How to Segment Your Customers & Make Tough Trade-offs
Allison Pickens is VP of Customer Success & Business Operations at Gainsight
I’ve previously written about how CSM leaders can take on cross-functional leadership roles. Here’s another opportunity for cross-functional leadership: crystalizing your company’s segmentation strategy. CSM leaders are well positioned to coordinate this initiative, given their exposure to how different types of customers fare in post-sales. We also need to segment customers in CSM specifically, in order to scale effectively our own teams.
Our leadership team recently convened to determine how to segment our customer base and define our strategy for working with each segment. Here’s how we did it.
Understand Your Customers’ Needs
As a first step, we needed to understand what customers needed from us in order to be successful. We started to realize that customers clustered into certain segments:
- Companies that needed guidance in shaping the evolution of their customer success organization, in addition to guidance in defining a strategy for using Gainsight. They wanted us to support the change management effort led by their PMO. (PMO stands for project management office, which is a team created for a particular initiative to ensure its successful roll-out.) In addition, these companies want to significantly influence our product roadmap.
- Companies that were already experts in growing their organizations, but that needed guidance in executing their customer success strategy within Gainsight.
- Companies that were just starting to build their customer success teams and wanted to digest all the information they could get about best practices.
I was able to detect these trends by talking with our CSMs, talking with other executives who had been involved in accounts, and especially by directly getting involved with customers, in order to witness these patterns firsthand.
We named these 3 segments as follows:
- Enterprise / Midmarket
Understand Your Customers’ Value to You
We also needed to understand the value that each of these segments provided to Gainsight. It may be controversial but still important to ask, should we actually serve each of these segments? The segments above offer us the following value:
- Huge expansion potential
- High retention rates
- Enterprise / Midmarket
- Strong brand value
- Significant ARR and high retention rates
- Fast sales cycle
- High advocacy rate
- Substantial product feedback
- This segment forces us to do more with greater constraints, given that we can’t afford to spend huge amounts of time with them. Therefore, much of our internal innovation in CSM processes comes from our work with SMBs.
It’s also worth noting any difficulties you have in serving each of these segments, in order to assess the value of serving that segment, net of any challenges.
Delineate Between Segments
We carved out these 3 segments based on ARR. We used ARR as the deciding factor because the customer clusters that I described above approximately corresponded to certain ARR ranges, although the correlation wasn’t perfect. Even so, anchoring on a financial metric makes it easier to define the right engagement model (and thus the proper amount of investment) for each segment.
The segments we’re using correspond nicely with the ones used in Sales, but they don’t align perfectly, since Sales doesn’t know upfront what the ARR will be. Instead, the Sales team segments based on employee count, as shown on the company’s LinkedIn page.
Here’s how we delineated among segments:
- Strategic: Customers that either present a major upsell opportunity (e.g. into a new division) or help us open up a market for a new use case for Gainsight. These are our highest potential ARR customers.
- Enterprise/Midmarket: Customers above a certain ARR threshold that are not Strategic
- SMB: Customers below a certain ARR threshold that are not Strategic
We designate Strategic customers early in the sales cycle, with input from our VP of Sales. We’ve divided the Strategic segment into industry verticals, with a Director overseeing each one. That’s because it helps to accumulate industry-specific knowledge in this segment: in order to serve large companies, we need to capture industry-specific use cases, and feed those back to our Product team.
Note that segments 2 and 3 are defined based on ARR rather than potential ARR: upsell potential for these customers is more limited, so it’s a fine approximation to use current ARR. This method accelerates account assignment for new customers, so that you don’t have to estimate upsell potential in each case.
Once we had defined the 3 segments, we needed to decide on our model for serving them in both Sales and Post-Sales. We returned to the question above, “what does each customer type need from us in order to be successful?”, except that this time, we kept in mind what we could afford to do when addressing those needs.
“What you can afford” all comes back to one number: your maximum ratio for net CSM fully-loaded cost / ARR.
Our target is 15%.
That number is affected by the following factors:
- ARR / account
- # of accounts / CSM
- Cost / CSM, including overhead
- Pricing for post-sales, i.e. charging for certain levels of support or CSM
We can change any of these variables, but at the end of the day, we have to make sure that they multiply to less than 15% for each customer segment. Here’s how you can influence those factors.
ARR / account: Hire a Renewals & Expansion manager to improve retention and upsell, or influence your sales team to increase the average selling price (ASP). Sales can increase their ASP by instilling more discipline, improving the sales process, hiring solutions consultants, introducing a different hiring profile for AEs, or introducing a new pricing package, among other strategies.
# of accounts / CSM: Limit the amount of time spent on each account. To this end, you can run 1:many programs, standardize your onboarding process, be more prescriptive about how to use your product, or introduce greater specialization among CSMs to avoid re-creating the wheel in every customer interaction. A pooled CSM model can involve specialization, in that each type of touch point could be handled by a different subject-matter expert.
Cost / CSM: Hire more junior people, or hire in a less expensive location.
Pricing for post-sales: Introduce a model where you charge for premium Support and/or CSM, to offset your costs.
The context for your business will determine which paths to 15% are most feasible, and therefore which trade-offs are more desirable. For example, if your sales team has difficulty increasing prices, but your customers are willing to tolerate less time spent with their CSM, then the best path to 15% may involve increasing the number of accounts per CSM.
Define the Lifecycle
Once you’ve made those tough trade-offs, formalize them by defining the lifecycle touches for each segment. I’ve described some of our lifecycle touches here.
If you have questions about how to segment your customers, feel free to reach out to your Gainsight CSM or to Allison at email@example.com. You can also follow Allison’s blog posts on Twitter at @PickensAllison.
Originally published at www.gainsight.com on August 17, 2015.