I’ve often reflected on the topic of Segmentation. The thought that sparked this blog came after realizing that the bulk of SaaS businesses I spot get it wrong – or better, not perfectly right.
The art is in getting it ‘perfectly right.’ Every inch you’re off harms performance. Just think of:
- The unnecessary waste of your marketing budget preaching to a far too broad segment that will never buy
- Poor quality ‘leads’ in your pipeline that are better off with your competitor, driving down sales performance
- The waste of efforts in an attempt to satisfy customers that will never become ambassadors
- The pollution of your product roadmap with feature requests that are pure one-offs
- Dealing with the wrong customers will eventually result in higher than the average churn rate
These examples negatively impact CAC, MRR, ARR, NRR, NPS, CLTV, and Gross Margin – to name a few metrics.
The problem: Most SaaS startups think they’ve defined their Segmentation deep enough.
“We’re focused on this [industry], in this [region] and in particular on organizations in this [revenue-band] that employ [xxxxx] employees” is what I hear 99%.
At the surface, this seems pretty detailed – but believe it or not, often, it still leads to a funnel that’s loaded with waste, and that’s where all the metric problems start.
Seeing the metrics getting worse often leads to the measures that worsen things even more: Widening the Segmentation to address an even larger market. You can imagine what there this leads to.
So let’s get back to the objective of getting this right: It is to identify high-yield segments- that is, those segments that incorporate your most valuable customers, that are likely to be the most profitable, and/or that have the highest growth potential.
That’s not easy – and a question I, therefore, often get is: How do you segment a market in B2B SaaS?
To address this, I’ve decided to help you solve this problem. The answer is in narrowing down – getting laser-specific across five layers. The magic is not in picking ‘the right layer’ but in how you blend them as a cocktail.
Question for you to reflect upon
If you critically (and honestly) assess your pipeline: What % are you chasing that would be better off with one of your competitors?
Perfect segmentation is like your favorite cocktail.
Recently, I was enjoying a cocktail with my wife and sons on the rooftop terrace at Nomad, in the port of Javea, where we live. It was a perfect celebration of a nice, relaxing holiday.
Then, as I was planning my week the Monday following, I reflected on this blog about the art of segmentation. And suddenly, this picture of the cocktails came back.
To me, the perfect segmentation is like your favorite cocktail. I’ve experienced over the years that getting segmentation right comes down to how you mix a range of ingredients.
- It drives good conversations: It helps you find those customers with whom you’re on the same wavelength. They believe what you believe and vice versa. It’s about “yes, and…”, not “yes, but…”
- It sparks energy: It helps you find those customers where every time you see them, it sparks positive energy – no matter where you are alongside the relationship journey.
- It attracts an audience prepared to pay a premium: The mix attracts the right buyer who understands the value you offer. Your offer doesn’t need to be sold to them. They desire it.
I can go on like this – but you get the drill. So the big question is, what are those ingredients? And to that, there’s no right or wrong answer. It’s unique to you and your ideal customers. And that makes segmentation so valuable. It allows you to create the optimal mix of common characteristics that defines this unique group of customers that instantly become your fans.
But let me break it down with a recipe (without the measures, though): The 5 prerequisites of market segmentation.
- Ingredient #1 – Demographic / Firmographic segmentation
- Ingredient #2 – what unique dynamics define them
- Ingredient #3 – what they stand for and value
- Ingredient #4 – what they deeply aspire
- Ingredient #5 – what risk they tolerate
Question for you to reflect upon:
Look critically at how you segment your SaaS solution today: how many ingredients have you used up to now? What if you’d start adding ingredients – how would that help attract a better customer?
The 5 types of customer segmentation to start mixing
In the coming paragraphs, I’ll address the question: what are the 5 types of market segmentation to consider to create the perfect segmentation cocktail for your SaaS business.
