The Pareto Principle of business states that 80% of your revenue will come from 20% of your customers.
But who are these VIPs?
Identifying and understanding your business’ 20% is critical to unlocking sustainable SaaS growth. An effective way to do this is with customer segmentation.
Segmenting your customer base streamlines all aspects of your business. It ensures you’re not wasting time, effort, and marketing on lower-value customers while your biggest spenders are getting ignored.
If you’re only looking at activity logs and recurring revenue to find your VIPs, there are valuable insights you might miss.
In this article, I’ll discuss what customer segmentation is and why it is important. I’ll take you through the different types of customer segments every SaaS business must have and share four simple steps to implement an effective segmentation strategy.
What is SaaS Customer Segmentation
SaaS customer segmentation is a marketing strategy that divides customers into groups based on common characteristics or specified criteria. The criteria may include anything from common data points like geographic location and company size to more advanced factors like account value, user behavior, customer preferences, and lead scores.
Breaking target audiences into smaller groups makes it easy to understand their needs. In doing so, you get to run more targeted marketing campaigns and improve customer experience and product development.
Well-executed customer segmentation strategies deliver high engagement and conversions. They boost net revenue retention rates, which is super important in the SaaS business model.
Why is Customer Segmentation Important for SaaS Businesses
Segmenting customers allows you to deliver better customer experiences.
Each segment has its tastes and preferences. Segmentation helps you identify and use these tastes and preferences to deliver tailored customer experiences.
Let’s say your SaaS product attracts both SMBs and enterprises. Then, it happens that SMBs only need a particular set of features from your SaaS. But you do not use unbundling strategies. That means you risk losing a significant portion of your SMB customer base.
You’ll only notice such trends and enhance your pricing strategy if you do effective customer segmentation.
Segmentation also enhances product development. It helps you create innovative and relevant features.
When you focus on specific user segments and how they use your product, you understand their requirements, ensuring product success by developing core features they want to use.
But perhaps the biggest reason you should invest in customer segmentation is how it facilitates effective marketing campaigns.
Segmentation shows you what each customer group cares about. You’ll get a deeper understanding of their struggles, pain points, and goals. It can also help you understand how freemium users are using your product, for example. You can then leverage these insights to write effective SaaS content and marketing message for each group.
This takes your personalization game to the next level. And as one Mckinsey research shows personalization generates 40% more revenue.
Types of SaaS Customer Segmentation
Depending on your goals and target audience, there are many ways to segment customers. Here are four ways SaaS businesses can approach customer segmentation.
1. User Attributes
This is the equivalent of segmenting DTC customers by demographic data. Instead of using age, gender, ethnicity, and marital status, B2B SaaS companies will need to understand the specific attributes of the brands they’re going after.
Admittedly, some demographic data can also be used here. For example, you may want to create a segment based on where the company is located. So you can have separate segments for companies located in California, USA, English-speaking European countries, and so on.
Enterprise SaaS brands like HubSpot use this technique to run relevant campaigns for the different regions they operate. This ensures each campaign resonates with the culture, language, and general expectations of customers from each region.
Besides location, you can also create segments based on attributes like:
- Company size – I.e., how many employees do they have? What’s their market share?
- Revenue – I.e., how much revenue does the company generate?
- Level of Subscription – I.e., how much is the company spending on your software?
But that’s not all.
With the help of advanced automation tools like Customer.io and Encharge, you can create more focused segments using user attributes. For example, you can link these platforms with your CRM to pull the data and create smaller segments using custom fields. You could create separate segments for contacts, leads, and customers, for instance.
Additionally, you can link the tools with Typeform to use the user traits from the form answers for segmentations. For example, you can place the users into separate segments based on the job roles entered in the form.
2. User Behavior
This is the most powerful SaaS customer segmentation strategy, in my opinion. It’s not as basic as user attributes, and neither is it too complex (as long as you don’t get too extreme with the options).
