The importance of customer segmentation in SaaS

Why cherry-picking is sometimes OK and why you can’t shave everything over a comb. 😉

Let me start this post with a question. If you look at the chart below, what do you see?

What you see, I assume, is the 12-month chart of a SaaS company that isn’t doing too well. Our fictional SaaS company, let’s call it Acme, Inc., hasn’t grown its customer count, and while MRR has increased, the growth rate of ~40% over a one year period isn’t particularly exciting. What you’ll also notice is that the 40% MRR growth must be entirely owed to a (remarkable) increase in the company’s ARPA.

What I bet you can’t see in this chart is that Acme is serving two different segments, let’s call them “rabbits” and “deer” ⁽¹⁾. The customer and MRR numbers shown in the chart above are the aggregates of the numbers of these two segments. Let’s look at these two segments side by side:

What becomes visible now is that the company has historically been selling mostly to rabbits, but that part of the business is on the decline. The company’s emerging deer segment has been growing very fast, though. In the last 12 months, Acme almost tripled its deer customer base, increasing deer MRR from $30,000 to $89,000⁽²⁾. If the company continues to grow its deer segment at this pace, it will soon generate the vast majority of its revenue from deer customers, and the rabbit segment will soon become an almost irrelevant legacy business.

If you look at the aggregate numbers only, the very promising development of the deer segment and the potential that it holds for the future of the entire company get almost completely masked by the underperforming rabbit segment. If you fail to segment your data you may, therefore, end up underselling yourself to investors. Even more importantly, looking at aggregate numbers or averages across your entire customer base may lead to poor business decisions, e.g. when it comes to how you allocate marketing dollars or the precious time of your AEs. As you might know, I firmly believe that in order to build a $100M ARR SaaS company…