You have a product. It makes the unworkable workable; the unavoidable and urgent easier. On some dimension of personal or corporate need (status, affiliation, safety, ease of use, cost, speed, etc.), your product wins big. Segmentation can only emerge from this: the solid foundation of a compelling product. Without it, you have nothing. Once you’ve nailed basic product / market fit, however, proper segmentation is the lift-off point for all future company growth.
Who is your customer? This is the question that customer segmentation answers.
Segmentation is a data driven filtering exercise. Your segmentation scheme divides the market into buckets, and then clarifies which buckets matter most. From your top priority buckets (segments) emerges your Ideal Customer Profile (ICP). Here we find the ideal buyers’ and users’ personas, tasks, expectations and pain points as they pertain to your product.
Let’s begin with a segmentation example that underscores its power. Zuora is the leading subscription management platform for B2B and B2C companies. It supports recurring revenue billing, multi-channel commerce, global payments, and workflow analytics. The company has raised over $200M in venture funding and is fast growing, with 600 employees serving customers worldwide. Tien Tzuo, founder and CEO, has developed a comprehensive, multi-layer segmentation scheme.
Working bottom-up from a detailed understanding of product use case scenarios, the company has defined three high-level segments: B2B subscription companies, B2C subscription companies, and companies in transformation. The latter segment is populated by companies that are innovating their business models. Each of these three major segments has been further sub-segmented by industry, company size and geography.
The segmentation scheme has been leveraged to clarify brand, tighten messaging, and focus the sales organization. The top-level Zuora brand is distilled into one word: “Freedom.” This cascades into three segment-specific brands. For B2B, it’s “Freedom to Grow.” For B2C, it’s “Freedom to Experiment.” And for companies in transformation, it’s “Freedom to Reinvent.”
The sales organization itself is organized into three tiers, based on company size. B2B, B2C, and companies in transformation are all served by the same sales teams within a size-based tier, but messaging is customized to these different audiences, based on their unique buyer and user personas.
Segmentation has also sharpened product road map decision making. By understanding the unique unmet product needs in each segment, smart decisions have been made to prioritize development.
That’s the power of doing it right. Smart customer segmentation:
- Anchors your brand strategy
- Sharpens pricing
- Drives product roadmap prioritization
- Lasers in messaging
- Superpowers lead generation
- Tightens sales workflow
So why do so few tech startup CEOs get it right?
Too often, CEOs either don’t segment at all, or they approach the task with a top-down, “gut instinct” approach. Lacking the time or money for extensive research, the next best thing, many CEOs conclude, is essentially an educated guess. But there’s a sweet spot that stands between “expensive, time-consuming research projects” and “winging it.”
This middle way involves the following:
The Use Case Scenario Exercise is the key to this “middle way.” It leverages the existing domain knowledge of your team so that you only need to focus on researching the things you don’t already know.
To complete the Use Case Scenario exercise, you need to start by coming up with at least 50 different use case scenarios for your product. This ensures you work from the atomic level on up towards a segmentation scheme, versus top down. The 50 use case scenarios are your “raw material” that will eventually yield 1–3 top priority segments. To come up with this number of use case scenarios, or permutations, the first question you will face is, “what segmentation dimensions matter most?” At this stage, you should cast a wide net. You’ll narrow later. Here are some dimensions to consider:
Size of company (revenue / employees / market cap / Alexa ranking / etc.)
Product usage profiles
Buyer or User profiles
Product demand indicators
Manufacturer / vendor affiliation
Product usage profiles
Once you have come up with at least 50 permutations, create the following columns in Excel or a Google Sheet.
Continue reading here.