Tag Archives: Customer Segmentation

B2B Customer Segments: Where Do You Draw the Line?

17 Oct

Whether you’re facing explosive growth or trying to manage your Cost of Services as you build out your customer facing organization, you know that you are going to be faced with real-world resource constraints as you fund and build a Customer Success function.  And after all, you’re a responsible leader and this is 2013, so you know better than to just throw people at a problem.  So how do you efficiently manage growth in a Customer Success organization while effectively empowering your customers?

In my last post, A Practical View of Your Customers, I introduced an approach for understanding and mapping your customers by revenue using a Pareto chart. While I focused that article on how to look at your customer segments based on revenue, I’d like to focus this article on where to draw the line for each segment and why. If you haven’t read the previous post yet, I’d suggest doing so now. If you’re familiar with Pareto principles, my prior post certainly isn’t rocket science. You may still want to read it, though, as I’ll be re-using a chart I introduced there to illustrate my points.

Customer Segmentation and Engagement Models

Customer Segmentation and Engagement Models

The First, High-Touch Segment

Unless your company is a rare blue unicorn and you have a completely homogeneous customer base, you’re going to have some distribution of current and potential revenue across that customer base. Creating a Pareto Chart will show you which of your customers make up the largest revenue contribution. While my hypothetical (but not uncommon) example in my previous post showed a top tier segment where 10% of the customers accounted for 45% of the revenue, your results may differ – possibly significantly. It is almost certain, however, that a minority of your customers will account for a majority of your revenue and very likely that a small tier will account for a significant percentage (greater than 30%).  If this is the case, you have a great opportunity to create a premium service offering via Customer Success that will focus on retaining and growing those customers.

This tier of customers is incredibly valuable.  You can afford to (and need to) provide them with some attention, and ensure that you have great two-way communication in place in order to both guide them as well as learn from them. If you’re in the early stages of building your Customer Success team, I’d suggest this first cut at determining how to build out this team:

  • Think about the key activities that are required to ensure your top tier customers are getting value from your product
  • Understand how much of a person’s time it will take to provide those activities
  • Multiply that time by the number of customers you have in your top tier, and then staff accordingly, understanding that your CSMs will likely be able to spend less than 100% of their time on the activities  you just defined

Note that this is a bit of an iterative process, and you’ll be doing a few “reality checks” as you understand how much time is needed for your customers – and as a consequence, how many people will be needed to deliver the experience you want your customers to have.  There truly is a combination of art and science to this process, and if you can’t afford to hire enough resources to adequately service the group you’ve identified as your top tier, then you have three options:

  1. You can redefine and reduce the size of that tier then only expand it once you can adequately staff to support a larger number of top-tier customers;
  2. You can redefine (reduce) the level of service you provide to your top-tier customers; or
  3. You can introduce automation (customer success automation, marketing automation) to assist the CSM in managing the customer relationship

How much service and effort you provide to each customer is going to be specific to your offering.  Once you’ve done your calculations, you’ll likely want to perform a reality check based on the Book of Business each CSM is projected to be responsible for. I’ve seen organizations where each CSM has a Book of Business of as little as $1M of annual recurring revenue and others where that number is closer to $10M… or more. Metrics and “standards” are still all over the map on this topic and are really dependent upon your industry and the level of service you need to provide to your customers.  Early stage, highly-technical solutions will require more CSM effort than later stage “commodity” solutions. Whatever stage or solution you’re at, though, be sure that you’re creating a role that is going to be sufficiently engaged to help your customers achieve value.

A Second, Hybrid Segment (Optional, but likely)

Depending on your customer distribution, you may want to define a second segment of customers who still represent significant revenue, but are probably closer to a 1:1 ratio of percentage of customers to percentage of revenue. In the hypothetical example I provide, the second customer segment represents 20% of the customers and 30% of the revenue. Again, your mileage may vary; however if you have a second tier of customers that makes up a sizeable percentage of your revenue, then you can (and probably should) identify a less intensive, but still personal, level of relationship with them (perhaps less frequent interaction than tier one and perhaps assisted even further by marketing automation). By doing this, you now have created personal relationships with two segments of customers that likely cover a majority of your revenue, but only a relatively small minority of your customers.  My example in the last post shows 30% of customers representing 75% of revenue. While my example data is hypothetical,  I’ve seen a number of companies within +/- 10% of these ratios, especially in the B2B space.

So how many CSMs should you assign to this space?

A good reality check for the number of CSMs to assign to this group is to use your Book of Business per CSM as the great equalizer. You may have CSMs in group 1 covering 10-15 customers and $3M in ARR. In Group 2, with smaller customers , a CSM might need to manage 50-75 customers to cover $3M in ARR.  Automation will play a key role here to help identify customers in need, customers at risk, and to trigger targeted communications to customers at the right time.

The Third, Highly Automated Segment

While you’ve likely covered a majority of your revenue base in the first two segments, you still have a long tail (actually a very long tail in cases like freemium) of customers who are using your services but – at least for the time being – provide you with very little revenue. This customer segment is certainly important, both from a numbers, lead generation, and future revenue perspective; however you can’t afford to provide them with the same level of service you provide to customers who are paying orders of magnitude more than they are per month, so what does automation for this segment look like?

