Step 1 of segmentation: Cater your outfit to the customer’s industry profile
The Goal of Segmentation
Segmentation is the process of dividing up your customers based on shared characteristics, with the goal of building a sales process that caters to their needs.
Customer variables may include:
Budget
How much can they realistically spend?
Decision maker
Who signs the check?
Procurement maturity
Will there be a formal RFP (request for proposal) process?
Sales timeline
What’s the estimated time from start to finish
Pain points
What technical solutions are important
Based on these inputs, segmentation allows you to meet your customers where they’d like to transact, with the right messaging and a pricing structure that makes sense.
Segmentation is crucial from a sales staffing perspective - selling to different customer types takes various process based skillsets. And from a marketing approach, you won’t find all leads in the same place, through the same channels, or for the same customer acquisition cost.
It’s an iterative journey, filled with both art and science. Here’s what we’ll cover to get you there:
The Output and Goal
Early On
Who’s Involved in Customer Segmentation
Customer Characteristics
Starting with Employee Count
Beyond Employee Count: Other Segmentation Criteria
What Not to Segment By
The Impact of Procurement Maturity
The MAP Model of Segmentation
Sales Rollout
Determining Lead Source
Avoiding Pitfalls
Let’s jump in.
The Output and Goal
Great segmentation results in lower CAC (customer acquisition cost) and higher LTV (Life Time Value). If you intimately understand the pain point, psychological predisposition, and procurement structure of your target buyer, it allows you to search in the right place, craft the best message, and scope out the buying process more accurately. That results in lower dollars spent to acquire the customer, and higher retention.
Early On
It’s common to start with a single core segment early on. It’s hard to be everything to everyone when you are just finding product market fit (PMF) and have limited resources.
For example, I worked at a company where we found our first segment in the midmarket for other B2B software companies, specifically those who built sales and marketing tools. From there we expanded to another mid market segment, fintech. But we had no idea how to sell to an Enterprise manufacturing company out the gates. That would take time, data, and a more refined process.
Speaking of that - a lack of data is often a challenge - it’s difficult to segment purely on opinions and anecdotes from your C Suite. In that sense, segmentation should get better over time as you compile historical data. But you have to start somewhere with a hypothesis and refine continually.
Who’s Involved in Segmentation
Product Marketing
Ideally they take the lead, as their job is to become an expert on the company’s offerings, the customer’s use cases, the competitive market dynamics, and cohesive messaging
Product
They’re responsible for building a product that solves for core pain points, and improving it with specific features that customers ask for. Ideally the product is an on ramp to purchasing where and how the customer would like to procure
Sales Operations
It will eventually become necessary to staff go to market resources against your segmentation. The sales ops team is responsible for deploying the strategy across sales teams, coming up with the right account mapping, and calculating quota targets based on estimated deal sizes and cycles
Business Intelligence
This isn’t the best team to start the process, since there’s no data, but they’re critical to informing the feedback loop and actually cutting the cohorts correctly for measurement
Customer Characteristics
Firmographics: Employee count, estimated revenue
Employee count is relatively knowable
Revenue is hard to get for private companies
Geographic: Location
Typically based on corporate HQ for sales ownership purposes
Psychographic: Attitudes, personality traits, values
Will take discovery
Behavioral: How do they like to buy (self service vs direct sales guided vs channel)
Will also take discovery
In the words of Tamara Grominsky, the founder of PMM Camp:
“Start with Demographic and Geographic, then layer in Psychographic and Behavioral – you’ll build your customer segments based on the first two categories. And then when you’re doing your persona work, go out and actually try to learn more about those segments to overlay psychographic and behavioral characteristics.”
Starting with Employee Count
As we covered, segmentation is typically divided based on the number of estimated employees working at a company.
This is used as an approximation for total potential wallet share, since revenue figures are not always disclosed, and employee counts can be approximated from public sources (or shelling out money to Dunn and Bradstreet, lol).
Employee counts are also important because they can be used for an approximation of license count if you are selling a pure play SaaS solution.
SMB (Small and Medium-sized Businesses): Typically under 500 employees.
SMBs usually have shorter procurement cycles because decision-making tends to be quicker, often involving a single decision-maker or a small team.
They require solutions that are easy to implement with minimal IT resources.
