies and organisational sizes at the same time. Founders tend to brag about attracting customers, website traffic, trial sign-ups and so forth. And sure, headline growth is eye-catching, but growth from customers made of sand is not. It is possible to get lucky once, twice even thrice. But to create a scalable proposition you need evidence of repeatability in terms of buyer engagement and behaviour. Finding that initial cohort of passionate customers that consistently use your product, and do not churn when given an opportunity to, is a tough nut to crack.
Carving out a distinct definition of your Ideal Customer Profile (ICP) is the foundation for this repeatability — so here is my formula for designing an ICP that bends, but doesn’t break, as you scale from seed and beyond.
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What is an Ideal Customer Profile (ICP)?
An ICP can be defined as the optimum characteristics and qualities that make a target prospect a perfect fit for the value you are providing with your product and/or service. Those that fit into your ICP have distinctive traits you can address as they are:
experiencing the most pain (severity)
experiencing the pain repeatedly (frequency)
actively looking for a solution (urgency)
allocating a budget for a solution (readiness)
Identifying these traits isn’t easy. How do you know if a potential customer is experiencing pain because of a problem or lack of solution? How do you know how often a pain point is being felt or whether they are engaged in seeking a solution or have a budget to invest in addressing the issue?
There are no right or wrong answers here, neither a magic wand that can profile and order your target prospects into nicely segmented profiles for sales activation. Like all things early-on there is grunt work involved initially in crafting your ICP. It will be shaped on trial and error, testing and learning, fine-tuning and refining, certainly in the months before you are confident (i.e. evidenced through real-life scenarios and enough data) that you have Product-Market-Fit. Getting to this inflection point, where recurring and scaling patterns emerge in the types of customers you sell to (and the Personas within them) need planning, patience and perseverance.
But rocket science it is not. Here is a five-step formula for creating an ICP.
The Five Step Ideal Customer Profile Formula
Where (do you want to play e.g. geography, segment, vertical — the firmographics)?
Who (do you want to sell to e.g. demographics, individual stakeholders)?
What (do you want to sell e.g. customer needs, product shelf offering).
Why (will someone buy your product e.g. pain points, needs).
Bending not Breaking (reiterating your ICP as you scale).
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Where
This is primarily about understanding the ‘firmographics’ of your target audience. Start with listing the geographies and market segments (industry verticals) that you could realistically address to understand the universe of potential customers your product and/or service could attract. This is a creative process, often started with little to lean on in terms of history and data. Over time you will however be guided by historical data and earned experience to understand what type of customers your product resonates with most effectively, and why. Do not waste the opportunity to leverage in-house data obsessively (conversion rates, ACV, retention rates, NPS scores, growth potential) but equally as a founder, ensure you stay close to the front-line and collect your own direct experience and anecdotes from your team’s engagements with customers as to what is sticking, or not.
At a geographic and industry vertical level my view is the narrower the ICP definition the better.
This is contrary to the commonly held idea that you should start off wider in appeal and narrow down over time. The exact opposite can be much more efficient and effective.
By starting small, you are by default forcing yourself to be laser-focused and explicitly targeted in your prospecting efforts. Early on your biggest constraint will always be time, so operating at a micro-level to get as granular as you can and to keep scope manageable in terms of the data and insight you collect. It makes things easier to control, allowing you to quickly get to qualification and validation. And it is easier to scale up, than scale back.
Next, you can refine the “where” further based on company size. In SMBs — budgets and decision-making processes — tend to also be smaller, and concentrated to a handful of people. Hence, less complex to navigate and understand. But not necessarily any less complex in terms of the pain points to address. In contrast, in larger companies — budgets and decision-making — tend to be decentralised throughout departments and managers. This means complexity is high(er), stakeholder structure challenging, and the size of problems likely greater.
Ultimately, where you sell to will be determined by your value proposition, and dictated by the size of your sales team and overall resources. This is why an ICP will evolve over time, as a company matures and can lean into larger, complex customers.
