The SaaS Guide to Customer Segmentation: Are you doing it right?
Why is customer segmentation so important for your SaaS?
A small number of customers could be your main contributors to revenue and have the highest growth potential. Yet, you might be focusing on the larger group of customers that helped establish your product but are slowing churning.
Understanding which customers to retain comes down to how you segment.
- Are you segmenting based on ARR value alone?
- Is the activity log your primary resource by focusing on logins and in-app time?
If you answered yes to either of those questions, it might be time to reevaluate your segmentation strategy.
The variables you pick will determine where to spend your product marketing efforts and your success for sustainable growth in the future.
This post will cover customer segmentation and why it is so valuable for SaaS companies. We will go over the types of segmentation that best fit your industry and how to segment to find your most important customers. Finally, we will go over how you can take action on those customer segments to improve their experience, grow the amount and retain them.
By the end, you will be able to decide which segment to focus on.
Table of Contents
- What is Customer Segmentation?
- Why is Customer Segmentation so important for SaaS?
- Types of customer segmentation
- How to Segment Your Customers to Find the Most Valuable, Step by Step
- How to Use Customer Segmentation to Improve Your Customer Experience & Grow Your Product
- Customer segmentation is dividing your customer base into different groups based on common characteristics or behavior.
- Customer segmentation is important because it helps you understand which customers are the largest contributors to revenue and have the highest growth potential. It also helps decide your product and campaign strategy moving forward.
- Without proper customer segmentation, companies could be focusing their efforts on the wrong group of customers and end up stagnating their expansion.
- The three types of customer segmentation are trait-based, needs-based, and value-based. By combining these elements with your product analytics, you can get a complete picture of your most valuable customers. Then you are ready to implement a strategy to use to improve their experience and increase their retention.
- To find your most important customers easily, you can capture demographic information with a welcome screen to create a buyer persona. You then should look at their behavior and segment if they have reached your activation points or are using your key features. For an even more advanced segmentation, implement an NPS survey and compare that data with your revenue metrics.
- You can use the information you gathered from your segmentation strategy to implement bespoke product experiences. These actions will bring customers closer to realizing your product’s value and make it easier to retain them.
What is Customer Segmentation?
Your customers are what makes your business, but you can’t paint them with a broad brush.
Segmentation is dividing a market or service based on common characteristics.
So, customer segmentation comes down to defining the different groups of your customer base.
These customer segments can be as straightforward or as complex to fit what you are trying to understand.
- Are you looking to apply specific messaging to new customers of a particular geographic region?
- Or are you trying to re-engage customers who have used all of your core features but haven’t logged in for seven days?
Source: Userpilot-Learn how to get more value from your customer segments with a free consultation call!
Both are valid customer segments that will influence your revenue but require different issues to address.
For geographic regions, you want to focus on localization and cultural awareness, while for disengaged customers, you want them to rediscover the value of your product.
The worst thing you can do is have a generic customer engagement policy that doesn’t address each customer segment’s needs.
Most importantly, you need to be capable of deciding which customers hold the most value and require the most investment.
If you do conduct customer segmentation successfully, it may be hard to say goodbye to a specific group, but it is a critical part of your growth.
Let’s dive deeper into what customer segmentation can mean not only from a revenue perspective but for survival in a crowded market.
Why is Customer Segmentation so important for SaaS?
There are multiple ways to look at the benefits of customer segmentation.
We could look at a chart or a cohort between two different customer segments in their contributions to ARR and MRR.
We could talk about understanding buyer personas to the granular level and creating an experience that builds trust – thus making it incapable of leaving your product.
Your customers understand your value proposition and will pay for the value that they want.
Don’t forget about the possibilities of running insightful campaigns that maximize your retention, increase your upsell rates, and provide direction for your product roadmap.
The main reason it is essential is that every business comes across a dilemma in their lifetime.
Let’s say there is a mid-sized company that makes marketing automation software. The product managers are tempted to continue to add features but accept they have to double down on their newsletter creation experience. They are ignoring the requests of over half the new users they acquire.
The newsletter feature is the most used feature by their most valuable customer segment.