Mid-Market: Usually between 500 and 1,000 employees.
These companies may have more formal procurement processes but are still relatively agile compared to enterprises.
The decision-making process often involves multiple stakeholders, such as IT, finance, and department heads.
Enterprise: Over 1,000 or 5,000 employees, depending on the definition.
Enterprises have longer procurement cycles due to their complex approval processes, which often involve multiple layers of decision-makers, including procurement teams, legal departments, and C-level executives.
They require solutions that are scalable and customizable to their specific needs.
Keep in mind: The numbers I’ve outlined above (e.g., < 500 employees for SMB) are mere starting points. These should be outputs of your process, not strict guardrails. I’ve seen some companies start Enterprise at 7,500 employees or more. But you can use these as a starting point, and then refine.
OK, let’s get more specific and outline a framework you can use.
Beyond Employee Count: Other Segmentation Criteria
Industry Vertical: Different industries have specific needs. Selling into a government branch or state run school board is a different beast than a a typical B2B company. They have different year ends (usually Q2) and a different request for proposal (RFP) process with bidding deadlines (and a ton of paperwork). Many companies will break out SLED (state, local, education) as well as Healthcare to tailor sales approaches to industry-specific procurement processes and decision-makers. For example, talking to a Chief Information Security Officer at a major healthcare corporation requires reps that you won’t get from talking to a Seed stage founder.
Geography: The employee counts may be different depending on country. For example, in Europe the Enterprise threshold may be lower because there just aren’t as many companies above a certain size available to sell to. On a domestic level, you may segment your coverage of areas based on wider swaths depending on the population of companies. Once you get big enough, a sales rep may only own a single street in NYC.
Regulation: You may develop overlays to work in segment specific experts in industries like Banking, which have high regulatory requirements, regardless of size.
Named (or Global) Accounts: Companies that are so large, or multinational in nature, like the Fortune 100, many deserve the attention of a single Enterprise rep (on steroids). For example, one of my friends works for a large cloud infrastructure provider and is responsible for a single bank who spends over $100 million per year with them. Everyday he wakes up and only thinks about them. And he has more than 15 resources reporting into him to make sure they get what they need.
Potential: You may also pluck certain accounts out of one segment, like SMB, to give them special attention, like they’re an Enterprise account. This is because you think they have massive growth potential and you want to treat them like they’re valuable from the start to make sure you continue to grow with them. For example, OpenAI was probably an “SMB” account two years ago for many sellers if they only used employee count. But given their crazy growth, they should be re segmented based on their potential.
What Not to Segment By
Website Traffic or Engagement Metrics: While these can indicate interest or awareness, they do not reflect the buying capacity, procurement process, or decision-making structure of an organization.
Company Age: The age of a company doesn’t necessarily correlate with its needs or buying behavior. A startup might have enterprise-level procurement processes, while an older company might operate more like an SMB.
Location Size: The physical size of a company’s headquarters or number of offices doesn’t provide insight into its purchasing power or procurement processes.
The Impact of Procurement Maturity
SMB: The procurement cycle is often fast, with decisions made by a small group or even a single person. It's crucial to present clear, concise value propositions that can be quickly understood and acted upon.
The typical SMB deal cycle in B2B software is under 6 months
An SMB deal may be closed in the same week an opportunity arises (we’d call those “Blue Birds” because they fly in out of the blue).
Mid-Market: Procurement cycles are more structured, with decisions typically requiring approval from multiple stakeholders. Sales strategies should include materials that address the needs of each decision-maker, such as ROI calculators for finance and integration details for IT.
The typical mid market deal cycle is between 3 and 9 months
Enterprise: The procurement cycle can be lengthy, sometimes taking several months to a year. This involves multiple departments and a formal RFP process. It’s essential to engage with a broad array of decision-makers, from end-users to executives, and ensure that your solution meets the detailed requirements of each group.
The typical enterprise sales cycle is a minimum of 6 months, and maybe even 18 months or more
The MAP Model of Segmentation
This framework comes from PMM Camp, and allows you a way to iterate on your segmentation process as needed.
Step 1: Measure Volume – the first step is to identify how many customers you have in different groups, and patterns between groups, to develop preliminary hypotheses about your most valuable segments. Start by understanding how many customers you have in different groups.
