How to Segment Customers for a B2B Vertical SaaS Company

After identifying your company's vertical(s), strategize how best to develop the business to win in each vertical. Your goal is to establish a defensible market position within the vertical, and you need to figure out where to start. We need to identify the traits your highest quality customers share and then target prospects who share those traits.

To clarify the difference between a vertical and customer segmentation, consider this example: Before the vertical identification process, Alpha Company had three potential product/market combinations, and, through the process, identified one vertical as the most attractive: selling CRM software to hotels. As a next step, Alpha Co needs to determine which segment of hotels to sell to in order to meet its target of $10M ARR by the end of Year 3.

To attain this target, Alpha needs to develop its product and tailor its sales and marketing strategies to meet the particular needs of a specific cohort of hotels; at this beginning stage, it is unlikely Alpha can provide a CRM product that meets the unique needs of both boutique hotels and large, multinational chains. It is unlikely that Alpha's

S&M team can effectively deliver a convincing message and value proposition to a similarly diverse range of potential customers. So, Alpha Co begins a customer segmentation project to identify who its highest quality customers are and what factors those high quality customers have in common. Through its analysis, Alpha Co identifies commonalities shared by its highest quality customers: non-multinational boutique hotels located in large cities. This insight leads Alpha to develop its go-to- market strategies to pursue sales to prospects who share these qualities.

The impact: Determining which customer cohorts make the highest quality customers continues the process of refining your company's go-to-market strategy and gaining a foothold in your vertical. It is an important step in the process to direct the efforts of your sales, marketing and product teams, increase your sales efficiency, and earn higher quality revenue.

The goal: At the end of the process, your company will have identified the two or three top customer cohorts.

How can Golden Section Assist?

Background

When considering potential segments to pursue, keep in mind the linear relationship between Customization and ACV (Annual Contract Value). For simplicity sake, you can assume a linear relationship; as Customization increases, so does ACV. This makes sense.

The power of this thought exercise, though, is considering the area below the line connecting customization and ACV - contracts that require high customization and deliver a lower-than-expected ACV. This is death valley and is not revenue that is worth pursuing. When considering segments, make sure that the level of effort required to deliver your value proposition matches the ACV.

Steps

1. Meeting 1: Vision and Hypotheses
2. Set vision and specific objectives for Segmentation process.
3. Preview work plan, timeline and needs from stakeholders.
4. Brainstorm potential segmentation hypotheses. There may be a large number of possible factors, and some may be less obvious than others. This is a good time to get significant input from others in different areas of your company.
5. Identify at least 10 segmentation hypotheses.
6. Depending on the time and amount of customer data you have, you may explore more segmentation hypotheses. The more customers, and therefore customer data, you have, the more hypotheses you can include. You will need the number of customers to significantly outsize the number of segmentation hypotheses so that meaningful relationships can be established.
7. Define who and what characterizes a high quality customer. As with segmentation hypotheses, the attributes that make a high quality customer are unique to your company. It is important to determine a quantifiable, standardized definition, however, that will support this segmentation analysis. Again, this would be a good opportunity to get input from others in your company.
8. Factors that may contribute to a customer's quality score:
9. ACV
10. Historical contract expansion
11. Historical contract churn
12. Cost of acquisition (including a factor for length of sales cycle and/or number of touchpoints)
13. Need for support
14. Need for special usage development / support
15. Purity of desired 'ROI' and value prop (cascading or complicated value-props lead to customer trouble)

1. Factors can be weighted in determining customer quality to more accurately reflect the importance of various components.
2. Exploration:
3. Assign Customer Quality Score for each historical and current customer using formulas you developed in prior steps and CRM data.
4. Collect data for each segmentation hypothesis.
5. Analysis:
6. Analyze data to determine any relationships between customer quality and segmentation factors.
7. This is not a rigorous, scientific data review. Rather, you are looking for relationships between variables and quality.
8. The relationship does not need to be linear; in other words, as a variable increases, the customer quality value does not necessarily need to increase.
9. Look for clusters (i.e. all multinational companies are in the top quartile of customer quality) to guide your analysis. Support clusters you find by checking to see if a relationship holds (i.e. are there any multinationals in the bottom quartile?).
10. Determine whether each factor has a positive (makes a better customer), negative (makes a worse customer), or neutral (ambivalent) effect on customer quality.
11. Finish the analysis with a final assessment for each factor. This one line definitive statement will clearly indicate the impact each factor has on customer value.
12. Verification:
13. Single out the two or three factors that have the strongest relationship with customer quality. These are the customer segments your company will pursue.
14. Confirm the relationship between the identified segments and customer quality by performing a simple average of customer quality for the customers who qualify for a specific segment. Is the average customer quality as high as you were expecting for that segment?
15. Finally, check that the identified segments align with your company's market objectives.
16. Estimate the market size of each segment. Using your company's SAM size, determine each segment's percentage of SAM. It is also helpful to estimate each segment's potential growth to ensure room for future growth for your company.
17. Sum the % SAM for all identified segments. A good rule of thumb is that the % SAM totals at least 25%. This represents a good starting point for your go-to-market strategy. If the total is less than 25% SAM, then it may be appropriate to reconsider the chosen segmentations.
18. Send template with data, analysis, and verification to team members present at Meeting 1. Ask for each person to review the data and findings in preparation for feedback at Meeting 2.
19. Meeting 2: Gut Check and Planning
20. After a period to process the information sent, reconvene to discuss the findings.
21. Do the top segments sit well with the team?
22. How do market trends play with these top verticals? Does the vertical play well with future developments and trends in this field?
23. Formally identify two or three customer segments for your company to align itself with.
24. Brainstorm how the company can shift to align itself in the chosen segments and the order of operations to accomplish this.
25. Codification:
26. Gather your conclusions in a presentation or document to store and communicate to additional stakeholders (board members, investors, new employees etc). Refer back to this document periodically to assess your hypothesis as your business develops.

Troubleshooting

If you're struggling to identify possible segmentation factors, use the following(https://openviewpartners.com/blog/customer-segmentation/#.XbcnduhKg9B) categories(https://openviewpartners.com/blog/customer-segmentation/#.XbcnduhKg9B) to direct your thoughts: (1) geography (in terms of location or reach), (2) type of industry, sub-industry or customer served, (3) product use, (4) company size (in terms of revenue, employees, etc), (5) product delivery model, or (6) special use or needs. Do any of these variables seen in your customers potentially make them a higher quality customer to you?

If the process seems forced or you feel it is arbitrary, then you likely don't have sufficient customer representation on your team. To solve this, reach out to a few customers, buy them lunch and use the time to dig into the factors or bounce your hypothesis off of them.