Whether this long tail represents 300 or 300,000 customers, you’re going to benefit greatly  from an automation solution (or solutions) that help you:

  • Identify customer usage patterns
  • Identify at-risk customers
  • Send appropriate communications to those customers based on behavior, triggers, or their lifecycle
  • Keep your entire customer base engaged by helping you connect with them in a relevant way

While the long tail doesn’t represent a majority of your revenue, both this segment and your second segment are going to contain customers who represent incredible upsell opportunities – if you do some analysis that will help identify them. If you spend the extra effort up front, you can also leverage marketing automation to target relevant messages to those customers based on their behavior, activity, and other usage metrics.

If your strategy is to land and expand, you’ll need to look everywhere for the expansion opportunities, not just in the top tier. And if you’re using analytics, segmentation and automation appropriately, you can drive meaningful action with the right customers, whether they’re in your “top” tier or in your long tail.

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A Practical View of Your Customers

7 Oct

A few months ago I wrote a post about customer segmentation titled All Customers Are Equal, But Some Are More Equal Than Others.  I graphically represented the concept of customer segments with a pyramid, because it was a simple and straightforward representation of the concept.  When it comes down to actually segmenting your own customer base, though, and making decisions about how to service them, I’ve found the best way to do that is to use a Pareto Chart.

Pareto1

Figure 1: Pareto Chart of 2000 Hypothetical B2B Customers

The Chart Described

If you aren’t familiar with the concept, a Pareto Chart is great way to visualize how your revenue is distributed across your customer base and how much your largest customers contribute to your overall revenue.

The chart above came from a hypothetical set of 2,000 customers I created from data that I made-up to represent a typical B2B customer distribution curve. The grey portion of the Pareto Chart is actually a bar graph made up of 2000 data points in descending order. Each (very thin) bar represents a customer’s Monthly Recurring Revenue (MRR) and maps to the axis on the left – in MRR dollars.

The blue line shows the cumulative percentage of revenue represented by the customer base as it moves along the X axis and maps to the axis on the right – in percentage of total revenue.

Creating Your First Segment

The Pareto chart quickly shows you a couple of things:

  1. How your customers are distributed
  2. How many customers fall into each bucket so that you can efficiently allocate resources to manage a large percentage of your revenue base.

The image below takes this hypothetical (but not uncommon) B2B case and creates a first segment of customers. This segment happens to consist of approximately 10% of the customer base (It’s 200 grey “bars” wide, representing 10% of the 2000 bars in the graph) and approximately 45% of the revenue (the right edge of the green area intersects the blue “% of revenue” line at about 45%). You’ll also see that the MRR value at the right edge of the green area is approximately $5,000 – which represents the minimum MRR for a “Tier 1” customer.  Again, these numbers are examples. The process for creating customer segments requires a little art to go with this science and is going to take some iterations to get right; however 10% of your customer base is a reasonable baseline number for a high-touch CSM organization.  You may choose to make it larger or smaller for a number of reasons (which I’ll cover in a future post), but this framework is a good way to illustrate it and justify whether you’re covering a reasonable amount of your revenue base.

Figure 2: The First Segment

Figure 2: The First Segment

The Second Segment

Now that you’ve created a high-revenue customer segment that can justify a high-touch CSM, you might want to see whether it makes sense to cover another relatively small number of customers that still might represent significant revenue with a somewhat lower touch, but still personal, approach.  Based on this customer distribution, you can see that a second segment can be created that consists of twice as many customers as the first segment, and in combination with the first segment gives you coverage for approximately 75% of monthly revenue.

Figure 3: The Second Segment

Figure 3: The Second Segment

Pareto Charts can illustrate pretty clearly how much revenue is represented by each segment of customer as well as show the baseline MRR that can be used to define the “floor” of each segment.  Figure 3 shows that in this hypothetical situation, 75% of the revenue is represented by approximately 30% of the customer base, with an MRR of $1,700 and above.

So Now What?

Now that you have a framework for segmenting your customers, you can optimize your investment in your CSM function.  In this example, the first segment of customers represents significant revenue that can justify high-touch named CSMs who can engage with customers in a personal, frequent, and customized manner. The second segment consists of roughly twice as many customers and a little over half the overall revenue of the first segment, so the amount of engagement per customer that can be justified for each CSM is significantly lower. The third segment represents approximately 3/4 of total customers yet only 1/4 of total revenue and can be effectively managed with Customer Success Automation and Marketing Automation. I’ll discuss how to address these three very different customer segments in more detail, and how Customer Success Automation applies across all three in a future post.

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All Customers Are Equal, But Some Are More Equal Than Others

14 Jun

With all the Orwellian quotes from 1984 being tossed around as a result of PRISM, I thought I’d use one from his other book to describe the paradox of customer service for those of us who have ever supported a large and diverse B2B customer base.  How do you provide a *great* experience for all of your customers in a scalable manner while creating something truly exceptional for your high value customers?

