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8 Best Methods for Market Segmentation for SaaS

You own an innovative software solution but struggle to reach the right audience. 

Targeting an audience without research is similar to launching an arrow blind in the dark. It will yield near-zero results. 

The solution?

Create laser-targeted user segments. Businesses must go one step ahead and understand who they want to target. The next big question is, “How?”

This post answers this question and covers why we segment target audiences, the key SaaS market segmentation methods and strategies, and how you can leverage SaaS marketing best practices to drive business growth. Let’s get started!

Why do we segment?

Segmentation divides or categorizes your target audiences based on common factors or characteristics. The main goal of this exercise is to define multiple groups within your customer base.

Segmentation is the key to better understanding your users or potential customers. The only way to meet and exceed your customer expectations is to know what they really want. Segmenting your customer base has various advantages, including:

1. Improved results with efficient target marketing

Say you’re searching online for a project management software that best suits your SaaS organization. 

What happens?

You’ll get advertisements related to project management software that aims to convert you and make you purchase the product. This is called target marketing.

When you know what an individual wants or needs, and you nudge them to make a purchase, they are more likely to buy what you want.

“The benefit: Segmentation enables SaaS companies to identify specific groups with unique preferences, needs, and behaviors. With this understanding, enterprises can tailor their marketing messages, channels, and strategies to resonate better with the segment, increasing the effectiveness of their marketing efforts.”

– Vineet Gupta, Founder, 2xSaS.

Here is the ideal step-by-step process to target different segments efficiently.

Source

2. Increased customer retention and loyalty with product customization

Customization is crucial for customers, especially in the SaaS marketplace. When you understand the different market segment needs, requirements, and challenges, it becomes easier to provide customized campaigns, messages, and products that cater to one segment.

Organizations can customize and personalize various things, including:

The benefit: Since we all know no size fits all, customization give your customers a sense of importance, thereby significantly increasing customer satisfaction, loyalty, and retention.

3. Increased conversion rates with optimized marketing efforts

In 2024, personalization is crucial to build customer relationships.

Say you’re selling a realistic text to speech tool that can be personalized to meet different customer needs, such as businesses in the creative field, big corporations, or an online beverage business.

The product team faces a unique and challenging decision: Who should they prioritize when personalizing the chatbot tool for the three clients mentioned above?

The data collected in the past clearly shows big corporations contribute significantly to business revenue, while the other two segments represent only a tiny fraction. Therefore, it’s logical to prioritize the tech enthusiast in this case. 

While they don’t ignore requests other clients raise, their main focus remains on their most valuable segment.

This strategic shift increases user engagement and conversion rates among tech enthusiasts, and the chatbot tool secures a high position in the market for this particular segment.

8 SaaS market segmentation strategies to boost your growth

Effective market segmentation methods for SaaS businesses are vital for targeted marketing and product development. This section dives into eight approaches to segmenting the SaaS market, each offering unique insights for maximizing business growth and customer satisfaction.

Source

1. Demographic

The most common way to segment the SaaS market is based on demographics. Let’s use a few examples to illustrate this.

  • “Men between the age of 45-50”
  • “Teenager who earns 15K/month”
  • “30-year-old married woman who works as a teacher.”

As illustrated below, demographic factors include occupation, marital status, income, education, etc.

Source
AdvantagesDisadvantages
+ Simplifies target audience identification
– Sometimes, this method can oversimplify customer behaviors and preferences
+ Ensures smooth and successful personalized marketing campaigns
– Possibility of ongoing adjustment to the segment, thereby making the process tedious
+ Enhances marketing effectiveness.– Demographics do not always represent an essential characteristic of your target market, especially in B2B — e.g., a SaaS marketing tool for B2B lead generators. 

2. Geographic

Another popular and effective method of segmenting markets is geographic segmentation. From country to postal code, geographic segmentation enables businesses to target potential customers from a specific region. Why?

Let’s take an example. Temperatures in Asia are usually extreme; there is never a static or regular temperature. The clothes Asian people wear are drastically different from those of the US. 

A particular segment in a specific location may need a product that a person on the opposite side of the world may not even need.

