What if we knew which SaaS customers were most likely to grow your sales the most or generate the most profit? If we had that information, what action would we take? Sometimes as business owners we cannot see the forest because of the trees. Well, let me introduce you to a little trick called customer segmentation.
Customer Segmentation Explained
Customer segmentation comes right out of marketing 101. Essentially you break your customers (and potential customers) into groups. These groupings might be based on customer needs, past behaviors, or demographics:
- Type (consumer, business, government)
- Business model (wholesale, retail, ecommerce)
Once a customer is using your service, you can do additional types of segmentation:
- Subscription plan
- Usage (daily, weekly, monthly, infrequent)
- Number of users
How to do Customer Segmentation
First, you need to decide on how you are grouping your customers. If you cannot decide, I recommend you take your 10 largest customers, review sales and profitability for each of these customers, and see if a pattern emerges in the behavior, demographics, or customer needs.
Once this is done, your accounting system can do a lot of the work. You can create an extra dimension in your accounting system (usually called a department, profit center, cost center, or class). Use this dimension to create the groupings and then reclass your invoices (revenue and direct costs) into these groupings. Alternatively, if you do not have a large number of customers, you can generate P&Ls by customer and use the SUMIF() function in excel to sum the customers into groups. Indirect costs can be allocated using an activity based driver (logins, sessions, users, revenues, cost of sales, etc.) or a straight average per customer. Most entry-level accounting systems don’t support allocations. In that situation, you’ll end up doing that in a spreadsheet off to the side. You may need some assistance from an accountant or a financially astute person for this part. Once the segmentation is done, we can calculate some interesting facts based on these groupings:
- Sales growth
- Proportion of total sales
- Profit growth
- Proportion of total profit
Your SaaS software should also be able to calculate some neat facts once you generate reporting by segment:
- Acquisition rate
- Churn rate
- Average age of account
You may even be able to put together a CAC/LTV calculation for each segment.
Benefits from Customer Segmentation
Are there groups of customers that are more profitable or growing profit faster than others? Are there groups of customers that do not generate much profit or profit growth? Perhaps this will help you decide how to focus your efforts in terms of sales, marketing, and product development. Maybe you will want to have different pricing, terms, or promotional offers for your different segments? Customer segmentation will help you make decisions with more precision, target your customer needs more closely, and increase your sales and profitability over time.
Resources and Links:
Management Tools – Customer Segmentation
Customer Segmentation is the subdivision of a market into discrete customer groups that share similar characteristics.
Source: Bain & Co. 2015. www.bain.com/publications/articles/management-tools-customer-segmentation.aspx