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.
Let’s get started!
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 geographic location, company size, account value, and customer behavior.
Breaking target audiences into smaller groups makes it easy to understand their needs. In doing so, you 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. 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. Demographic Segmentation
This approach divides the target market based on age, gender, ethnicity, marital status, etc. In my experience, it’s not the most effective customer segmentation strategy, especially for B2B SaaS businesses.
However, there are some practical use cases in the B2C industry. An obvious example is dating apps that tend to segment users by gender and sexual orientation, allowing them to deliver content using the correct gendered language.
Or how they can segment their audience by age to target each group effectively.
2. Geographic Segmentation
This segmentation organizes customers by location, including urban settings, time zone, and cultural-linguistic regions. It allows video streaming sites like YouTube and Netflix to deliver localized content and offers appropriate subtitle options.
Enterprise SaaS brands like HubSpot also 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 every customer segment.
3. Behavioral Segmentation
The behavioral approach to customer segmentation groups customers by behaviors, such as how often they use the product, the types of features they mostly use, etc.
It is the most vital SaaS customer segmentation strategy, in my opinion. Implementing it effectively allows you to identify customers who’re about to churn. It also shows your product’s biggest fans.
Behavioral customer segmentation can also highlight product development opportunities.
For example, you may notice that most of your customers do not use a particular feature. Why is that?
Is it possible they’re using another SaaS product for that feature? If so, how is that product different from what you’re offering?
This all becomes really important as your SaaS brand grows and you start providing sub-tools. Think about a project management software that adds a time-tracking feature, but no one seems to be interacting with it.
4. Psychographic Segmentation
Have you ever encountered a company’s asset, e.g., a targeted ad, that triggered an emotion in you?
That company probably leveraged psychographic segmentation.
This segmentation strategy allows businesses to deliver content based on customers’ values, opinions, lifestyles, and interests.
Let’s use a productivity SaaS product to demonstrate this.
Productivity apps can save time. And you could use this fact to market your product. It’ll probably get you decent results too.
However, through psychographic segmentation, you could tap into something that tends to be stronger than logic. Emotions.
Going back to our example, some professionals value family time more than anything else. Most of them are in need of a productivity app. They want to spend more time at home with their kids and dogs.
Creating a segment with these professionals can boost conversions by tapping into their values and emotions.
For example, you can create an ad copy tailor-made for them. The copy would show how your productivity app helps busy moms and dads spend more time with their kids – complete with a picture of a happy mom hugging her kids and pets.
Such an ad will likely generate more engagement for that audience than a general copy about how productivity apps save time.
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.
Here’s 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 and higher profits, 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?
- Are you trying to identify upselling 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.
Whatever goals you choose should align with the ultimate business goals.
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 boost customer experience, you’ll need to identify relevant KPIs that can measure customer experience. Something like net promoter score, for example. Then, you’ll take the scores before and after doing segmentation.
Similarly, you’ll need different KPIs if your goal is to improve marketing campaigns.
2. Data Collection and Analysis
Once you have defined your segmentation goals, you can source customer data for your segments. But where would you find data about customers’ values for a psychographic segment, for example?
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 phone. 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.
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.
4. 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 say your goal is 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.