In B2B businesses, we often use the 80-20 rule that says, 80% of the profits are incurred from 20% of the customers. This is the foundation of customer segmentation in SaaS.
As a SaaS business, you’d have often tried to make your service ‘good for everyone’. As a matter of fact, it never really benefits your business. Targeting ‘everyone’ out there is definitely not on a successful business’s to-do list. The very first rule of business marketing often begins by stating the importance of a target audience and defining what customer base you are addressing. But, that’s certainly not enough.
What is Customer Segmentation?
Segmentation refers to the division of a market or service on the basis of various features that bind every group together. Customer segments are groups of customers that share common characteristics like industry, number of employees, products, location, etc for B2B marketing and gender, age, preferences, demographics, etc for the B2C market. These segments are then treated with different engagement strategies.
Smaller segments and targeted campaigns have been proved to increase open rates, click-through rates, and customer interest than average.
Why is Customer Segmentation in SaaS Important?
Statistics reveal that 81% of the customers trust their friends and family’s advice for choosing between applications. On the other hand, a report suggests that, in 2020, 86% of the buyers would pay more for better customer experience on an application.
Even after deducing the customer base that is to be targeted, segmentation can do wonders for your business. It can affect both, the service, as well as the communications of the company.
Segmentation allows you to send niche-focused marketing messages and implement specific marketing strategies to adherent groups of people. Every segment identifies itself on the basis of a few parameters which are instrumental in deciding the marketing strategy to be used.
Depending upon a particular customer segment, it becomes easy for you to devise the best communication channel for the people. While one segment may be easy to engage through email marketing, other strategies like social media marketing might work well on the other.
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How is it useful?
- A segmented customer base improves your product and service to be more effective. It can be synonymous with hitting the nail right in the head. Customized messages leave a deep impact on the customers and they feel inclusive of the company’s well-being.
- Specific customer segments make it easy to test pricing options for your subscription-based software. Also, customer surveys or ground-level practices can also be easy to carry out within a concentrated segment.
- Improved concentration on the customers will let you notice their grievances easily. This improves customer service by dividends. Better the customer service, larger would be your profit margins. A customer is said to be 4 times more likely to buy from a competitor if the problem is service-related.
- Customer segmentation and research & development should go hand-in-hand. Identifying and innovating new products or services becomes easier if you focus on one specific segment. Since you get well-acquainted with the customers, it becomes easier to understand their requirements and ensure product success.
- Customer segmentation allows personalized marketing techniques that can have a deep impact within a limited time. Smaller durations of marketing campaigns can be worth enough to gain more revenue. This, in turn, reduces your expenditure on marketing.
- With better efforts, your customer relationships take a new form. The bond with customers deepens and you can expect loyalty in turn. SaaS customer segmentation can transform your customer relationships. 5% of customer retention results in 75% of business profits.
- A customer segmentation strategy can help in running effective marketing campaigns. A prime example of that is let us say you find out that most of your SaaS users are B2B brands’ CMOs (Chief Marketing Officer). During such times, you can concentrate on reaching CMOs to ensure that you get more brand visibility and subscribe to more users. Also, it assists in saving your time and marketing budget.
- Customer-based segmentation assists you in ascertaining your pricing for your product. Most SaaS executives perceive that whatever they charge will determine their success. However, the who and how you charge the price determines your success. User segmentation is the primary step to SaaS pricing success. For example, Netflix’s basic plan costs $9 per month, while for the Indian segment, Netflix has created a mobile-only plan of $3 per month. The reason is that they found that the Netflix users in India are primarily mobile users, which will make them out of the $9 per month plan.
- Customer market segmentation aids in creating an ideal customer journey map. By making appropriate changes per the customer segment, the company can create a better product or service experience for the prospective customers. This way, they can also make more money.
- With the help of customer segmentation, you can determine the category of customers who upgrade from Plan X to Plan Y. Once you ascertain that, you can push the upgrade sales to a similar customer segment. This can make you upsell to prospective customers and increase your net revenue.