Ingredient #1 – Demographic / Firmographic segmentation
What’s the easiest way to segment a market? Well, the first and most used ingredient is ‘Demographics’ or ‘Firmographics’. What I often see is that they’re mixed up under the same denominator to do the same, i.e., a summary of all the things that you can easily fact-check about your ideal customer:
What defines the business (firmographic segmentation)
- What they do industry they are in
- How they do business (online, service, channels, etcetera)
- What size their business is (number of employees, revenue and profit numbers, etcetera)
- What performance characterize them (growth %, valuation, stock behavior, etcetera)
- What (ownership) structure defines them (Private, Public, VC, PE, …)
- Where do they operate (location / geographic segmentation aspects)
- What stage is their business in (funding stage, pre-seed, scaleup, IPO, etcetera)
Which individuals or buyer personas do you target within that business (i.e. demographic segmentation)
- Function / Role / Job titles
Essentially, this is the foundation of your segmentation – not more, not less. It helps you to define the outer limits of the collection of organizations where you can potentially deliver the most significant impact.
The good thing about demographics/Firmographics: Data is easy to obtain. Targeting is straightforward. It’s cost-effective, simple to measure, and easy to monitor trends.
It helps you define the outer barriers of your Total Addressable Market (TAM).
The biggest downside: It’s too vague (no matter how specific you get).
Just the fact that detailing demographics/firmographics tells you there are 1000, 10.000, or 10.000 organizations you can target doesn’t mean they’ll buy.
All the facts outlined only help you to do the 1st level of sifting. As such, there’s often enormous waste embodied in this method. It might very well be +90%.
There are too many assumptions. Context is missing.
And as such, every €, $, or £ you spend to attract potential customers is a gamble and potentially a big driver for waste, slow down, and frustration.
This is precisely why it’s critical to bring in other ingredients to address the motivators and the self-interest that drive the businesses (and the people they employ) where you can make the most significant difference.
So my question to reflect upon today – Realizing that demo-/firmographic detail still matters:
Looking at your current demographics/ firmographics definitions: what can you refine to niche down for more accuracy?
Ingredient #2 – what dynamics uniquely define them
Now it gets interesting. We’ve placed the tent-poles of what defines the market we’ll target at the demographic and firmographic level. Now it’s time to start adding the ingredients to our segmentation that define the DNA of your ideal customers. The first is: What dynamics define them?
What do I mean by that? Just because you focus on Engineering Consultants in the UK with 500-1000 FTE that drive +£75M revenue doesn’t mean they’ll all magically purchase your SaaS product.
Why not? Because they’re all wired differently – either because of their management style, ownership structure (Private, public, etc.), or the economic, political and competitive conditions of their market, you name it.
Let me give an example from my time at Unit4 – an ERP vendor. Technically we could sell to everyone in the mid-market. But often, we knew right from the start when we’d lose against SAP, Oracle, or Microsoft – and when we’d win hands down. And so did our competitors.
The difference: Not because we had more features or a better UI. No way – every vendor consistently scored +98% on the functional side. No, our solution fitted the dynamics of our customers better than anyone else. Customers that became our biggest fans were in constant flux – and the ERP we provided them turned this into an advantage for them.
In other words, our platform’s DNA uniquely matched our customers’ DNA. It allowed them to acquire and merge faster than others. Deal with regulations more quickly than anyone in their market. Restructure the business on the fly. Expand into new territories as soon as the opportunity emerged. And so on. They were ‘businesses living in change.’
So how do you go about it? Two tips:
- Zoom out – and look at your ideal customers with a different pair of eyes. Describe their DNA. What dynamics are normal to them and not to those customers that are better off with your competitors?
- Zoom in – Create a list of problems that keep your ideal customers up at night. How is this list different from customers not ideal for you? What does this tell you?
In essence, clarifying this ingredient will open the doors to truly understanding their pain points and what your ideal customer needs to succeed. And the other ingredients that will follow will just help refine that.
