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Using Market Segmentation for your Go to Market Strategy for B2B SaaS
You cannot ignore the maturity of the Category your SaaS is in. Here are some unique segmentation strategies for a Go To Market strategy for B2B SaaS.
To reach Product Market Fit (PMF), segmentation is everything. Market segmentation helps you understand, and engage with, the parts of the market that are most in need of what you have to offer. It helps you focus your resources and time your execution. In this blog, you’ll find multiple segmentation models that I’ve found helpful in growing a successful business. B2B SaaS Startups require a unique approach to segmentation because your market, your solution, and ultimately Product Market Fit (PMF) will change fast as you grow.
Preparing for the hunt
I’ve found market segmentation by average revenue per customer (or user, ARPU) very helpful in determining the right go-to-market strategy for a B2B SaaS venture.
Here are four broad segments that I believe are most helpful, as they were originally envisioned by Christoph Janz (more in this great post by him) each requires a different approach and specific investments.
Small, aka Rabbits
These are the smallest types of clients that could warrant a B2B Go-to-market approach. At ~$1000 annual contract value (ACV) you need 100,000 paying users to get to $100M ARR. These (usually) small businesses will need to pay you $50-$100 per month in subscription fees. To build a successful SaaS business in this segment, you require a high volume of trial sign-ups…into the millions. Given the high churn rates of small business customers, the Customer Lifetime Value is not likely going to surpass $3000 so to achieve a healthy profit you can’t spend more than $500 to acquire a customer, maybe a little bit more if you’re able to bring down churn levels over time.
I can’t see SaaS Companies that follow this strategy succeed without a self-service approach (i.e., “zero-touch”, and no inside sales), combined with 100% inbound marketing (a great website, content marketing, and constant funnel optimization). When I led SaaS Contact Center mightycall.com my team pulled this off. It took a focused content marketing effort and lean team to get the flywheel going, and a very cost-effective go-to-market to keep it growing. We also licensed some technology to partners who white labeled it, a viable alternative strategy to get to the $100M mark while focusing on small businesses. In the following graph, you can see the SEO impact our content marketing had that allowed us to grow Mightycall without any sales resources.
The first B2B SaaS product I helped launch was Office 365 when I led global SMB Marketing at Microsoft. Given the scale of our channel, and the existing relations with customers of the non-SaaS Office products, we could get to 100k paying users fast, and it made me appreciate how hard it is to do this as a smaller SaaS startup, without those existing relationships or marketing infrastructure.
Medium, aka Deer
With $10,000 ACV, this is where many typical B2B SaaS Companies start as they try to find PMF. You need 10,000 paying users to get to $100M ARR, and this is a goal that is not too daunting for most founders. While a real enterprise sales team with account executives and traditional solution selling through a managed opportunity pipeline is likely too expensive, at this ACV, it’s possible to include paid lead generation sources in the growth mix, and you can start using an optimized team of BDRs to drive outbound sales. Since most B2B SaaS products usually don’t go “viral”, you’ll have to put the effort into building a customer referral program.
My personal experience in this segment started at Acumatica.com where we were targeting $100k ACV customers and often sank closer to $10k ACV customers when we were still getting to PMF. We also gave up some ACV margin as we developed a go-to-market with a leveraged VAR Channel. I believe it’s ok to give up ACV in exchange for not having to bear the cost of sales and marketing as long as your partners take that over.
Large, aka Elephants
The elephant hunting segment only requires you to get to 1,000 paying customers, at $100,000 ACV. This is the typical approach for a B2B SaaS Company focused on an Enterprise workload. At Acumatica.com, this was our target segment, and it allowed for the creation of a real sales organization, to complement your marketing-led growth. An additional strategy that has worked for many companies is to start selling $10,000 ACV customers, find Product Market Fit, and then scale up to grow their Enterprise customer base.
Knowing your Audience - the Technology Adoption Journey
Using the stages as defined by Moore in Crossing the Chasm, let’s dive into how they impact various segmentation models. Your audience can be broken down into five segments, each defined by their technological sophistication and willingness to engage your service.
Innovators, aka Tech Groupies
Innovators are super techies. They speak your language. They are first in line. They consider themselves visionaries like you. They want you to succeed because that validates their own insight. They want to join your success. They will even help you build your product, validate its usefulness and value proposition. If your service delivers, Innovators are your evangelists. They will invest time and energy in your company. They will like you on Facebook, retweet your news, share your blogs. They will talk you up at parties and at work. They will offer testimonials.
One of the fundamental insights in human psychology is that the best way to make a friend is not to provide help but to ask for help. Seek input from Innovators as to what they like about your product and how you can improve it. They can be a reliable sounding board. Ask them for useful feedback.