So how exactly does it work?
Behavioral segmentation involves segmenting users based on the actions or inactions they take while interacting with your brand. There are multiple levels to this too. You can segment users based on what they do on your website, what they do inside your platform, and how they interact with your emails.
The first two are especially interesting.
Here is what I mean. By installing a website tracking code, you can create a segment of users who visited specific pages on your site, like the pricing page. Not only that, but you can also go as far as creating segments for people who visited those pages several times within a specific period.
For example, you can have a segment of users who visited the pricing page 3 times in the last 30 days. These contacts can be forwarded to your sales teams for further follow-up.
Meanwhile, by connecting user segmentation platforms with your app through an API, you can track in-app actions and use the data to create different segments.
Let’s say you have project management software, for example. In that case, you might want to create a separate segment for people who invited their teams, launched a project, and created tasks.
Note: Not all automation tools support this level of segmentation. For example, some tools do not provide advanced AND/OR rules to help you create hyper-focused groups. That means in the last example above, you wouldn’t be able to create a segment of users who performed only three actions, i.e., invited their teams, launched a project, and created tasks out of a bunch of other options.
I’ll talk more about marketing automation tools for segmentation later in the article.
3. User Preferences
This is a more straightforward segmentation strategy. You basically identify users’ interests or preferences and use that to place them in relevant segments. You can ask the users directly what they’re interested in when they’re signing up for your email.
Alternatively, you can track user activity, like the email links they click, to determine what they seem to be interested in. This is not very precise, but it helps keep your email signup forms short.
The other option is to ask the users what exactly they’re interested in during demo calls.
Bonus Point: You can combine some user attributes and behaviors to score leads and come up with a separate user segment based on the lead scores. For example, you can add a score for every key event, like visiting the pricing page, signing up for the freemium plan, using a core free feature at least x number of times per week, and clicking on certain links in your emails. These segments can be very helpful for your sales team. You can also create automated email workflows targeting them.
Steps to Implement SaaS Customer Segmentation
Customer segmentation can become messy. It’s easy to get tempted and go on a crazy spree creating as many segments as possible. Don’t do that. It’s not sustainable, and it gets costly very fast.
Neither should you have too few customer segments. This can defeat the whole purpose of segmenting your audience in the first place.
You want that sweet spot in between.
The sweet spot for most SaaS brands features three types of customer segments:
- Company size (small, medium, large)
- Value (high-value vs. low-value users)
- Active vs. inactive users
These categories ensure your segments are stable, distinguishable, and profitable.
However, if your team wants more hyper-focused, albeit complex segments, behavioral segmentation is a good option.
Here is a step-by-step process on how to go about SaaS customer segmentation:
1. Define Your Goal
Besides the overall business goal of more sales, higher profits, and whatnot, ask yourself what you want to achieve through customer segmentation.
- Are you looking to improve customer experiences?
- Do you want to enhance your marketing campaigns?
- Do you want to convert more freemium & free trial users?
- Are you trying to identify upselling opportunities?
- Do you want to discover product development opportunities?
While not explicitly profit-oriented, these goals impact the bottom line.
Improved customer experiences reduce customer churn; optimized SaaS marketing campaigns maximize ROI; and upselling opportunities increase product value and customer service.
Setting goals for your segmentation project draws clear lines around your customer groupings. They help you define the total number of segments, identify data sources, and outline measures of success.
For example, if the goal is to convert more freemium & free trial users, you’ll know the type of data you need to create the relevant segments. You’ll also know the specific KPI to track to determine whether the segmentation and your promotional campaigns that followed were effective in achieving the goal.
2. Data Collection and Analysis
Once you have defined your segmentation goals, you’ll need to source customer data for your segments.
The following are a handful of data sources for segmenting projects:
- Registration forms
- Analytic tools
- Customer Surveys
- Customer database
- Social media
- Heat maps
- Transaction history
Let’s look at a couple of examples.
