The Importance of Customer Success Segmentation

How much you engage with your customers — and how much your customers engage with you —  plays a vital role in the success of your business. It needs to be clear who on your team is the point of contact for your customer, how you’ll create the map of your customer’s journey, and how new product launches will be communicated to them.

Taking a one-size-fits-all approach to customer engagement isn’t the best strategy. Every customer is different. Some might expect increased hand-holding from you and your Customer Success team. Others might not want more interaction, and might actually get frustrated due to excessive communication. And that’s a churn risk.

That’s why customer segmentation is a great tactic to lean on. When you separate your customers into distinct groups, you can get an accurate assessment of your customers’ needs and how you can best meet them. It’s particularly relevant for SaaS companies, and we’ll dive into why SaaS customer segmentation is just so important.

What Is customer segmentation?

Customer segmentation to divide customers into groups, based on similarities, in order to deliver your products and services more effectively. These characteristics could include location, industry, number of employees, usage behaviors, stage in the customer lifecycle, subscription type, and more. 

For SaaS customer segmentation, a company’s Annual Recurring Revenue (ARR) value can be an important identifier. Although ARR is an easy way to think of segmenting customers, it can often signal a more reactive than proactive approach. Because organizations cannot afford to lose their largest customers, they default to prioritizing accounts with high ARR. This risk-avoidant behavior can make them prone to other reactive approaches. Customer Success teams should think beyond ARR segmentation to create more strategic groups based on shared characteristics and needs.

SaaS companies are well aware that not all their customers are the same. An approach that works for one customer may not work for another, so it’s important to understand which of your customers might be similar, and which might be different. That way, you can develop different engagement models that will work better for the various groups.

What is the purpose of customer segmentation?

The purpose of customer segmentation is to best service your customers needs. When your company has a clear understanding of the nature of its customers and their needs, you can group them accordingly and deploy your own resources more effectively. This can come into play with product or service development, marketing, and Customer Success.

Your portfolio of customers could include companies from various industries that are all of different sizes and generate widely different amounts of revenue each year. All of these customers are important for your bottom line, but the way that you target each of them will vary, based on their needs.

Grouping all of your customers together and hitting them with the same messaging won’t deliver the desired results. You might, for example, have a new product or service that some of your customers would be able to afford, while others can’t. Pitching this same product to both sets of customers will only be a waste of time and resources. If you segment your customers into groups, based on who is most likely to benefit from this new product, then your communications will be more effective.

What are some Customer Success segmentation models?

There are countless Customer Success segmentation models, but a few have proven themselves quite useful, particularly for SaaS customer segmentation. No matter which model you choose, you’ll always have to keep in mind variables that might be specific to an industry or a particular business. The nature of your products and services will also influence the segmentation model that works best for your company.

Trait-based segmentation

This type of segmentation relies on readily available demographic information about your customers, such as those mentioned previously like their industry or company size. 

This is often the most common type of segmentation, next to ARR. It offers advantages since it’s easily identifiable and a model that’s easily built, but it operates on the assumption that industries or companies that share traits also share desired outcomes, which isn’t always the case.

RFM-based segmentation

The RFM — recency, frequency, and monetary — segmentation model is used to sort customers into groups based on these three attributes. Recency takes into account the time elapsed since your customer’s last interaction with your company, to help you gauge how responsive they’ll be to communications.

Frequency measures how often, how routinely, your customers engage with your company. And lastly, monetary value takes into account the total spending the customer has done with your company over a given period of time.

Value-based segmentation

This Customer Success segmentation model groups customers based on their economic value to your business. It’s a useful model for SaaS companies since it allows them to focus on the ARR potential of their customers. These groupings could also be based on subscription levels, production attachment rates, and existing ARR.

It’s one of the most tactical SaaS customer segmentation models because it enables you to locate upsell and cross-sell opportunities with existing customers. It’s also a great way to devote attention and effort to building relationships with customers that have the most revenue potential.

Needs-based segmentation

Customers have chosen to use your product or service because it addresses a certain need they have. With needs-based segmentation, you can group your customers based on why they’re using your product. Customers who use your products for similar objectives can be put into one group.

This allows for highly targeted service delivery, or Customer Success management, since you have a clear understanding of exactly what a certain group of your customers are looking for.

How do I choose a Customer Success segmentation model?

When choosing the right model for SaaS customer segmentation, it’s important to consider several factors. You need to have a clear understanding of the market in which you’re operating, your position in it, and how your customers relate to that. When you know where you stand among the competition, that’s when you can take action to leap ahead.

The primary consideration when choosing a segmentation model is always what your customers want and expect from you. When you understand how your product or service is solving a particular problem for a certain customer, then you can group them with other customers who might be facing similar problems. This enables you to provide just the right solution for the obstacles they’re facing, ultimately making your Customer Success efforts truly worthwhile.

By choosing and implementing a Customer Success segmentation model, you’re really striving to improve service or product delivery, and therefore reduce churn. Choosing the wrong model, or having messy segmentation, might actually end up increasing churn, so it’s important to think this choice through.

Use customer segmentation to supercharge your Customer Success efforts

Segmentation not only allows your customer engagements to be highly targeted, and hopefully more effective, but it also allows your Customer Success teams to get a better understanding of your customers and their needs. This increase in Customer Success will ultimately reduce churn, and make your product more competitive. If you’re ready to get started with segmentation in your business, check out our Smart Segmentation Guide Ebook.