Question for you to reflect upon:
If you had to describe the DNA of your ideal customer, what words would you use?
Ingredient #3 – what they stand for and value
In all my work with helping my customers get super clear on who they are for / not for, there’s one ingredient to the mix that’s a massive attractor but virtually always forgotten: Clarity about what your ideal customers stand for and value. This is often referred to as psychographics segmentation. It’s what intrinsically drives customer behavior.
Let me explain this.
Imagine you’re looking for a new SaaS solution to manage internal services inside your organization.
You meet two vendors – which one would you be drawn towards?
- “It’s a platform for the service departments within mid-sized service-centric organizations,” or
- “It’s a platform for service teams passionate about making things happen.”
Do you feel the difference?
The first line is factually perfectly correct and explains things at the demo-/firmographics level. Next, the other vendor articulates what their ideal customers firmly stand for.
Why is this important? Because describing what your ideal customers feel strongly about creates a natural pull. They instantly think. “That’s me!” They’ll react so strongly because this is what they unconditionally fight for when dealing with their customers. It’s what creates the vibe and what gives them energy.
So, how can you find out? Well, first of all, by paying attention to the traits that characterize those customers that become your ambassadors. What do you sense when working with them?
Alternatively, visit the About page on your prospect’s website and read between the lines of what they promise to their customers. On the About page, you usually find more nuggets of gold, namely, their values. So why not include that as well in how you segment your market?
Let me extend the earlier mentioned example:
“It’s a platform for service teams passionate about making things happen. Teams that believe in empowering people. They are strongest when working together, and for whom making an impact is their calling.”
Just think about it. The only thing to do is to state what they already state, and your ideal customers will say: ‘That’s me!’
My question for you to reflect upon:
What could you add to your segmentation that your customers will instantly connect with and say, ‘That’s me!’
Ingredient #4 – what they deeply aspire
Let’s zoom into the definition of segmentation: Market segmentation seeks to identify targeted groups of consumers to tailor products and branding in a way that is attractive to the group.
If this is the definition, how come so many SaaS companies forget to bring possibly the most ‘attractive’ ingredient into the Segmentation cocktail: What they deeply aspire?
Wouldn’t it be most effective to spell that out rather than stick to just the demographics and firmographics that don’t do anything with their emotion?
Let me give an example again. Imagine you are the CEO of a B-corp or Social Impact company, and you’re looking for a solution that will help improve the impact your people can make – individually and as a team.
You meet with two SaaS vendors and ask them to tell a bit more about what type of customers their solution is best suited for. Two answers follow:
- “It’s an Employee Participation for startups and privately owned mid-sized companies across Europe” or
- “It’s an Employee Participation Platform for organizations who want to create meaningful impact with teams of heroes.”
Which vendor would you think: “OMG, they get me….” The only difference is that you move the focus from you to them.
Instead of explaining your ideal customers’ profile in factual terms that they don’t care about, you bring what they deeply aspire to into the mix. That works like a magnet – before you even have to position yourself.
Just think about it. We all talk about our ICP – Ideal Customer Profile. But all too often, we forget to bring ingredients like this that define perfectly (in their terms) what makes them your ideal customer. What makes them ‘ideal’ is that they desire something that’s both valuable and critical to them. Something that you exceed their expectations on.
So my question for you to reflect upon:
Assessing your ICP with this lens, what are the three things they all deeply aspire?
Ingredient #5 – what risk they tolerate
The final ingredient of the perfect Segmentation cocktail I want to address is: What risk do they tolerate? Naming it – and then acting on it makes all the difference.
Why do I say this? Somehow most of the SaaS vendors I see want to sell to the innovators, but in reality, they serve the early and late majority. And this mismatch in what they think they are and what they actually are hurts them: in terms of credibility, competitiveness, and performance.