Well, first, you need to understand your customers – and while it’s actually not that uncommon for many startups in the SaaS space to have very good aggregate metrics such as CAC (Customer Acquisition Cost), Conversion Rates, etc., many companies don’t necessarily have individual customers very well segmented into logical groupings of actual and strategic value to the organization.  It’s ugly, but it’s true, and it’s because a number of startups have gone through a growth process that looks something like this:

1) Invest in product and build it;

2) Invest in sales and grow the customer base;

3) Realize that the growing customer base is now large enough that it needs to be proactively managed and scramble like crazy to get the recurring revenue base under control.

Customer Segments

If you’re at this stage, getting things under control and categorized can actually be pretty straightforward.  It just takes some thought, focus, and basic analysis.  I’ve blogged about some of the technologies that are emerging in the space of revenue renewal management or Customer Success Automation.  The reality, though, is that most SaaS companies, especially early stage ones, don’t yet have an analytics or Customer Success Automation solution to provide them with good insight into their customer base using real data-driven scoring and early warning systems across all customers.  This post focuses  on how to segment customers in the short term using basic data that you already have on your existing customer base (MRR, ACV, CLV, plus some other identifier for “strategic” accounts) …and it starts with the 80/20 rule.

Cust_Segments

The Top Tier: The “Most Equal”

While it may not be exactly 80/20, the reality is that in the vast majority of B2B SaaS companies, some small percentage of customers will represent a very large percentage of their revenue.  Those customers are very high value and need to be treated as such.  Create executive relationships and multiple touch points.  Invest in them.  Meet them face to face.  Get to know them.  Involve them in your business.  Provide detailed monthly or quarterly business reviews that give them an indication of progress against stated objectives that you’ve worked out with them in advance.  Determine the set of services you should be providing to this tier of customer and identify the amount of time it will take on an ongoing basis for your CSMs to provide those services to a model customer, then understand how many customers you can reasonably and consistently service given that time requirement… Congratulations, the laws of time and space just helped you create your first cut at your top customer segment.

Until you add more trained, senior, CSMs to your team or modify the level of service, you shouldn’t try to service more customers than you can at this level.  If you over-commit, you risk missing on delivery expectations and you’ll leave your customers, er, less than satisfied.  That may sound obvious, but getting from today’s reality to tomorrow’s desired state needs to be carefully managed.  Next, determine how many customers you would like to see getting that level of service and either staff up your CSM team or pare back your service offering slightly (or some combination of both) in order for your needs and reality to align.  Whatever number you come up with, you will need to justify it financially and take it into consideration when calculating your cost of services.  A good initial target to shoot for if you’re a B2B SaaS company is to get 40% of  your revenue into this bucket.  In many cases it will be represented by fewer than 10% of your customers.  Your mileage may vary, of course; however a reasonable range seems to be 1/3 to 1/2 of revenues represented by this customer tier for B2B SaaS companies.

The Second Tier: “The Most Leveraged”

While a high touch model works for that small percentage of customers who represent between 1/3 to 1/2 of your revenue, the law of diminishing returns takes over quickly and that model won’t scale to service the rest of your customer base.  In this next tier, each CSM will handle significantly more customers (sometimes up to 10x more) than their “Top Tier” counterparts and they will need automation in order to be effective.

Try to identify useful data that you can extract from your systems, and automate its delivery to your customers via Customer Marketing and drip campaigns that are “signed” by the CSM.  Compare that customer’s data against relevant benchmarks or aggregate data from the rest of your customer base.  The more you can automate the heavy lifting and position your CSM as the expert who can provide some context, insight, and recommendations around the data presented, the more you’ll position your Customer Success Managers for success.

The Third Tier: “The Most Scalable”

Some percentage of customers, (in many companies this group might represent the majority of them) are not going to generate revenue sufficient enough to justify the cost of a high-touch relationship – especially with respect to proactive communication with customers.  In order to support this tier of customers, a company needs to build out great self-service tools, including a self-service portal and an excellent customer marketing program… and they need to have a product offering for this tier that is intuitive and continuously improved as a result of customer feedback.  Companies like MailChimp and ZenDesk are poster children in this space for what to do and how to do it.  They provide great content.  They also understand that many of their existing customers interact with their company primarily online, so they focus on creating a powerful, bonding, consistent online experience for their customers.  Philosophically, they don’t see a “low touch” model as “low service”.  They see it as a way to create a consistent, powerful, engaged relationship with their customer base – at scale.  Understanding the importance of getting the product experience right, they also constantly listen to customer input, concerns, and challenges and respond by continuously making their product easier to use, more prescriptive, and less support-intensive.

While every company’s distribution of customers across these segments will vary with respect to percentage and number, and while your specific circumstances might require one more (or fewer) segment; understanding and segmenting your customers will help you focus on taking the right steps to provide the right level of service to each of them and create a great experience across all of them.

How have you segmented your customer base and what challenges have you faced in the process?

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