By optimizing their experience, they improve their retention rates, create upsell opportunities, and acquire similar customers who have the same needs.
Deciding on which customers to focus on is painful but worth it.
Now that we have covered how influential customer segmentation is in determining growth and product strategy, we can explore the different methods for segmenting your customer base.
Types of Customer Segmentation
Before you identify new segments in your customer base, you should understand the three methods of segmentation.
1. Classifying customers based on their traits
- The key variables are demographics, industry, role, company size, geographic region, age, or gender.
- This data is either publicly available, collected by sign up forms or welcome screens.
- This is usually the first step in segmentation for many companies since the data is readily available. However, it assumes customers who have the same traits also have the same expectations/needs.
2. Segmenting based on customer needs
- The key variables are desired outcomes, pain points, goals, job that needs to be done.
- This data can be found through market research, customer success/sales calls, and customer interviews.
- This method helps align your organization on the specific use case of a customer segment. It will not point you to the exact value of that segment.
3. Understanding the value of each segment
- The key variables are economic potential, existing ARR vs. whitespace ARR, product adoption rates, customer LTV, MRR, and Churn rates.
- This data can be found through your revenue analytics, sales reporting, and accounting.
- The method is essential for understanding which segments are important to nurture and grow. It also helps understand which segments are closest to churn/no longer hold the same value.
Speaking of product adoption:
These segmentation methods are helpful but are the most insightful when they are combined to create detailed customer segments.
For example, knowing a customer segment based on their company size, use case, and LTV is much more informative than only segmenting based on age and gender.
The next step to effective customer segmentation is understanding their behavior through your product analytics.
Incorporating Product Analytics into Your Customer Segmentation
Segmenting customers by their product usage helps reveal the correlation between their behavior (login frequency, actions taken, feature usage, etc.) and your subscription metrics (ARR, MRR).
Behavior is such a critical element to effective customer segmentation because it lets you know how certain features or actions impact your conversion and retention rates.
Source: Userpilot-Discover the actions that define your power users segment on a call with one of our product specialists!
However, before cutting up your customer base, you want to be clear on your business priorities.
How do you define success?
User onboarding stage completion, free trial conversion, churn rate, activation rates are all KPIs that will determine how you decide to act upon your analysis and what you are trying to improve.
With these KPIs in mind, along with your detailed customer segments and their product usage, you can create new segments such as:
- At risk of churn
- Low-value but high maintenance customers
- Product Advocates/power users
Now let’s take a look at how you can find your most critical segments using product experiences.
How to Segment Your Customers to Find the Most Valuable, Step by Step
Step 1: Collect Customer Information Through Welcome Screens
The beauty of the welcome screen-besides looking cool-is the ability to get to know your customer on a more personal level.
You can include fields such as role, company size, location, etc., along with some copy that gets them excited to explore your product.
Just make sure not to include too many fields. You don’t want to know your customer’s life story, and it may be a point of friction for some of them. That is why it might not always be best to ask these questions in the sign-up process.
This data comes in handy for two reasons:
- Developing personalized onboarding experiences since you better understand their use case.
- Adding to your customer data to create more detailed customer segments and buyer personas.
Now that you have gotten some insight into who your customers are, you can peer into how they actually use your product.
Step 2: Understand Customer Activity and Actions with Product Analytics
With your product analytics tools, you get a complete image of what customers do along their journey.
You could collect this data through session recordings, literally watching how customers interact with your product from the moment they sign up.
However, this process isn’t really scalable unless you want to take military-style shifts in watching your users.
The answer is much more simple.
Feature tagging-this is where you can measure how many users use your core and secondary features.
Source: Userpilot-Discover which customer segments aren’t using your core features. Launch experiences to show them your value!
Onboarding tied to activation points-Setting up checklists and walkthroughs that hinge on the customer reaching your activation point, like downloading the toolbar widget or connecting their account.
Setting up goals for your customer journey’s various stages is another way to understand the customer experience. You can see where your customer segments are ending up, what stages they may be getting stuck at, or where everyone gets through.
These data collection methods are valuable because they add a layer of insight into how your customers use your product and set the stage for improving their experience.