Regardless it is good practice (and easy) to talk to your potential prospects, existing (if you have them), as well as churned customers and prospects lost in your sales process, as these touch-points can help identify the sweet-spot of where your ICP operates. Once you do this, you can hunt with intent and a high degree of confidence that your acquisition cost (resource, time, spend) will provide a sustainable payback.
A few sample questions here to ask are: what market vertical are they operating in? where are they located? what industry (industries) are they in? what is their business model? how many people are in the company? what are their revenues? what is their annual spend on similar services?
Further Readings: When it Comes to Market Leadership Be the Gorilla by Andy Rachleff or Why You Should Find Product-Market Fit Before Sniffing Around For Venture Money by Andy Rachleff.
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Who
Going from firmographics to demographics and individual profiles within the company types and customer segments you have defined. Create personas of individuals or groups of people (stakeholders) you want to sell to in the customer segments, industry verticals and geographies identified within your ICP. These can be individuals who are the direct buyer/decision-maker or who will likely play a key role in the buying process at some stage. Personas can be curated through demographics, but also professional criteria relating to job titles, functional areas, domain expertise, or personality characteristics and behavioural habits. Once you have an overview of the organisations where your customers operate today, the intention is to look closely at the characteristics of those you interact with and generate an understanding of their function in relation to stakeholders and the overall sales cycle.
A few sample questions here to ask could be: what titles and seniority do your customers have? what kind of business function do they occupy or manage? what is the size of the team they are managing? what is their role in relation to the primary decision-makers? who are they reporting to? what are the trigger(s) that generally push them into a buying process and decision-point?
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What
You need to articulate what you are selling to your ICP. One way to do this is to document your current product options and map these to your ICP “where” and “who” criteria. What products or services are the best fit for those customer segments and personas? If you only have one product, this is a straightforward exercise. If you have multiple product or services positioned for different segments and buyer profiles, it is worth explicitly mapping each of these to your ICP profile(s). Over-time, you can build out the sophistication of what you aim to sell, align it with other components of your proposition mix i.e. pricing, channels-to-market and messaging.
Further Readings: The Most Important Sales Channels by Richard Thornton.
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Why
The why connects the problems you address for your ICP. Why will a prospect buy your product instead of another? What is the value you are offering and how does this differentiate alternative options? Why will your product provide a better ROI than another? Basically, why choose you?
Once your ICP is created you can visualise this in a simple way to socialise across your company to ensure everyone is clear on who you want to sell to, what you plan to sell, how you plan to sell it, and what key components of your product and/or service will resonate with your ICP segments.
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Bending not Breaking (reiterating the ICP as you scale)
Following the logic of fundraising cycles and macroeconomic shifts, your commercial goals will change as you scale, and so will your ICP with it.
Pre-Seed/Seed — validation of problem and product.
Series A — repeatability and revenue expansion.
Series B — evidence of broader scale (segment/geo).
Series C — capital efficient growth.
The ability to maintain ruthless focus on a specific target audience is one of the traits founders need to prove at seed (and beyond) to raise further capital. At the same time, obsessing over customers also means bending and reiterating your ICP as the world changes. The environment your customers exist in is subject to the same macroeconomic exposure as you are. Customers will adapt how they buy and engage in buying processes, in turn determining how your buyer profile evolves.
Ensure you review your ICP periodically (early on likely in-flight or monthly eventually transitioning to at least annually). It will help mitigate drifting away from your ICP over time. This can be done by recording and tracking closed won and closed lost outcomes — i.e. the end result of a sales opportunity — and if they were ICP customers or not by definition.
Does your criteria and profiling hold true or not? Are you actually winning an increasing number of new logos outside of your core ICP? Are there commonalities amongst these customers that are additive to your existing ICP criteria? Are non-ICP customers yielding equal or better outcomes in terms of Average Contract Values, Gross Margin profile, customer acquisition costs and so on? If they are this could be an indicator your ICP is evolving or broadening in scope, and therefore it is time to double down on these shifts and broaden your ICP sales and marketing efforts.
Further Readings: The Framework for Ideal Customer Profile Development by Gartner, How to Create an Ideal Customer Profile (ICP) by Pipeline.
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Access the google slide templates here:
The J12 Commercial Excellence Playbook — All Template Slides (2022).