Customer onboarding presents an opportunity to get to know your customer. You can collect demographic and geographic data like occupation and location.
Bitly, a link management platform begins its onboarding process by asking users how they use links. It creates two segments – personal users and professional users. Depending on the answer, the form directs users to different questions.
Don’t be overzealous in collecting data during onboarding, especially if you do this via some online form. Too many fields could create friction with some customers and cause them to abandon the process altogether.
On the other hand, if you’re an enterprise saas that conducts onboarding calls, you may have more leeway to collect more data.
Customer feedback tools like surveys help collect behavioral data such as customer satisfaction and loyalty. Happy customers are more likely to recommend your product to their peers.
Above is the Net Promoter Score (NPS) scale. The NPS is a single-question survey.
Respondents who answer your question with a six and below are detractors. They are unhappy customers.
Scores of seven or eight indicate passive customers. While they are not dissatisfied, they aren’t loyal either. Promoters, with nine and ten scores, are brand advocates, your 20% that drive growth.
You can use the NPS survey to group your customer base into three groups, allowing you to optimize content for each target segment.
Integrations: Lastly, you can rely on integrations to automatically import the data from your software or third-party platforms like CRM, lead generation tools, and payment providers. This is probably the best path. However, you’ll need to use a customer segmentation tool that supports the integrations you need.
So you may want a tool that integrates with your CRM and Typeform, for example. You may also need one with an API your team can use to connect your app. This will help you import and use real-time data for segmentation.
3. Pick a Marketing Automation Tool
Most modern marketing tools will help you segment your users to some extent right out of the box. For example, both CRM and email marketing tools provide user segmentation options.
Unfortunately, the degree to which you can segment your users varies from one tool to another. For example, HubSpot is phenomenal at helping you segment users based on company and contact properties. It gives you more than 200 properties to pick from. This can be quite overwhelming, to be honest.
But there’s a drawback. To access the data you require for event or user behavior segmentation, you’ll need the enterprise plan. That plan costs north of $43,000. Not every SaaS company can afford this.
Then you have email marketing software like Mailchimp and ActiveCampaign. They both support segmentation but not without drawbacks.
Mailchimp, for example, does not have advanced and/or segmentation logic. You only get any/all segmentation logic.
Any/all can be limiting in several scenarios, e.g., when you want to create nested groups
Let’s go back to the project management software example I mentioned earlier. Let’s say you wanted a segment of users who have launched a project and invited their team but haven’t created a task. These are probably users who initiated the process of using your product but haven’t really started using it.
A tool with an advanced AND/OR function can help you create that segment without starting from scratch. But with Mailchimp’s any/all functions, you won’t be able to separate those users from a segment with all three properties (invited a team, launched a project, and created a task).
Then, you have marketing automation tools like Encharge and Customer.io. These tend to integrate with your existing software stack, pulling the data you need to create hyper-focused customer groups.
They also provide more segmentation options. Encharge, for example, support both advanced and/or segmentation logic, event counts, time window, and event property.
The problem is these tools can get very complex. It can also be an additional expense.
So, what’s the bottom line here? Think about the specific goal of your segmentation campaign. What are you hoping to achieve? That should tell you the level of segmentation you require. You can then use that information to know what tool will likely work best for you.
You may also want to consider your future needs. There’s no need to add an expensive line item to your budget if you’re not going to utilize it in full. But at the same time, it won’t make sense to save a few bucks right now if you know you’ll need additional functionalities of a different platform in the near future.
4. Create Your Action Plan
With the relevant data ready, you can start devising the appropriate techniques to target each group based on the goals you set earlier.
For example, you can identify the relevant SaaS marketing strategies to implement if your goal is to boost marketing campaigns.
Let’s say your segmentation goal is growing referral traffic or app installs, and your NPS survey revealed several promoters. A suitable strategy would be developing a referral program to incentivize loyal customers to promote your product.