- Psychographic: Seeks change. Wants to shape the future.
- Motivated by: Help you build the product.
- Risk tolerance: Confident. Welcomes an experiment.
- How they learn: Independent. Wants to “figure it out”.
- Decision criteria: New features. Latest Tech. Highest performance.
- Go-to-Market approach: Involve early. Ask for help and feedback. Enable them to spread the word. Provide VIP/Early access.
Early Adopters, aka Your Fans.
Early Adopters also see the value in your service, in addition to wanting to be first. They are quick to embrace your offering, however, it’s more from a transactional point of view. It’s in their best interests to do so. They might not get excited to be reference customers as they don’t think that’s in their best interest. You provide something that helps them do something they couldn’t do on their own. Your product gives them a competitive advantage, makes their operation more efficient, or lowers operational costs.
Throughout the PMF stage of your growth journey, Early Adopters are your most valuable customers, forming the foundation for your sales efforts, providing the momentum for your flywheel. As such, you need to reward them with access and attention. These are the people you will sell to as the founder and get their feedback. Think of the following rule as the impact that your performance with this early audience has on later success (or failure): If an Early Adopter customer has a great experience, they will likely tell three other people. If they have a bad experience, they might tell ten other people. And often overlooked, if they have a bad experience, and they speak up, and you listen and correct it, they might become your biggest fans and tell many more customers, for a long time to come.
The flywheel effect becomes even more pronounced because of the type of communication that is the most effective channel of all…word of mouth (WOM). Nothing beats the targeted precise delivery of the WOM channel. It’s not only delivered 1-1 to the intended individual but the message will also always be customized to that audience of one. In addition, the person delivering the message will get instant feedback from the audience through visual and verbal queues. This makes WOM the most effective channel for your product to be presented through, so any impact you can have on the quality of the content will improve outcomes.
Institute a referral program that rewards Early Adopters with exclusive access and makes them feel relevant for your success. They want and can appreciate, being treated specially in return for the risk they take.
- Psychographic: Be part of the next thing. Don’t miss out.
- Motivated by: Get an “edge” over the rest.
- Risk tolerance: Ok to try new things that others are also trying out. Gages risk vs. return.
- How they learn: Happy to invest in learning.
- Decision criteria: New benefits. Innovation vs. status quo. Supports the “Job-to-be-done”.
- Go-to-Market approach: Make aware of the “Pain” and show the “Gain” (tangible benefits). Early reference customers. Free trial/demo.
Bridge the chasm or get stuck
Generating adoption from early adopters and innovators is relatively easy. Your early customers have faced similar workplace challenges and have been eagerly awaiting a solution like yours. Innovators want to be a part of the adventure and are willing to do the work to help make it happen. Early Adopters want to be a part of it if you do the work. You are all in the same club, so to speak.
However, the next three audience groups present a stiffer test. Not as tuned in technologically or eager to spend, they are slower to adapt and adopt. There is a gap—a chasm—in their willingness to consider, much less embrace, your service. To succeed, you need to bridge this chasm.
Pragmatists, aka The Early Majority
While not total geeks, the Early Majority are tech-savvy. They also want to partake in the future. They just don’t want to take the same amount of risk. They see the value in your service but are slower to respond. They want others to go first and pay the price of testing your product. They are pragmatists and weigh pros and cons before committing. They want to see a clear ROI.
The early majority want testimonials from happy users. Testimonials are critical for the Early Majority customers and allow you to build credibility through inference, by reference, and ultimately by evidence.
One of your top priorities, when you try to achieve product-market fit, is to write up the testimonials from your early adopter customers, as they help you win the early majority. 90% of customers consult online reviews prior to making a purchase, and to win over the early majority, you need to get some reviews on your website, landing pages, etc.
With the Innovators, Early Adopters, and Early Majority on board, you have captured the customers most important to you.
- Psychographic: Solves for my need. No brainer to use it.
- Motivated by: Not being “left behind”.
- Risk tolerance: Limits their risk. Need to see ROI.
- How they learn: Buys a “proven” product and expects hand-holding.
- Decision criteria: Will pay for features that match requirements. Brand equity & reputation. Expects good T&C.
- Go-to-Market approach: Industry/Use-case specific case studies. ROI Calculator. (Custom) Demo.
Conservatives, aka The Late Majority
The Late Majority is conservative by nature and circumstance. They can also make your company jump through hoops to convince financial and executive gatekeepers of the merits of your service. They often require ROI studies and reference calls in addition to quotes or testimonials. Thus, sales cycles with this group are longer.
