Startups need to use their resources as efficiently as possible. When you’re marketing and selling your products and services, every founder wants to understand whether the right groups and individuals are being targeted. Many founders look to define their ideal customer profile (ICP) early in their development, to make sure your startup is building the right things for the right people.

Usually, an ‘ideal customer’ is perceived as the group of users or customers that have the highest propensity to buy your product or service, and who can do so with minimal friction. Writing in TechCrunch in 2023, Jonathan Martinez argued, "Startups using ICPs tend to acquire more leads with higher quality and are able to shorten their sales cycles."

But can startups over-optimise around one particular customer group? What are the consequences of identifying an ICP too early, with insufficient data? And how can founders and senior leaders best use data and instinct together to create a reliable and useful ICP? This article is your starting point to understand ideal customer profiles in early-stage companies.

It’s rare that you’ll have a fully-fledged idea of your ideal customer before you’ve started winning customers. “For companies that are pre-revenue, I would always advise to close the deals you can close, and get a batch of customers that are paying you before you spend much time thinking about your ICP,” says Rob Denton.

Rob is a marketing advisor with experience supporting fast-growth startups including Granola, Translucent and Gett. Previously he worked in-house at companies including PayPal and Nested. “You need demand before you really measure and categorise anything. Without demand, you can hypothesise, but you won’t have the data you need to even start building an ICP,” Rob says.

Rob gives an example of how a startup can begin to test whether they’re ready to build their product and commercial motions around an ICP. “Can you accurately complete this statement: ‘If a prospect meets X% of our desired archetypes, they have a Y% higher chance of converting to become a customer’? That depends on the completeness of your tracking and analytics, but it is also a measure of how well you’re defining the ‘jobs to be done’ in your potential ICP demographic.”

When a startup decides they need to define their ICP for the first time, where do they begin?

In Rob’s experience, the process starts by asking a set of questions that are gleaned through conversations with customers (particularly applicable to B2B businesses):

• What pain are you solving
• Whose pain is it: who are you building for?
• Are your customers currently using an existing solution for their problem?
• If so, why should they use your solution instead?
• How, and where, do you find these customers?

By asking these questions, you’ll move towards a rounder understanding of what your potential customers really want to achieve, and the hurdles they might face in completing those tasks at present.

Having posed these questions and quantified the results, the next step is to analyse different groups of potential customers and assess how they’re progressing through the sales funnel. Rob suggests:

This kind of analysis can often reveal which demographics are your ‘ideal customers’. Rob shares an example of the ICP work he carried out at tech-enabled estate agency Nested. “We learned through our funnel analysis that the key demographic was people who’d already tried to sell their home and failed, such as having experienced a sale that had fallen through. Those people were around five times more likely to convert and become Nested customers compared to other groups.”

Once you’ve identified a group of ‘ideal customers’, it’s about being confident enough to invest in reaching those individuals and/or businesses. “After we did our ICP analysis at Nested,” says Rob, “we completely retooled our marketing strategy to optimise for reaching those prospects. The channels we used changed, and the messaging we crafted had to change too.”

But what about if your ideal customer group isn’t big enough on its own to bring in the revenue you need to hit your forecasts? Essentially, do you need to model your total addressable market (TAM) around winning your ICP segment(s)? Or do you need to be more ambitious?

At certain points in a company’s scaling journey, it’s likely that pivots, product launches and new market entries will expand your definition of an ‘ideal customer’. Investor and SaaStr founder Jason Lemkin believes that the main job of the CEO is to “materially expand your TAM”.

That means companies in this situation need to carefully balance their product roadmap, so that new customer acquisition efforts don’t collide with the reality of serving their existing ICPs. “At Nested we had a big new product launch targeting first-time buyers,” remembers Rob.

Startups can often conflate ICPs with the more nebulous idea of a ‘buyer persona’. And the terms are closely related. All kinds of companies build persona profiles of the users they are serving, so they can better advocate for those users’ challenges, fears and desires when building and selling products.

The difference may vary depending on whether your business sells to other businesses, or to individual consumers. “Generally, in B2B you can think of your ICP as a company profile, and a persona as a profile of an individual employee at that company,” says Rob. “In B2C, for obvious reasons, it’s a bit muddier.”

Practically, what advantages do companies gain by thinking about personas alongside ICPs? For one, personas can help go-to-market functions navigate the additional complexity of buying decisions inside larger organisations. Rob says:

It’s arguable that a founder’s most important job is to find ways to expand the company’s TAM. In a growing company that is reaching new audiences, it will always be likely that the definition of an ICP will shift over time. But as Rob says, “It’s helpful to make your ICP quite binary: either they’re in, or they’re out. That mitigates the inevitable grey areas that always crop up in sales pipeline meetings and in marketing attribution conversations.”

Whether or not your ICP will change over time, following a consistent set of principles as you scale up – observing which groups of users or prospects are badly served by existing solutions, then tracking cohorts’ progress through the sales funnel – is a tried and tested way to continue building commercially viable and influential ICPs.