AdvantagesDisadvantages
+ Ensures relevance and cultural appropriateness.– Oversimplifies customer behavior

+ Critical for local SaaS businesses — e.g., a French franchise platform
– Similar to the demographics segmentation, geographic conditions might not be critical for some types of SaaS businesses, especially B2B

3. Technographic

The technographic method is a unique and innovative way to segment the SaaS market. True to its name, technographic segmentation refers to grouping customers based on technologies.

When you use this SaaS market segmentation strategy, collecting data on your customers’ products, services, or technology is crucial.

The best example here is the Android vs. Apple segmentation. A user who prefers using Apple and has used the same brand’s products for years is likely to continue buying from a known brand. Android users follow the same pattern, too. This way, it’s easy to market and sell products, considering what a specific group of people want from your business.

Advantages Disadvantages
+ Offers valuable insights into your customers’ technologies and tools – Captures only a part of the scope of a customer’s needs and preferences
+ Highly effective marketing campaigns and product development– Can overlook other crucial aspects that influence customer behavior
+ Identify early technology adopters, a potentially influential segment– The person might use different tech (devices, browsers, etc.) for different purposes, so limiting the segmentation to one particular technology can narrow the market unnecessarily. 

4. Firmographics

As B2C companies leverage demographic information to group users with reference to personalities and traits, B2B  businesses, on the other hand, focus on firmographics.

Firmographic data, or firmographics, refers to specific business characteristics, including industry, location, revenue, number of employees, etc. These details help segment their target market and pinpoint the ideal customers.

AdvantagesDisadvantages
+ Focuses on business-related data– Misses accounting for individual users within a business
+ Helps tailor products and services to the unique needs of different businesses– Business-related information can change in the case of expansions., mergers, etc.
+ Streamlines the process of targeting high-value clients
 + Enhances customer satisfaction

5. Psychographic

Before we go deeper into psychographic segmentation, let’s understand what it means.

Source

Diving into interests and understanding customers deeper enables businesses to craft interactions that genuinely resonate. Let’s take the psychographic model Cambridge Analytica developed as an example. 

The consultancy divided individuals into specific segments by considering the presence or absence of five key personality characteristics, as illustrated below. 

Source

And as fantastic as a cool drink feels in the summer, psychographic segmentation enables businesses to draft marketing strategies that invoke the right emotions of their customers, ensuring a successful sale.

Advantages Disadvantages
+ Enables businesses to craft highly personalized marketing efforts– Resource-intensive process, often requiring complex surveys, social media analysis, and deep qualitative research
+ Significantly increases engagement and conversions– Can lead to market misfiresPrivacy concerns
+ Empowers content creation that connects with customers’ emotions and desires.

6. Usage

Closing a deal has more layers in 2024 than in the pre-subscription era in the marketing sphere. Let’s say a user signs up for a product. As the first step in the subscriber’s lifecycle, they go through the onboarding phase. 

Here, businesses start targeting and grooming the user to ensure they keep using the application for a long time. The user needs to become familiar with the product, and interactive walkthroughs and personalized product guides go a long way toward achieving that.

After the onboarding phase comes the engagement phase. Let’s take Netflix as an example. Say a user enjoys watching thriller movies on Netflix. With this information, Netflix can leverage predictive analytics to automate notifications and feature thriller movies that viewers would like based on their viewing patterns. 

Every time a viewer interacts with Netflix, it is a personalized journey. That’s the ideal scenario every business must aim to reach when segmenting users on the basis of life cycle. 

AdvantagesDisadvantages
+ Enables SaaS businesses to provide highly relevant content and support– Accounting for exceptions is tough
+ Increases chances of conversion, retention, and advocacy– Adapting to the segmentation framework is tricky and time-consuming
+ Foster deeper relationships
+ Maximize customer lifetime value

7. Behavioral

Businesses can leverage customer behavior to create groups, enabling them to optimize their UI/UX and marketing strategies. 

Here’s a list of customer behaviors you should consider:

  • Browsing pages
  • Sign-up patterns
  • Feature usage
  • Product upgrades, etc.

Behavioral segmentation caters to how your users interact with your SaaS, giving you insights into what they like, dislike or avoid, and everything in between. 