Be careful before you pursue these customers. They may not be worth the trouble until you have clearly established PMF and know what your ICP looks like. Before that these can put a burden on your team that’s not yet worth it.
- Psychographic: The default state of inertia. Risk-averse.
- Motivated by: Peer pressure.
- Risk tolerance: Does not want change. Seeks assurances.
- How they learn: Will delegate the work after getting proof. So easy it does not require education.
- Decision criteria: Uses an RFP or competitive shoot-out. Will only buy proven brands.
- Go-to-Market approach: ROI Proof in Case Studies. Analyst coverage. Create “Fear of Missing Out”. Drive industry standards.
Skeptics, aka The Laggards
Laggards, as you might expect, are the last ones to the table. They resist change, skeptical that it will not deliver as promised, be implemented on schedule, and come in at cost. They invest in your product only if they absolutely must. In addition to proof points, case studies, and ROI analysis, laggards need to see others in their category investing in your solution first. They may even need hand-holding or a real-life beta test, a proof of concept or a pilot. I recommend you stay away from this audience until you have a very mature offering with many reference customers.
You may be tempted to market to as many interested parties as possible to jump-start sales. However, you should take a strategic, methodical approach, marketing to each group in the right order, one at a time. You need to excite Innovators first to propel your flywheel and attract Early Adopters. Testimonials need to be gathered from your evangelists to offer needed proof points to capture the Early Majority.
To make things even trickier, each group is different so that one-size marketing will not fit all groups. Each group is on a different technology journey. Each has a different familiarity with your service. Each is in a different emotional space. You must market to them in sequence, at the right time. Your messaging must be tailored specifically to each group.
To bridge the adoption chasm, concentrate on reaching the Early Majority. Catering to the late majority and laggards at this point would be a mistake and waste of resources. They need the most convincing, and it will take more time and money to convert them. They will also require a lot of attention from your team, putting a strain on your customer support staff. Chances are their expectations are unreasonable and therefore have complaints about product capability and quality.
Market Segmentation Models
Having defined your most important audience segments—Innovators, Early Adopters, and Early Majority—now you’ve got to market them. Note that based on the maturity of the market and the category you are focused on, different segmentation models could be appropriate.
Psychographic or Behavioral Segmentation
Each persona will have opinions on their industry and job. They will have values they hold true that will influence what kinds of companies they’ll do business with. They may be loyal to their company or perhaps just true to their profession. Messaging here is more personal: your solution helps the customer overcome their fears, reach their goals, and be a hero. Other examples are leisure preferences, interests, attitudes, opinions, memberships, personality, lifestyle, interests, health consciousness etc.
Contextual and Situational Segmentation
Context affects buying behavior e.g., a recent promotion, actively shopping, economic downturn, entered a mall, or a foreign country (GPS information can affect digital bidding strategies).
What’s the work the audience needs to do? How does it impact their customers?
- What are they trying to accomplish in their role?
- What “job” are they hiring your solution to do for them?
- What friction do they face in their current day-to-day?
- What pains are caused by the current way of doing things?
- What’s the “dream state”? If they had the perfect solution, what would it allow them to do?
- What is the event that encourages someone to buy?
Each persona will be defined by demographics. They’ll have an age range, a breakdown by gender, education, economic standing, income, family size, and socio-economic status. In B2B Marketing, this might come to play if you’re dealing with an older worker who might feel threatened by your solution. Or a younger worker who might be more tech-savvy and more inclined to be your advocate.
- What job titles do your ideal customers have?
- What age bands do they typically fall into?
- What kind of education do they have?
- Where do they go for information? (“watering holes”)
- What motivates them personally or professionally?
What industry is your prospect’s business in? How big is the company? How many people are in the company? How big is the department you sell into? Is there a minimum or maximum size? Are there any organizational changes that could affect their propensity to buy? Do they have partnerships that make them easier to sell to? How old is the company? What’s their business model? The revenue? The number of employees? Where are they located?
This is an expansion on either Firmographics or Demographics, focused on technologies used, mostly software and digital services.
- Your product integrations or limitations/dependencies
- Does your product replace/complement a certain technology?
- Are there certain technologies that “point” at challenges a suspect is facing?
This can be part of either Firmographic or Demographic segmentation, depending on if the underlying object of segmentation is an individual or a company.
What segmentation model to use?
Once you have reached PMF, firmographics, technographic and demographics are good primary methods for segmentation. You can analyze your current customer dataset. Are there any trends in the data that create a cluster or a “beachhead” that represents customers you want more of?
If you have not reached PMF, it can be risky to segment your ICP in the same way as above. You may need to focus more on psychographics and job-to-be-done characteristics to segment the market.