Common Characteristics of Customer Segmentation
Here are some of the common characteristics of customer segmentation listed below:
This is a must for customer segmentation. Each customer in the segment needs to have the distinguishing characteristics of the segment. A prime example of that is if the segment includes the city = of Manhattan, the particular target customer segment needs to be in Manhattan.
The customer segment you opt for needs to have a sizeable number of customers. It is always good to go for more niches because you can then personalize the customer segmentation needs accordingly. But, you need to understand that making a separate promo email for seven users in Manhattan is not a cost-effective affair.
You should be able to reach all users of each segment with the help of a common communication or distribution channel. A prime example of that is if you plan to send emails to a particular segment of users, first, you must ensure that you have the email addresses of all the users.
The results that you are expecting from a particular customer segment need to remain consistent for a long time. The external environment should not affect it. A prime example is that a new batch of customers in the segment should behave as anticipated.
A segment of users must be distinguishable from another segment. At least, it must have a clear difference that makes each segment look different.
You must take appropriate action with a particular customer segment. Otherwise, it makes no segment to make user segments. A prime example of that is, personalized marketing can create enhanced customer loyalty, so any segment that sends personalized messages needs to be actionable.
How Can Customer Segmentation in SaaS be Useful For You?
Customer segmentation identifies the correlation between your entire customer base and obtains the best-fit strategies for product marketing. SaaS customer segmentation is one of the best analytics practices for businesses. Let us understand how.
Best Customer Segmentation Practices
To assess the customer base and segment them, many things should be kept in mind.
- A customer segment should be measurable. The segment should be accountable enough too have specific metrics and should be able to produce enough data to analyze and discretize.
- The customer segments should be addressable. While communicating with the segment, you’d need a segregated boundary of the segment to be kept in mind, in order to ensure effective marketing.
- The very basic motive of dividing customers lies in the consistency of the customer segment. Therefore, the measuring parameters of the customer segment must be consistent throughout.
- External effects can disturb the stability of the customer segment. Therefore, segments mist have negligible fluctuation to ensure reliable insights.
SaaS Customer Success Through Customer Segmentation
SaaS marketing in 2020 requires more than just a marketing campaign. It requires tailored efforts and effective customer success strategies. In the past decade, most SaaS businesses have experimented with customer success strategies.
Despite enough investment in customer acquisition, their products failed to satisfy the customer and customer retention dived down. Thus, customer success became a vital ingredient of the recipe of strong revenues.
Not just the churn rate, businesses have been focussing on more customer success initiatives to strengthen their subscription models. Also, customer success metrics are an important parameter to drive business growth.
Almost, 55% of the SaaS enterprises acknowledge Customer Retention Cost as the key parameter to measure. Focussed customer success managers are appointed for a better emphasis on customers as well as the company’s accounts.
If customer success could be made any stronger, it is only through segmentation!
Your SaaS business would have got you to crossroads where you came to know that some customers bring in more revenue than the others. This indicates that customer success managers should prioritize working on those customers first.
So, for instance, one of your CSMs sends out an email with some industry news or articles, every month, to the clients from the manufacturing industry. What if the same CSM starts this work by sending an email to the ones in the priority list first? Or, what if the mail goes every week to the higher-priority customers, rather than every month?
Zendesk, a leading SaaS company suggested that 87% of the consumers agree that organizations need to provide a more consistent customer service experience. Also, customer segmentation can ease up the process much more and gain you better insights on what your customers are looking for.
Segment Value Matrix
The segment value matrix shows how customer behavior can be traced in between current and potential value scales. Notice that a segment with more new customers has less revenue invested in the current scenario.
But the same segment holds good potential value and can give higher revenue growth in the future. Similarly, a medium-sized customer segment with ample investment in regular intervals shows good potential value in the future as well.
The segment value matrix assists in the identification of revenue generation potential. Also, various factors are put into focus into account like the subscription level, company history, company size, etc.