The best referral programs incentivize both existing and potential customers. This is the strategy Dropbox used to skyrocket signups.
Referrals are a powerful SaaS marketing strategy. 92% of customers trust recommendations from people they know.
So, this type of advertising generates quality leads, boosts conversions, and builds trust. When used correctly, you retain your best customers and attract similar targets, which is perfect for sustainable growth.
Here’s another example.
You discover that you lose customers after they use your product three or four times. Or customers use a handful of features. That could mean your onboarding process doesn’t demonstrate the value of your product.
However, the problem with comprehensive product tours is customers quickly forget the information.
Instead of these one-time tours, consider integrating tooltips into your software. Tooltips are brief explanations of an app element or feature.
Brands like Canva use tooltips to familiarize users with the products as they use them. In the above example, Canva guides users step-by-step through creating branding assets.
5. Execute your Plan and Monitor the Results
You have to monitor the performance of your action plan to know if it’s working. The specific metrics you track depend on the goals of the segmentation strategy.
Generally, they measure retention and revenue growth.
- Conversion rates
- Monthly recurring revenue
- Number of active users
- Customer lifetime value
- Customer satisfaction
- Customer retention rates
Let’s go back to the previous goal of converting freemium users to paid account holders. The key performance indicators (KPIs) for your upselling campaign could include measuring the conversion rates of users from the free plan to a premium one. This will be calculated separately from the overall conversion rate.
Challenges of SaaS Customer Segmentation
Customer segmentation gives businesses a strategic advantage over non-segmenting competitors. However, many SaaS businesses fail to reap the benefits for the following reasons:
1. Inaccurate Data Collection
According to Gartner research, inaccurate data costs organizations $15 million in losses. So, the data collection process is crucial for successful segmentation.
Data inaccuracies occur for several reasons, including data entry errors, incomplete data, non-standardized collection methods, and duplicate data.
For example, collecting behavioral data from social media analytics but not other platforms won’t give you a complete picture of your segments.
2. Inadequate Resources
Effective customer segmentation is resource-intensive. Early-stage companies don’t have the time, money, and expertise to segment their entire customer base.
That could lead to data inaccuracies and ineffective customer segments. Fortunately, many marketing automation tools have segmenting features to help small businesses organize data.
3. Ineffective Implementation
Customer segments that don’t align with overall business goals aren’t productive. If your groupings are non-qualified, one-dimensional, or rigid, they will not be profitable or provide valuable insights.
Your customers aren’t static, and your parameters should be able to respond to customer trends.
The opposite of narrow segmentation is over-segmentation. You can segment customers along as many lines as you want, but too much segmentation has adverse effects.
It’s so easy to divide your user base too much that you lose the big picture. Based on our customer segmentation definition, you should look for similarities, not differences.
SaaS Customer Segmentation FAQs
SaaS customer segmentation is the process of dividing customers into several groups based on their similarities and other set criteria. For example, you can segment customers based on how active they are.
The most vital customer segments for a SaaS company are based on company size, active and inactive users, and the value of customers, i.e., low-value and high-value customers.
Customers are not a monolith. 71% of customers expect personalized interactions, and painting them with broad strokes makes them feel unvalued. On the one hand, acquisition requires appealing to a large audience. However, it is your most loyal customers that drive growth.
Customer segmentation helps you identify and profile your ‘ride or die’ customer. And focusing on your profitable segments ensures low churn rates and stable revenue growth.
But this shouldn’t give you a license to ignore other segments. Customer segmentation helps you identify at-risk customers and develop strategies to nurture them into loyal ones.
This article outlined the steps to create such segments: goat setting, data collection, a plan of action, and monitoring. Happy segmentation!
Nico is the founder of Crunch Marketing, a SaaS marketing agency. He works with enterprise SaaS clients like Writer, Right Inbox, and Surfer SEO, helping them scale lead generation globally across EMEA, APAC, and other regions.