Why Customer Segmentation matters for SaaS Companies
Customer segmentation — aka market segmentation — divides potential customers in a given market into subgroups. That division is based on customers having the same enough:
1. Needs so that a specific product can satisfy them.
2. Buying characteristics, feedback to messaging, marketing channels, and sales channels so that the same go-to-market strategy can be used to sell to them effectively and economically.
This distinction is vital because needs-based segmentation research, by definition, requires specific primary research and data collection to find and correlate customer needs with their characteristics fully. Such research is complicated for B2B software or technology-enabled services since the buyers are typically sophisticated, multi-tiered organizations that cannot easily be worked or predicted like consumers. As a result, the vital information needed to analyze potential markets needs significant resources that many SaaS companies do not have.
It is vital to note that the customer segmentation flow outlined in this article is exclusively focused on a company’s current customer base. It is predictive segmentation research focused on helping discover homogenous groups of prospects that are most likely to become the top 5 percent customers. It is not a flow that will help a company find and prioritize previously unknown market segments, nor is it a definitive segmentation of the market that fully sorts its market into distinct needs-based, homogenous parts.
The three main approaches to market segmentation:
The Elementary segmentation, the most straightforward approach, uses a classification division based on publicly available characteristics, namely industry and company size, to create customer groups within a given market. However, elementary market segmentation may not always work since companies in the same industry and of the same size may have very varied needs.
Needs-based segmentation is based on precise validated motives/drives(needs) that customers express for a specific product or service offered. The requirements are found and verified through primary market research, and segments are marked based on those different needs rather than essential criteria such as industry or company size.
Value-based segmentation features customers by their economic value, grouping customers with similar value levels into outlined segments that can be targeted.
“Why Customer Segmentation matters for SaaS Companies” is intended for CEOs and senior marketing executives at expansion-stage SaaS companies. It focuses on the value-based strategy to segmentation, which helps companies distinctly define and target their best prospects and fulfill most of their segmentation needs without consuming the time and resources that a conventional, descriptive segmentation research process would.
Why Having Clear Segmentation Assumptions and Variables are Important
While most companies have enough market knowledge to predict or look for which customer segments are their most valuable or profitable, the leaders of those businesses also know that growing a business is best not left to feeling or gut, that’s why, in a customer segmentation approach like the one described in this article, it is pivotal to develop customer segment assumptions and variables and validate them with a well-thought research process.
That is particularly right in needs-based and value-based segmentation schemes, where it is improbable to utilize a customer segmentation process without prior establishing clear hypotheses that will serve as the basis of your research. Ultimately, ideas should form around customer traits or factors that allow you to distinctly separate your present customers into distinct needs-based or value-based segments. While your assumptions do not need complex mathematical or statistical statements, they should be clear and rational enough to be testable and valuable.
A typical assumption might look like this:
Customers with revenues of $1 billion tend to be in segment A
Customers with revenues of less than $1 billion will be in a different segment from customers with more than $1 billion in revenues.
Customers with more than $1 billion in revenues tend to be of more excellent value (or are part of a higher-value segment)
Using that illustration, the segmentation variables can be defined as the objective estimates, factors, or traits that help you classify segments, whether they are needs- or value-based. In the above outline, those variables focus on financial variables. Still, they could just as well pertain to the customer’s credibility, online presence, or market model, depending on the most relevant segment.
Developing variables and assumptions is essential for various reasons, but its primary purpose is to provide a structure for the customer segmentation identification process. Once you have established an apparent hypothetical assumption and the variables you need to test it, you can begin executing the winding strategy that will help you identify your best current customer segments.
Exploring Typical Customer Segmentation Schemes for SaaS companies
As with most business offerings, the goals and outputs of customer segmentation research will likely be based on your company’s stage, market conditions, and countless other variables. However, some relatively standard schemes converge — or at least overlap — with most needs-based or value-based segmentation offerings.
The six standard segmentation criteria that could be applied to your customer segmentation research:
- Geographic location
- Industry / sub-industry
- Product class/usage
- Organization size (measured by turnover, number of employees, etc.)
- Product delivery model / product format / packaging format / special technology / process methodology
- Special use/needs
It is crucial to note that even if a market is divided into one of the categories above, it is not a valid segmentation of the market unless it results in purposeful differences in customers’ values and wants its value proposition go-to-market strategy associated with each scheme. It is merely a good organization of the market with no tactical or operational value in such cases.
“ By adopting a customer segmentation plan, businesses will see a great increase in the value of their marketing efforts. Knowing your customer is the genesis of any successful marketing strategy. Marketing leaders who do not take the time to develop a segmentation strategy are risking their success. In these days of permission marketing, marketing leaders cannot afford to spray their messages — they must be specifically targeted and relevant to their customers. With that as a background, customer segmentation is a must.”
Joseph Abraham, CEO, Alpha Cube
The Business Case of Current Customer Segmentation:
At the growth stage, executing a marketing strategy without knowing how your target market is segmented is similar to firing a machine gun at a target 100 feet away — while being blindfolded. The chance of hitting the target is a sheer instance of luck.
Without a clear understanding of how a company’s best present customers are segmented, a business often does not have the market focus needed to efficiently allocate and spend its precious human and capital resources. Furthermore, a lack of the best current customer segment focus can cause scattered go-to-market and product development plans that hamper a company’s ability to engage with its target segments fully. Together, all of those factors can ultimately hinder growth.
If the best current customer segmentation is done right, however, the business benefits are numerous. For example, a best recent customer segmentation exercise can tangibly effect impact your operating results by:
Advancing your whole product
Having a definite idea of who wants to purchase your product and what they need it for will help your company as a good solution for their particular needs. The result will be increased customer satisfaction and better performance against competitors.
Focusing your marketing message
In parallel with advancements to the product, conducting a customer segmentation project can help you develop more focused marketing messages customized to each of your best segments, arising in higher quality inbound liking in your product.
Empowering your sales organization to pursue ample ticket opportunities
By spending less time on less viable opportunities and more on your most feasible segments, your sales team will be able to multiply its close rate, cover more ground, and ultimately improve revenues.
Getting stronger quality revenues
Not all revenue streams are created equal. Sales in the wrong segment can be more expensive to execute and maintain and may have a lower retention rate or lower upsell potential. Avoiding these types of customers and focusing on better ones will increase your margins and promote the stability of your customer base.
Conducting the best current customer segmentation research can have numerous other ancillary benefits, of course, but this eBook will focus primarily on how it can impact the four cited above. The bottom line is that if you can sell more of your product to your most profitable customers, you will be able to scale the business more efficiently and ensure that everything you do — from demand generation to new product development — revolves around the better things.
Creating Positive Change
This first step toward creating purposeful change in an organization is acknowledging that change is a necessity. A SaaS company moving from the startup stage to the growth stage often means abandoning a non-discriminatory, “take every customer we can get” approach and replacing it with a far more targeted, best current customer segment strategy.
Executing a customer segmentation research process is the first step toward helping a growing company make that transition. Ultimately, the best current customer segmentation can help your business better define its ideal customers, identify the segments that those customers belong to, and improve overall organizational focus.
In the next series of articles, we at Alpha Cube will outline a step-by-step approach that will help everything you need to set up your project, perform customer data analysis, execute data collection, conduct customer segment analysis and prioritization, and implement the results into your organizational strategy.