This gives you a good choice as to which segments should be invested more into and which can make a lot of money for your business. Further, segments with high churn potential can be recognized and marketing efforts can be implemented.
Churn Rates In SaaS Customer Segmentation
The customer success engine ramps up on the backbone of tools, processes, and incentives that they think they will need to scale customer-success initiatives. But to sustain the process, customer segmentation is essential. How?
Customer churn rate can be a useful parameter for customer success teams to define customer segments. Moreover, the likeliness of the customer to churn can help the CSMs to brainstorm the effectiveness of customer success initiatives.
While CSMs have a deep understanding of the customer and their objectives, they also possess product knowledge and domain expertise. This helps them use the right internal resources and advanced customer success software to generate key insights into customer behavior. Analytical statistics and comprehensive trends of customer behavior can generate accurate churn rate predictions.
For example, a customer that hasn’t used your application for a week or more might fall into the high churn score category. Whereas the one that logged in four days ago will have a relatively low churn score. In such a case, the customer success manager can give a quick lookup and follow up the customer with high churn scores.
Lowering the customer churn rate might seem like a deadlock for any SaaS provider. However, the best customer segmentation can increase the response rates and improve your customer happiness index.
Customer Segmentation Approach
The easiest customer segmentation parameter can be defined by customer age. Long-term customers have quite different needs than short-term clients. In fact, the loyalty points act as a great incentive for long-time customers to stick around with your application.
Age can also depend on the implementation factor. One customer might need a longer time to actually use your product while the other might be a momentary one.
If you are a B2B SaaS business, the goals and outputs of your customer segmentation research would depend on your market and industry position. Also, there might be several other variables in discerning the segmentation schemes. If generalized, the following parameters can be used for B2B customer segmentation:
- Company geographics or reach
- Industry to which the company belongs
- Product category
- Process technology used in the company
Similarly, for B2C SaaS businesses, the customer segmentation requires a lot of analytics. Identifying the segments might be tough but upon looking closer, niche-specific distinguishing factors can be easily discerned.
B2C businesses can employ customer segmentation by:
Apart from this fundamental information, intrinsic evaluation can also let you discover the segments. Why does the customer use your product or service? What is the customer’s motive for using the app? This simple question can make different segments visible to you.
Being a SaaS provider, you can also notice various behavioral segmentation parameters in your customer base. Customer behavior holds endless possibilities. Also, by using your customer success manager insights, you can obtain interesting statistics of the customer behavior. And use them for segmentation.
Though these are just indicative parameters of how the customer segmentation might look like, you know best what suits your business. A valid customer segmentation schematic should result in the discretization of the customer base. And should ensure the company’s go-to-market strategy, value proposition. With this, the revenue levels show significant results.
For a SaaS business, there might be customers who would be called ‘product advocates’. Moreover, this segment is the most loyal one and is the best segment to contribute to your word-of-mouth marketing. Such a customer is your promoter.
The Net Promoter Score (NPS) is calculated by subtracting the percentage of detractors from the percentage of promoters. It is a general indicator of brand loyalty and devotion of the customer towards your brand. Further, your NPS shows you how well your application is doing in the market. Interestingly, an NPS promoter score has a customer lifetime value that’s 600%-1400% higher than a detractor.
SaaS customer segmentation is an effective measure of ensuring business growth and good revenue returns. The future holds immense potential for customer segmentation in terms of micro-segmenting. And other technological improvements. Understanding a client is all that matters at the end of the day. Customer segmentation begins with an understanding of customers.
This gives way for unique marketing as per the preferences and requirements of the customer. And hence, customer success. Further, analysis of customer behavior using machine learning and usage of marketing automation tools is a great opportunity for SaaS businesses to obtain powerful results.48
Anshi has over 12 years of experience in demand generation, digital marketing, and managing global teams. In her prior role as head of marketing operations for a high growth US healthcare tech organization she transformed marketing from cost to revenue center.
Published April 24, 2020, Updated January 06, 2023