By Charlie Pope

Most organizations today engage in some form of customer segmentation, accepting the truth that “one size does not fit all.” Customer segmentation can help an organization target the most profitable segments of their market, conserve resources and ensure that revenue growth is sustainable even in times of disruption and uncertainty.

However, when organizations consider customer segmentation, they often do it through the lens of customer acquisition alone. While it is certainly a valuable tool for this part of the customer journey, the logic and benefits of customer segmentation apply across the entire customer lifecycle: acquisition, success/support, retention and upsell/cross-sell.

The value of customer segmentation in marketing is well established, but every function of your business should be engaging with customers according to some segmenting logic, including marketing, sales, customer success, and customer service.

In this article, we will introduce best practices for customer segmentation through each lifecycle stage. Although we will be referencing mainly B2B relationships, the logic applies across industries and business models.

Customer Acquisition Formula

As we discussed in our article on “Customer Segmentation: A Value Driver in All Economic Climates,” there are two basic facts that drive value-added customer segmentation:

1. You can’t win over your entire addressable market with one approach to marketing or customer acquisition.
2. Not every customer is of equal value to your organization.

What is customer segmentation? It is the process of identifying customer sub-groups that you can target to deliver more focused and efficient sales messages. There are many potential dimensions along which to segment customers; you must identify the optimal segmenting dimensions based on your unique business.  In the case of acquisition, start  by asking: What features of a potential customer are most likely to influence purchasing decisions?

This step is critical. There’s very little point in segmenting your market by, say, industry if historic data shows that companies in different industries  display identical buying behaviors. Valid segmentation must identify meaningful differences in customers’ values and needs that can inform a go-to-market strategy for each segment.

Also remember that companies don’t make purchasing decisions; people do. Personal characteristics such as job position, level, professional motivations, preferred marketing channels, etc. can be used to create specific customer personas. The best personas are based on deep understanding of your customer. The more data, the better. Reference past interactions and outcomes, CRM notes, mutual connections, online research, etc. to build a detail-rich segment profile.

Segmentation provides your team with a common language to discuss appropriate outreach scenarios. For example, you might designate a segment called “Price-Sensitive.” These buyers are cost-conscious and motivated by the desire to show everyone how their investments have produced positive ROI for the organization. Therefore, collateral targeted at this segment should emphasize economic value, low upfront costs, payback period, etc.

But what if these Price-Sensitive customers aren’t the best ones for your business? What if they nickel and dime you to the point of low profitability and then leave the minute a better offer comes along? Attribute information can also be used to anticipate when a prospect may not be right for your company.

If you can do this successfully, you will have an effective way to prioritize your high-value prospects. By spending less time on prospects with less potential and more time on your “best,” most lucrative segments, your sales team can increase its win rate and company revenues.

This type of segmentation can also help you cap the amount of effort and the customer acquisition cost (CAC) that you are willing to devote to a prospect. Based on your industry, there is a general ratio of customer lifetime value (LTV) to CAC that you should be targeting. For example, the typical target LTV/CAC for enterprise SaaS companies is 3:1. If certain customer segments are driving LTV/CAC ratio significantly below 3:1, they should probably be deprioritized.

Customer Support Best Practices

What happens once you’ve made the sale and your prospect turns into a customer? Segmentation is just as useful, but the dimensions you use to differentiate and prioritize existing customers are likely to be different.

The question you should ask to create segments for customer support should be: What features of a customer most impact the way we deliver support to them?

The answers could be:

• Tech stack – For software companies, clients’ tech stack and required integrations may be highly specialized, requiring support specialists to be assigned according to software expertise.
• Current purchases/growth opportunity – Of your product suite or line, what have they already bought? What is the likelihood for upsell/cross-sell based on their initial purchase and segment behavior? This may require integration of CRM data with customer success management tools.
• Churn likelihood – Use metrics like product usage to determine at-risk clients. These customers should be a high priority for Customer Success Managers (CSMs).

The Customer Success Prioritization Equation

To optimize the time and efforts of your CSMs, just as with your sales force, it’s important to calculate risk vs. reward. In this case:

• Reward = Customer Lifetime Value
• Risk = How likely are you to lose this client’s business?

Any calculation of the reward or value you get from a customer should take into consideration:

• Existing contract value
• Potential future contract value based on size, current share of wallet
• Qualitative assessments like industry influence and brand cachet

Risk is the churn likelihood for this client. You can assess this risk through:

• Survey or NPS responses
• Anecdotal client discussions
• Systematic analysis of client communications (for example, AI tools that use natural language processing to determine tone of communications)
• Client engagement with / use of your product

Clients who offer high value with a high risk of churning should be receiving the most attention from your customer success resources.

Customer Retention

Customer retention has two components: churn reduction and upselling. Depending on the industry and the client, both efforts may involve cross-functional teams (e.g., sales, customer success, finance, executive, etc.). Just as in acquisition and customer service, customer retention can benefit from the valuable insights provided by segmentation.

The important questions to ask in segmenting for customer retention are: What does our customer value about our goods/services? What would impact their decision to reduce, maintain, or increase their consumption of them?

Some examples of the segments your customers may fall into are:

• High maintenance – These customers expect high-quality, responsive service. Retain these customers by allocating additional customer support resources or having trusted individuals — executives or the original sales person for that account — reach out to them so they feel heard.
• High momentum – These customers have high switching costs (or low appetite to incur them). They have a low risk of churn and low potential for upsell. It’s counter-productive to spend significant resources on these relationships.
• Cost-conscious – These customers have limited budgets relative to the cost of your products or services and prioritize value. Identify if and where you can extend economic value to this customer. Is there room to renegotiate a contract at a lower rate but over a longer duration? If you can’t satisfy them without compromising your margins, it may be time to let this customer go.

Not Just Sales Talk

Segmentation has always been part of sales strategy. Informally, sales teams have always known that “Multinational companies make worse clients,” or “Companies with a small IT Team make better clients,” and “It’s harder to sell the money people in the organization.” These statements differ from team to team, but they are always there in the background.

Today, availability of data and sophisticated analysis techniques enable us  to formalize the things we “sort of knew” and to challenge old orthodoxies. It’s easy to see that different customers react in varied ways to your customer service and retention strategies. Today’s technology and experienced experts can help you predict and therefore control those reactions in advance.

By thinking carefully about how to segment customers during acquisition, service, and retention efforts, companies can optimize financial outcomes. Is your customer lifecycle as strong as it could be? Axiom Consulting Partners can help. Let’s chat today.