Be careful with the word active
The one thing you want to avoid is only segmenting based on in-app time and login frequency. Although useful, these metrics shouldn’t be defining characteristics. You could have active customers, but they aren’t engaging with your core features.
Or even worse, there could be a nefarious activity where users are exploiting your product, like in the case of one of our customers, a social media scheduling app called Postfity. The social media app was ready to celebrate when they saw a group of new users with high login frequency and hours. It wasn’t until their domain was blacklisted they got the wind of what was going on.
The users were just using one feature: the link shortener, in order to disguise spammy Farmville links. Postfity had to move the feature to a higher-priced plan to make it stop.
Moral of the story: Beware vanity metrics for customer segmentation. They can be misleading.
Let’s now take a look at an advanced feature of segmentation and how to compare it with revenue metrics.
Step 3: Implement NPS surveys to find your promoters, detractors and compare them with revenue data
By now, you should have some pretty detailed customer segments where you understand their company size, use case, and how they engage with your product.
Another segmentation technique that gives you more advanced insight is deploying an NPS in-app survey to your customer segments.
Source: Userpilot.com. Do you want to deploy customizable in-app surveys at the click of button, without coding? See how easy it is to measure customer satisfaction with a quick consultation.
These are the same as any NPS survey where customers have to rank on a scale of 1-10 how likely they would recommend your product or service. You can decide which segment sees the survey, on what page, and when.
The great thing about these in-app surveys is that you can add a follow-up question to explain why they chose that score.
You can then track their responses and your NPS score over time in your analytics dashboard.
This dashboard lets you see what your customer segments actually think about your product, the issues they are experiencing, and what they love.
Source: Userpilot.com – What do your most valuable customer segments care about most? Find out in quick call!
The final part is seeing how these customer segments giving high or low scores impact your revenue.
Look at what payment plans they have and how quickly they are growing/declining. Compare that with your revenue data.
You will be able to see if it is truly worth investing in improving their experience or if it might be time to raise their pricing. Essentially you are getting real-time insights on what to prioritize for your product roadmap.
Now that we understand how to segment your customers effectively, let’s see the actions you can take to improve your high-priority customers’ product experience.
How to Use Customer Segmentation to Improve Your Customer Experience & Grow Your Product
Ok, high revenue customer segments? Identified. High potential customer segments found? Check. Customer segments that are wasting your time? Also, check.
What do you do with all this data so you can keep growing your product?
Bespoke user experiences
One option is delivering bespoke user experiences across the different stages of the user journey.
This means adding tooltips for your most important customer segments so that they adopt your secondary features.
It could also mean setting up personalized onboarding to high-growth potential customer segments that still haven’t reach your activation points.
The idea is to create a customer experience that clearly shows your product’s value and directs engagement to your core features.
Email campaigns based on in-app interactions
Another option is setting up automated email campaigns, or customer success calls for customer segments that may be struggling with the app, haven’t signed in for a while, or haven’t adopted a feature that fits their use case.
These emails help show that you care about their progress and are there with them along their journey. Some other ideas are:
- Invite them to onboarding calls with your customer success team.
- Point them to the features that would improve their experience.
- Send an invitation to a webinar that goes over tips and tricks for your product.
In-app upsell opportunities
Finally, the most significant impact you can have on your revenue with customer segments is pushing bespoke messages to drive upsells.
Just look at this tactic from Grammarly.
It was specifically designed for highly active premium users to convert into business accounts and came just when you login to take action.
You can also always develop a prompt when a customer in a low-tiered plan clicks a feature that isn’t part of their plan. In Asana they demonstrate the value of the features in a modal.
All you have to do is decide the customer segment you want to show the experience to and on which page.
Then create the experience that will appeal to them most, launch it and see your conversion rates explode!
Wrapping Things Up
The benefits of customer segmentation are well known among the SaaS community.
However, many companies miss the value potential of their customer segments by relying on broad segmentation strategies.
By drilling down and creating more detailed segments that include buyer personas, product activity and are relevant to your KPIs, you can get a more complete picture of your customers.
This will prove essential as you determine which customer segments are most critical to your growth.
You can then focus on taking action that improves their product experience, increases your retention rates, and attracts more customers of the same profile.