SaaS Customer Segmentation: B2B Framework For Best Results

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In my previous article, “How to Build a Customer Success Framework in 2022,” under ‘Practices,’ I touched upon how to focus on not just the top X% of your clients but also those accounts that are small today but have the potential to grow in the near future. In this article, we will cover the ‘why’ and ‘how’ of it.

What Is Customer Segmentation?

Customer segmentation is the process of breaking your consumers into groups based on common discipline.

For example, suppose you run a B2B SaaS firm. In that case, you may categorize clients depending on the size of their organization, the user's position within it, their geography, and a variety of other factors.

Then, in order to maximize outcomes, you may connect with those diverse groups in a different and more relevant way.

Let's look at a basic example: user segmentation by location. After segmentation, cultural context may be used to generate more successful marketing tactics. For example, put all of your Indian users together and offer them exclusive deals around Diwali or any other Indian event. Then, during other significant holidays for different segments, launch similar advertisements.

Customer Segmentation, especially in the SaaS industry, helps organizations prioritize business results and KPIs in a more qualitative way.

Why Is Customer Segmentation Important?

B2B software companies have been relying on the classic ‘Enterprise/Mid-Market/SMB’ segmentation for years, which worked well for the long-term (multi-year) on-premise license deals. However, for the SaaS model, this segmentation approach doesn’t give insights that might be helpful for the next annual renewal and identifying key expansion opportunities early on as the client’s business evolves.

For example - how do we identify and segment those ‘fast growing’ SMB clients that are going to hit the Mid-Market tier in, let’s say next 6-9 months or a Mid-Market client reaching Enterprise level in the next 12-15 months? And how do we nurture them in a timely manner during this growth phase by delivering additional value aligned with their KPIs and creating a win-win proposition?

As another scenario - how do we proactively address the situation where we know that a current ‘Enterprise’ client may reduce spending with us next year simply because their relevant business unit is in the decline phase because of internal re-org and other external factors?

It might also be a case of clients not getting enough value from the product - a classic case of mismatched expectations during pre-sales, poor onboarding, or a product roadmap not aligned with their evolving needs. As a side note - I wrote another article on ‘customer-centric onboarding’ to prevent this situation.

Actionable Customer Segmentation Framework

From my experience, it’s more helpful to have ‘actionable’ segmentation based on not just clients’ current status but also their future potential - by assessing how much is their spend as a share of their current and future wallet (budget) potential.

Here is the 2X2 framework, a customer segmentation technique - showing the four segments with easy-to-remember action-based names (Grow, Manage, Re-Evaluate, and Protect), and it also helps to track where the majority of focus should be for the CS team (using the 80:20 principle).

Here are some best practices for each of these segments.

Grow (80% Focus)

These are your high-growth strategic clients and typically have been onboarded within the last 12 months.
Ensure the initial POC/Pilot is successful and closely nurture the relationship to drive engagement.
Collaborate with the sales team to drive expansion into multiple regions and business units.
Invest the majority of your time and resources for these clients, drive structured account plans, regular face-to-face MBRs and QBRs, regular internal SWOT analysis, ensure high CSAT/NPS, and pre-empt any competitive threats.

Protect

These are the key clients that contribute a reasonable part of your current revenue and typically have been with the company for over a year.
These clients have reached 80% or more of their revenue potential.
Protect these accounts by ensuring a high NPS score with them and killing off any competitive threats.

Re-evaluate

You should not have clients in this state for long, and clients could be in this transient state for various reasons - including low CSAT/NPS, not a strong alignment between the client’s future business goals and your company’s value proposition, external factors in the client org, etc.
In case of low CSAT, re-build the relationship to ensure they continue to see the value from this engagement.
Re-evaluate these clients to ensure that your value proposition is still aligned with their business strategy going forward, and if not, move them to the ‘Manage’ segment.

Manage

These are typically the long-tail SMB clients with very limited budgets.
Follow the low/tech touch engagement with these clients using online meetings, for the most part, using automation tools and processes to drive the NPS and ongoing renewals.
In some cases, where some of these clients might be very demanding that don’t justify the effort vs. revenue, then it is better to let these clients churn gracefully to avoid any impact on other high-value clients.

Key Takeaways

Unlike the legacy segmentation, which is easy to do by just sorting all the clients on a revenue/company size filter, getting good value from this segmentation requires a reasonable level of ‘Account Due Diligence’ work (captured in the ‘Account Plan’ document, especially for ‘Grow’ accounts) including company background, corporate strategy, business goals for next 1-2 years, a summary of their business lines, company SWOT analysis, financial performance in the last 2 years and forecast for next 1 year (if available), key (relevant) highlights from press releases and new initiatives in the last 6 months, competitive landscape, etc.
The inputs for this due diligence will come from multiple sources like - the company’s website, quarterly & annual reports (in the case of a public company), usual internet searches, LinkedIn, industry events, and ongoing QBRs with clients.
Given the dynamic nature of this segmentation, it’s a good practice to review and revise the segmentation of clients every 6-9 months to guide your account strategy for the next couple of quarters.

So with this in-depth understanding of client’s business, their industry trends, and domain knowledge - the CSM will be able to demonstrate not only ‘thought leadership’ (that strategic clients expect from a good partner) but also offer only those solutions that will directly impact client’s business KPIs - rather than just pushing the tool and following up on adoption without understanding the big picture of why and how this product adoption will help clients.

Interestingly, sometimes it also brings a ‘moment of truth’ for CSM to reflect on in case of adoption issues - if our solution was really that important for their business (as we thought during onboarding), then why is adoption not taking off or dropping now? Is our solution still solving big pain points/objectives based on what I now know about their business?

Frequently Asked Questions (FAQSss)

What is customer segmentation, and why is it important in SaaS?

Customer segmentation is the process of dividing customers into groups based on shared characteristics, such as company size, geography, or user role. In SaaS, segmentation is crucial to identify growth opportunities, proactively address potential churn, and align solutions with clients' evolving business needs.

How does customer segmentation differ for SaaS compared to traditional software?

Traditional software often uses fixed segmentation like Enterprise/Mid-Market/SMB. SaaS, with its subscription model, requires more dynamic segmentation to account for annual renewals, growth opportunities, and potential risks due to client business changes.

What are the four actionable segments in the 2x2 segmentation framework?

Grow: High-growth strategic clients with high engagement and expansion potential.
Protect: Key clients contributing significant revenue; focus on retention and NPS.
Re-Evaluate: Clients with low alignment or satisfaction; require strategic evaluation.
Manage: Long-tail clients with limited budgets; rely on automation and low-touch engagement.

How does actionable segmentation improve customer success?

By focusing on actionable insights, segmentation helps Customer Success Managers (CSMs) align solutions with clients’ KPIs, demonstrate thought leadership, and build trusted partnerships rather than merely promoting tool adoption.

How can a CSM address low product adoption issues identified during segmentation?

CSMs should reflect on the product's relevance to the client’s current needs. Questions to ask include:

Is the product still solving critical pain points?
Are there unmet expectations from onboarding or mismatched use cases?
Is the client receiving enough value to justify ongoing usage?

How does segmentation impact account planning?

Segmentation guides account planning by prioritizing resources and strategies based on a client’s growth potential, alignment with the product, and long-term business goals.