Just because we create value by leveraging the latest technology doesn’t mean it’s always innovative or for the innovators. So the trick is bringing this in balance and being good about it. It can be very lucrative to build for the early/late majority. So let’s stop pretending otherwise.
Each stage of Rogers’ innovation adoption curve comes with a different risk profile, which is why blending this into your segmentation cocktail helps make it perfect. This way, you can optimize your whole product experience around it, which builds high levels of trust with your ideal customers.
The first step is to clarify their risk attitude: Is your ideal customer risk-averse, risk-neutral, or a risk lover?
The second step: Can you name the risk specifically? What risk would be non-negotiable, and what’s OK? Be concrete. Often the risk averseness is highly focused on one or two areas. Addressing this – i.e., naming it – helps you become attractive to those customers.
Assess how sensitive your customers are to the dozens of risk factors out there:
- Regulatory compliance for them or towards their customers
- Privacy and data security
- Their environmental sustainability profile
- Their credit rating/stock stability
- Health and Safety
- Delay / operational hick-ups
- Brand reputation/market acceptance
- and so on
Why is this important to blend into your segmentation cocktail? Because this is important to them. It’s what they feel strongly about – because it defines their business. So instead of talking around it – address it upfront. If your ideal customer is one where operational hick-ups through downtime are non-negotiable or whose brand reputation needs to be spotless, spell that out. But, again, this defines them – so they’ll look for vendors that get that.
My question for you to reflect upon
Are you spelling out the risks your customers are most sensitive about on your homepage? What if you would? How would that make them feel?
In Summary – Creating your Segmentation cocktail – why bother?
To tune or not to tune your segmentation – that’s the question. So why bother? It all starts with recognizing what’s harming performance in your SaaS company:
- The apparent signals: dreading sales cycles, win rates that feel too low, and the typical discount battles.
But there are more signals to watch:
- Unnecessary waste of your marketing budget (targeting people that will never buy)
- Poor quality ‘leads’ in your pipeline that are better off with your competitors)
- The costly attempts to satisfy customers that will never become ambassadors
- A bland Product roadmap filled with features to please a single customer
- A higher than the average churn rate
When you sense any of this, you might have a segmentation problem.
As you can see, a go-to-market strategy with too broad segmentation impacts the business in many ways: The resources you need (both people and money). Your revenue potential. Profitability potential. Customer lifetime value (LTV), etcetera.
It not only harms the business at the beginning of the customer journey – it does its damage across the entire customer journey. It’s a ‘fine’ you pay forever.
Top SaaS companies eliminate this from the start. And it makes everything easier for them: Attraction, conversion, time-to-value, retention through a smoother and better customer experience – and possibly the most important one: leverage through word of mouth.
The latter allows them to consistently have a high Net Promoter Score / Customer Satisfaction Score (CSAT) and benchmark Net Revenue Retention (NRR).
They approach their perfect segmentation like creating their favorite cocktail:
- A splash of demographic and firmographic criteria
- A touch of detail on what dynamics uniquely define their ideal customers
- A pinch of information about what they stand for and value
- A splash of what they deeply desire
- And last but not least, topping it with clarity on what risk they tolerate/do not tolerate
The power is in the mix – make each ingredient work to make it unique and attract the right customer.
Sharpening your segmentation is a critical component of your value foundation.
- It defines the clarity of your positioning
- It defines how compelling your value proposition can be
- It defines the level of leverage you can create across the business
It’s a choice. Good luck
Last question for you to reflect upon
Out of all the benefits you can get from sharpening your segmentation, which one do you desire most?
How to leverage your perfect segmentation cocktail?
The easiest way. Simply book a free call to explore if there’s a fit to do this together.
Otherwise – here are 5 other options
- Long-form blog: 5 strategies to optimally position your B2B SaaS business
- Long-form blog to creating a SaaS Value Proposition that works
- and obviously, read my book The Remarkable Effect
- Alternatively, simply subscribe to receive a daily reflection on how to become a SaaS business no one can ignore