Let’s continue with the Netflix example we covered in this blog. Netflix is a prime example of how businesses leverage the power of personalized recommendations based on customer behavior.

Source

Netflix has cracked the code and understood that recommending content that closely matches with a viewers liking will lead to increased time spent on the application and, in the long run, an active subscription for life.

AdvantagesDisadvantages
+ Aids in identifying loyal customersPrioritizes retention efforts– Gathered information can lack insights into motivations and emotions
+ Helps build long-lasting relationships– Privacy concerns 
– Always a potential to misinterpret behavioral patterns 

When it comes to SaaS, you need to choose an advanced marketing automation platform that enables you to segment based on behavior data. Encharge provides the most powerful behavior segmentation on the market, allowing you to plug in your product feature usage, billing data, CRM data, and more.  For instance, you can segment based on user actions (user events) that a person has performed or not performed in your SaaS app.

Segment based on user actions in Encharge

8. Value

Customer value can mean two things: 

  • For a customer, it’s all about getting as much or more value as they paid.
  • For businesses, it’s about CLV or Customer Lifetime Value. 
Source

It goes without saying that not all customers bring the same value to businesses. Some may be paying a fraction of a business’s product/service price, while other sections might be paying 80% of the total cost. That’s why, in this method, it’s crucial to focus on top-value users. Top-value users are the ones businesses will want to retain and build relationships with. 

AdvantagesDisadvantages
+ Optimizes marketing strategies– Complex process
+ Empowers SaaS businesses to prioritize efforts effectively– Possibility of neglecting future top-value customers
+ Provides insights into upselling and cross-selling opportunities– Focuses solely on immediate financial gains
– Doesn’t consider brand loyalty or building long-term relationships

With Encharge you can segment your customer audience based on their billing information. Encharge integrates natively with Stripe, Chargebee, Recurly and other billing provides to sync information such as MRR, ARR, plan name, and more. 

Segment based on recurring billing data in Encharge

How to drive growth with segmentation

A comprehensive understanding of the customer’s purchase journey, from initial needs identification to post-purchase experiences, is crucial for creating personalized offerings that resonate with individuals and foster long-term loyalty.

A study stated that about 30% of SaaS companies reported their churn rates had increased significantly in the past year, all because of segmentation.

Businesses should embrace three key strategies to drive growth with segmentation in today’s complex consumer landscape. 

  • Firstly, leveraging social media for real-time insights provides a wealth of consumer data, allowing companies to uncover micro-segments and track shifting preferences. 
  • Secondly, harnessing the power of automation through cutting-edge technologies like machine learning and AI enables personalized experiences and streamlined processes, enhancing customer engagement and retention
  • Finally, combining various research methods to ensure precision in segmentation, allowing businesses to adapt effectively to the dynamic nature of consumer behavior.

Conclusion

In conclusion, effectively segmenting a Software as a Service (SaaS) market requires a nuanced understanding of customer needs, behaviors, and preferences. 

While traditional segmentation methods such as demographic and firmographic segmentation provide a solid foundation, leveraging more advanced approaches like benefit/need-based, psychographic, and behavioral segmentation can offer deeper insights into customer segments. 

Ultimately, by prioritizing customer segmentation and leveraging innovative tools and methodologies, SaaS companies can effectively identify and target distinct market segments, driving growth, and fostering long-term customer relationships.

Currently, Encharge offers the most powerful set of segmentation methods for SaaS companies. You create targeted segments based on 8 different types of conditions:

  • Field — User data, including automatically tracked demographic and technographic data. 
  • Tag — Tags applied to users.
  • Email activity — Segmentation based on email engagement such as email opens, clicks, unsubscribes, etc.
  • Event — Segmentation based on user actions in your app.
  • Page visit — What pages people visit on your website and in your product.
  • Flow goal — Segment based on whether a person has reached a Goal in a specific automation.
  • Segment — What other Segments people belong to.
  • Group — Use sophisticated AND/OR rules to create nested groups of Segments.
  • Association — Segment based on associations with Companies or Custom objects. You can bring in your CRM data in Encharge and segment based on companies associations, as well as any other custom object. 

The possibilities are endless. If you’d like to learn more about segmenting your SaaS audience with Encharge, do not hesitate to book a free consultation call now.

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