You’ll want to build a big data set in excel and start to slice and dice. This is where you cast the widest net and then trim down.
Take a shot at dividing them into 3 to 5 groups based on your initial hypotheses, or even just by employee counts
Think of this as the initial “line in the sand” and a starting point for the segment’s TAM (Total Addressable Market)
You’ll want to enrich the firmographic data with a Clearbit or Dunn and Bradstreet
Step 2: Analyze Performance – this is where you’re in the spreadsheet and looking to validate or invalidate those hypotheses that you have around these potentially good segments.
After this analysis, you want to have 1 to 3 high-performing segments that you want to pursue.
This is where you’ll start tracking by cohorts (a fancy world for a group that started buying at the same time)
For example, do these customers convert better than average, or have an above average high retention rate.
Eventually you’ll also want to track their retention and expansion. This will take over a year to get to if most customers are on annual contracts. If you are on monthly contracts, you can start tracking it immediately.
Step 3: Prioritize Potential - With some data you can now start to hone in on which segments are big enough, growing fast enough, and are cost effective to acquire.
Even if you have a few big buyers in, say, print media, that may not be a fast growing market to deploy resources against in a big way
Similarly, you may also identify an extremely specific segment that could perform well, but only has five total customers in the world
You’ll also want to be aware of the competitive dynamics - is it impossible to bid on key words for a certain type of customer? The customer acquisition cost may not make sense
You can take what you learn here and tweak how you define your segments. The “high level” way of defining segments is typically by employee counts, as we discussed. What you learn from the MAP process will help you better quantitatively define those bands, and break out specific segments that should stand on their own. It will also help you figure out how many sales reps you can have staffed to each segment.
Perhaps most importantly, it will tell you who to NOT go after (…at least not at first.)
Sales Rollout
This process has a crucial link to your sales capacity model - you’ll need to work backwards to figure out how many accounts each rep needs to be successful and have a shot at hitting their quotas.
Segmentation should define your sales team structures. And each segment will need different resources to succeed.
Battle Cards
What is the customer’s main “job to be done” when using your product?
What are the common objections when purchasing?
Who are the competitors at each segment?
Who is the typical decision maker (e.g., VP of engineering vs CFO?)
What features do they value / devalue?
Pricing Models
For SMBs, straightforward subscription-based pricing might work best, while enterprises may require detailed proposals and negotiations with procurement and finance departments.
Are your value metrics the same across each segment?
Do you need a simpler, more straight forward pricing structure for small businesses compared to enterprise customers who may require some sort of enterprise agreement?
How many years do you offer your product for?
Sales Enablement Courses
What is the sales training process for new reps?
The rollout never ends. It’s a continuous process of better arming your sales team with the resources they need to succeed. There should be a network effect where you learn more and more about your target customers over time with more deal cycles under your belt. For example - what are the common objections? These should be answered in battle cards.
Determining Lead Source
Marketing will need to figure out how to drive pipeline for the sales teams we just talked about. Each segment will need a different approach. Not many CFOs at Fortune 500 companies are converting off cold emails.
Here’s a hypothetical mix by segment:
You’ll also need to figure out at what point you reach diminishing returns for certain marketing channels as you try to reach each segment. That will, of course, need to happen over time. It’s typical to over index on one source to get off the ground and iterate as you go.
Avoiding Pitfalls
Over-segmentation: Avoid creating too many segments that complicate your sales process. Stick to a manageable number that allows for effective targeting while considering the different procurement cycles and decision-making structures.
Ignoring the Customer Journey: Consider where your customers are in their buying journey and their procurement process. Segmenting based solely on employee count without considering procurement cycles and decision-maker involvement might limit effectiveness.
Final Thoughts
There’s an art and a science to segmenting your customers. Pain points and messaging are not qualitative, but you can tell if you are addressing them correctly by iteratively segmenting your customers and measuring the cohort performance.
Final things to ask yourself as you go through segmentation:
Which segments are tangential to one another (e.g., do I better understand one through another)?
Do my sales compensation structures match the level of experience required to interface with a segment’s decision maker?
What am I learning about the length of a sales cycle, and how does it inform my underlying sales capacity model
Smart Stuff I Read at 2AM (Sources)
Tamara Grominsky of PMM Camp - This is the best source I found on customer segmentation. Highly recommend
