Glossary

Everything You Need To Know About Customer Segmentation

November 14, 2023 | By Dhruvil Sanghvi & anurita.sinha

Customer segmentation categorises SaaS company’s customers based on parameters like tech, products and business goals.

Table of Contents

What Is Customer Segmentation?
How SaaS Companies Segment B2B Customers
Four Key Challenges Of Customer Segmentation
Five Ways To Boost SaaS Growth With Customer Segmentation

What Is Customer Segmentation?

Customer segmentation is all about categorising a company’s customer base into distinct groups based on critical parameters. While creating customer segments, a SaaS player may only consider primary data or delve deep into tech aspirations, product innovations and business goals.

Typically, SaaS providers will start with basic information such as business type and size, industry/sector, locations and markets, revenue and technology solutions in use. However, they will move on to more granular analysis to tailor their products and services, communications, and sales and marketing strategies to resonate better with each customer group and profile.

This is no easy task, as SaaS players need to enhance customer engagement at pre- and post-sales levels based on the data insights revealed by these groups. More importantly, routine data crunching may not be adequate for this purpose, leading to many pitfalls and a subsequent loss of business. In simple terms, a holistic blend of data, creativity, business perception and knowledge of market trends is needed to create these segments and meet their unique needs and preferences.

Whether SaaS companies are leveraging customer segmentation to drive growth in existing markets or using the datavantage to explore new geographies, this exercise is essential for maximising revenue and delivering personalised customer experiences. Ultimately, it ensures that resources are allocated efficiently, customer satisfaction is optimised and companies can thrive in competitive markets.

How SaaS Companies Segment B2B Customers

Data-Based	Requirement-Based	Technographic	Financials	Decision-Makers
1. Firmographic Segmentation: Considers location, size, business model, revenue, technology usage and other business-related parameters Benefit: This broad segmentation helps understand basic customer profiles and their requirements. These parameters are also used to identify potential customers at the top of the marketing funnel, the widest part indicating the most initial stage.	1. Needs-Based Segmentation: Takes into account customer data, market data and customer behaviour to identify pain points and solution requirements in sync with market needs Benefit: A clear understanding of customer and market segments helps tailor sales & marketing initiatives.	1. Tech Maturity Segmentation: Customers are assessed on tech knowledge and sector trends. Benefit: Differentiates the need for tech support. For example, a knowledgeable customer may get an auto-onboarding option and minimum hand-holding, but a new-to-the-tech business will get hands-on training and dedicated tech assistance.	1. Pricing Segmentation: SaaS companies have tiered pricing based on product features and categorise customers according to pricing tiers. Benefit: Tracks product preferences of each price tier so that customers get what they value most and SaaS players can maximise their revenues	1. Single Controlling Authority Segmentation: Segmenting companies based on this parameter is easy, but SaaS companies should also consider multiple stakeholders with skin in the game, even if they don’t have the final say. Benefit: Helps identify the person in control, which enables targeted communications and quick decision-making
		2. Jobs To Be Done (JTBD) Segmentation: Focusses on the outcomes sought by customers. Here, ‘job’ means the desired result rather than product functionalities. Benefit: Promotes creative marketing strategies based on customer needs and their desired output	2. Product Usage Segmentation: Groups customers based on how often products are used and the purpose and intent of such usage. For instance, a business exploring product nuances may soon look for an upgraded version, while routine users will stick to the code product alone. Benefit: Helps track upselling and cross-selling opportunities	2. Key Accounts Segmentation: Classifies customers based on their financial value. For instance, the top group can be 20% of the customers, accounting for 80% of the revenue. Benefit: Prepares SaaS companies to customise products and services for high-value entities	2. Multiple Decision-Makers Segmentation: A complex procedure if multiple decision-makers exist in a single company Benefit: When decision-makers are identified, SaaS companies can customise communications accordingly and tailor their sales and marketing strategies.
						3. Profitability Segmentation: A financial parameter grouping customers on profitability Benefit: Helps allocate resources wisely, with the focus on differentiated requirements

Source: Secondary Sources

Four Key Challenges Of Customer Segmentation

Access to adequate and good quality data: Amassing,analysing and updating a vast quantity of relevant and reliable data can be extremely challenging at times. To effectively manage data, SaaS providers should determine their requirements, implement data management systems, integrate data capture through customer feedback and other tools and use AI/ML for data insights. Unless data is validated/cleaned regularly or synced with ground realities such as changes in market trends, competition or customer preferences, errors will creep in and distort analytics.A significant pitfall here could be adherence to data privacy regulations. SaaS companies need to opt for permissible data usage, ensure transparent data collection and implement data security measures if they want to leverage customer data for business growth.
Getting the segmentation criteria right: Developing an effective strategy for customer segmentation can take time and effort, given there are too many criteria to consider, from demographics, requirements, spending and tech usage to value creation, retention and more. Overall, it will be a complex manoeuvre involving qualitative research and in-depth statistical analysis. To choose the most suitable criteria, SaaS companies should focus on the right datasets aligning with their business objectives. For instance, if a company wants to push its revenue at the earliest, it will focus on onboarding a large number of customers with immediate requirements and explore datasets to identify that segment. However, the company may not be able to retain so many customers in the long run. On the other hand, companies targeting customer retention or high-value enterprise deals for long-term growth will take their time and tap into areas for maximising customer satisfaction or creating innovative, value-added products. Eventually, customer segmentation will be a dynamic procedure wherein different criteria and methodologies will be compared and tested to make sure that they work for specific business goals.
Getting the segment size and the segment number right: Determining the right number of segments and right-sizing each is crucial for optimum growth. If there are too many segments or too many businesses in those groups, customising one’s offerings becomes difficult. Again, going too granular may lead to faulty resource allocation and a rise in costs and operational complexities without adding any real value. To achieve optimal segmentation, one should balance breadth and depth, consider capabilities and measure outcomes via critical metrics like customer acquisition, retention, revenue and profitability.
Effective communication and collaboration: Until a SaaS company thoroughly understands its customer segments, goals and expectations, it is difficult to become partners in growth. In contrast, one can easily customise communication and collaboration strategies when customer segmentation aligns well with customers’ needs, values and vision. Staying attuned at every step is the way to achieve desired outcomes.

Five Ways To Boost SaaS Growth With Customer Segmentation

Better efficacy of products and services:With a suitable model in place, SaaS companies get a better understanding of each segment as entities are broadly based on similarities. Consequently, they can improve the products and services required by each group.
Increased revenue potential:Customer segmentation allows SaaS companies to target high-value businesses/enterprises and increase revenue through innovative products and services, upgrades and cross-selling.
Better price matching:Market knowledge and customer data help strategise sustainable pricing for different customer segments.
Enhanced customer service:Again, a good understanding of customer profiles and segments improves customer service by providing personalised experiences along each touchpoint and promptly resolving unique grievances. This further boosts profits and customer retention.
R&D boost:Finally, segmentation drives R&D, enabling research teams to focus on each segment for the most suitable solutions. This approach simplifies identifying pain points and innovating new products. Understanding user requirements from the get-go further increases the chances of product success.