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SaaS Metrics Refresher #9: Segmentation

Segmentation in SaaS may seem like a basic analytics practice, but it’s actually a critical part of your growth strategy that can help you understand customers and drive deliberate growth. Let me show you why.

Simply put, segmentation is the difference between answering questions like “what’s our churn rate this month?” And “what’s the churn rate of customers who haven’t fully onboarded?” Both of those questions can be useful to a SaaS business, but the second one is significantly more actionable in the insights it promises.

“At HubSpot, we started to see some of our biggest improvements in unit economics when we started segmenting our business and calculating the LTV to CAC ratio for each of our personas and go to market strategies.”

Brad Coffey, HubSpot

What is segmentation?

“Audience segmentation isn’t a new concept. A lot of major brands have it down to a science, but it can be a foreign concept to startups. When done right, there are tremendous benefits to be had.”

Sujan Patel

A segment is basically just a defined group of your customers. It could be as simple or as complex as you like. Here are two perfectly valid customer segments:

  • Customers in APAC region.
  • Customers in APAC region who haven’t completed the onboarding flow but have invited other users to their account and are active in the app more than five times per week.

Why is segmentation important?

“Despite the added work to produce the metrics, there is high value in understanding the different segments. This tells us which parts of the business are working well, and which are not … As soon as you start doing this segmented analysis, the benefits will become immediately apparent.”

David Skok, Matrix Partners

Segmenting your metrics by product usage enables you to measure the correlation between user actions in your product (e.g. feature usage, login frequency, etc) and subscription metrics such as MRR. This also lets you compare how certain features or actions impact your conversion and retention rates.

Characteristics of a useful customer segment

“…is the segment measurable, addressable, stable and consistent? But the most basic is the first. Is there enough data? Segmentation is a powerful tool to be employed by startups once the customer base becomes large enough, which probably means at least a few hundred customers.”

Tomasz Tunguz, Redpoint

In the article Using Deep Customer Segmentation in SaaS I unpacked these commonly-referenced characteristics:

  • Measurable –You can assess its value, through some form of metric, and that you have enough data to produce that metric.
  • Addressable – You can have a real impact on the segment of customers you’re identifying (otherwise why would you define the segment?).
  • Stable – Segments need to have minimal fluctuation caused by external factors. Such instability will mean that you’re unable to pull any reliable insights from the segment.
  • Consistent – You measure the segment in the same way, across its lifetime. Changing the way you measure it would effectively nullify the value of any findings.

Barriers to achieving smarter segmentation

If segmentation helps you get to deeper, more actionable findings in your data, why isn’t everyone doing it? The key downside here is likely to be complexity and effort, as Justin Talerico writes on SaaSX:

“The problem goes back to time, resources and expertise. Authentic relevance comes from domain knowledge that takes time and deep expertise. It’s like vertical marketing (the highest level of segmentation) — if you don’t do it all the way, you’re sniffed out as a poser and doomed to fail … You’re better off staying out of verticals — and segmentation — if you can’t execute authentic, knowledgeable content for each segment.”

What Justin is saying here is that in order to build a complex segment — or highly specific description of a subset of customers — you need to be able to define it. And it’s the definition that usually requires deep domain knowledge or resources.

A second problem can be measurement. Being able to define a complex segment is one thing, but the entire exercise is useless if you don’t have the tools or metrics available to measure it. When you dig deeper into defining segments that make up the more behavioral characteristics of customers, your analytics may fall short of the data you need to built it.

Interesting customer segments in SaaS

Struggling to get started with defining some useful customer segments? Here are some common definitions that are actionable right out of the box. If you want to read more on this, I expanded on how to define and use these in Using Deep Customer Segmentation in SaaS:

“At-risk of churn”

If you know the customers teetering on the edge of cancelling, you have an instant focus for your customer success efforts. Measuring this one can be hard and should take into account a number of factors like lack of engagement with the product or upcoming credit card expiry.

“Low value, high maintenance (unprofitable) customers”

Segmenting by profitability is a common strategy employed by larger businesses with a sizable customer base. These types of segments will help you formulate a strategy for turning unprofitable customers into profitable ones.

“Profitability segments are first-pass filters. They answer the question, which customers should I be acquiring? Which are the most profitable for the business?”

Tomasz Tunguz, Redpoint

“Product advocates”

If your SaaS is solving a real world problem in an effective way, it’s likely that you’ll have a small-ish group of product advocates. These are your most valuable segment of customers and, when embraced, can nurture word-of-mouth based inbound acquisition.


Resources and Further Reading

BASICS

Using Deep Customer Segmentation in SaaS (ChartMogul) — This post gives a comprehensive overview of SaaS customer segmentation, and covers some of the topics mentioned above in more detail

The Importance of Segmentation for Your SaaS Startup (Tomasz Tunguz) — Tunguz does an excellent job of highlighting just how large the impact of segmentation can be, using examples from big enterprise and retail.

DEEP CUTS

Customer Segmentation: A Step By Step Guide For B2B (Tien Anh Nguyen) — This article goes way beyond the basics (it’s a beast!) but if you really want to immerse yourself in strategies for segmentation, start here.

3 Audience Segmentation Strategies for Your SaaS Startup (Sujan Patel) — Sujan has some solid advice for embedding the roots of good segmentation in your SaaS business from the beginning.

When SaaS Marketing Segmentation is a Bad Idea (Justin Talerico) — This piece covers some of the downsides of segmentation, including the cases where you can run into problems.