A lot of early-stage SaaS companies start and stop after they define their TAM (total addressable market).
The problem is that a TAM is too broad for an effective GTM strategy – especially for younger companies. In the beginning, you need to find customers that are a great fit, not just... a fit.
When you don’t define an ideal customer profile (ICP), it tells your marketing and sales teams to operate with a “spray and pray” mentality, trying to force product-market fit somewhere within your TAM. That’s really inefficient, especially when you have limited money and time to get results.
When you go after the wrong companies, write the wrong messages, promote the wrong value-props, and create the wrong content for too long, you run out of time to get results.
Creating an ideal customer profile (ICP) forces you to segment that market to find best-case accounts for your company – so you can focus your time on strategies that are most likely to get you customers.
An ICP is an outline of your ideal customer – the ones you want more of. The ones that buy from you consistently and tell others about their great experiences. The customers that don’t churn. The customers that had a real pain and clearly saw your value proposition. The customers that had the shortest sales cycles and lowest sales friction.
Your ICP provides guidelines to your sales and marketing teams. It tells them which companies are a great fit – and what they should look for to find more like them. It should be the “North Star” for your team as they build your customer base.
To be very clear, your ICP should not be used strictly to accept or reject all new prospects. There may be companies that fall outside of your ICP that are still a great fit for your product. Your ICP’s main job is to provide guidance for the companies you want to approach outbound.
One of the first things we do when we start working with our partners at Kalungi is hone in on their ICP. It’s important to get this step right. It influences almost all of the GTM work that follows.
It doesn’t need to be complex – in fact, it should be (somewhat) simple. If it’s too strict, you’ll find yourself with too small a target to aim for. If it’s too broad, it defeats the purpose of the whole exercise.
If you’re struggling to find the right balance, start with lots of detail. When the time comes to size up your TAM (total addressable market), SAM (specific addressable market) and SOM (specific obtainable market), you can always remove certain filters to make your pool large enough to be meaningful.
At Kalungi, when we define ICPs for our partners, we try to fit them onto a single slide. If you need more space than that, it might be worth rethinking your filters and signals.
Before starting this exercise, you need to answer one very important question: Have you reached product-market fit (PMF)? Depending on your answer to this question, you may want to approach your ICP development differently.
How do you know if you’ve reached PMF? Here's a good litmus test: How many of your customers were referred to you by your existing customers?
If it’s ~30% or more – it’s a good indicator that you’ve reached PMF within a segment of your customers. Obviously this also depends on the verticals you service and the kinds of software you sell – but it’s a good place to start if you’re unsure.
You’ll know you’ve reached PMF when your customers are really excited about what you’re selling – maybe even more than you are. Josh Porter from Rocket Insights sums it up well:
Some other indicators you can look to tell you whether or not you’ve reached PMF are:
“Product/Market Fit is a funny term, but here’s a concrete way to think about it: when people understand and use your product enough to recognize it’s value, that's a huge win. But when they begin to share their positive experience with others, when you can replicate the experience with every new user who your existing users tell, then you have Product/Market Fit on your hands.”
- Josh Porter, Rocket Insights
When you’ve reached product-market fit, firmographics, technographics and demographics are good primary methods for segmentation. The first thing you can do is analyze your current customer dataset. Are there any trends in the data that create a cluster or a “beachhead” that represents customers you want more of?
When you haven’t yet reached product-market fit, it can be risky to segment your ICP in the same way as above. You may need to focus more on psychographics and job-to-be-done characteristics to segment the market.
Firmographics are characteristics of the companies where your customer personas work. Think about the accounts that are the best fit for your product. A few sample questions you can answer are:
These are the technologies your ideal customers use to run their organizations. Are there tools they use that make them a good fit? Some sample question to get you thinking:
These are characteristics of the specific people that interact with your team – both in the sales process and as an end-user. The people who use the product on a daily basis are just as important as the people who make the decision to buy – and in some cases may be the same person.
This is the actual job your customer is trying to accomplish. It should be something that’s solved by your product, or is tangential to the problem your product solves. It should also be findable – there needs to be a virtual footprint that tells us someone is trying to do this job. You may be able to combine these with technographic data. For example, if someone is a Monday.com user, they’re likely trying to solve a project management problem.
As you build out your ICP, note which segmentation criteria are filters and which are signals. This is an important distinction.
Filters are used to remove portions of the market from your consideration pool. You can use filters to create a shortlist of accounts you want to go after (this is also your SAM, or Specific Addressable Market).
Within this final list, you can use signals to prioritize which accounts to prioritize. Signals are indicators that certain companies are better fits than others. They tell you which accounts are tier 1 vs. tier 2.
Create a centralized document of your ideal customer profile's relevant information that gets sign-off from your leadership, sales, and marketing teams. Here’s a template to help you get started.
Once you’ve segmented the market and landed on your ICP, you’ll want to create simple personas that reflect the actual people you’ll be selling to – the users, influencers and decision-makers. Read more about our method for creating personas here.
Once you’ve defined your ICP, you can scope the size of your market and begin list building. This is a crucial step in developing your account-based marketing strategy.
Decide where your sales and marketing teams are going to focus their efforts to find accounts that match your ICP. Depending on your customer personas, your company resources, and existing materials, you may decide to prioritize inbound more than outbound in the short term – or vice versa. There are also other approaches to reaching prospects that should be considered.
We like to balance both inbound and outbound together. Inbound is a more long-term, sustainable approach – you need to build the machine to educate customers and help them find you. But, if you’re in an immature (or new) market where customers don’t necessarily know they have a problem (or aren’t looking for a solution), a strong outbound approach may be best to help you get more immediate results while you build the inbound infrastructure in the background.
Don’t let your ICP sit too long without a refresh. Refine and update it with learnings on a regular basis. Include customer success, sales and marketing teams in the conversation.
As your company grows (and if you create multiple different product offerings) you might consider creating different subset ICPs. There’s no one-size-fits-all approach to this. Do what gets the best results for your company.