This is the second article in our 12-part subscription sales series, designed to help you understand and prepare for the evolving sales landscape. This article details the importance of customer segmentation and provides you with the tools to segment your own customer market. Don’t forget to read the first article in this series; Subscription sales: a new sales strategy.
The importance of customer segmentation
A universal primary business objective is to generate revenues that are higher than costs. In theory, this principle should guide all aspects of a business’ operations – including the customer sales approach.
Few companies compare the cost of their sales approach with the actual revenue of individual customers. Without this consideration, experienced sales representatives risk spending significant time servicing their lowest value customers.
The misalignment of sales costs with individual consumer revenue often occurs in businesses that haven’t invested time to understand their customers. While it is infeasible to create a sales approach for each individual consumer, the process of segmentation provides a sales framework that maximises customer value.
Customer segmentation is the process of designating customers into broad categories based on similar characteristics. This creates streamlined sales approaches where the costs are less than the expected customer revenues per segment.
Segmentation should consider all aspects of the sales approach, including the number of resources dedicated to each segment, experience of sales team members, sales process, average time per sale and lead generation strategy. Once segments are defined, businesses can develop appropriate sales approaches for each group.
Every business typically has three segments
Customer segments differ by the number of customers, amount of sales revenue generated per customer, complexity of internal decision-making processes and the most effective sales channel or approach.
Ideally, a business should only target one segment. If two or more segments are targeted, it is critical that each segment is clearly defined so that sales teams, products and initiatives can be organised accordingly.
While specific categories vary between businesses, each market generally has three customer segments. One technique for segmenting is to use the number of employees in a company. Potential revenue and internal decision-making processes often correlate with the size of an organisation.
It is critical for businesses to segment existing and future clients to streamline their sales approach, maximise sales efforts and align resource allocation with customer profitability to ultimately generate revenues that are higher than client costs.
Small and Medium Businesses (SMB)
SMB customers have a small number of employees. The actual head count depends on the specific market, but it is usually less than 150 employees. This small size means purchasing decisions are streamlined and only require approval from one stakeholder. Sales in this segment often start small, and revenue remains low due to small employee numbers.
SMB customers best suit a digital sales approach. One benefit of selling to SMB is the requirement to develop a strong digital sales approach that can also be applied to drive sales in other segments.
Customers in this segment are larger than SMB and should have no more than 1,500 employees. While the internal purchasing decision process is more complex, MM customers generate substantially larger sales revenue than an SMB.
MM sales require a low-cost, time-critical approach. Inbound leads need to be qualified and quickly directed to an Account Executive with the right expertise and availability to respond to the customer. To account for this, inside sales teams are often based in a single location to help sales velocity and lower costs.
The MM segment is an important category to target, as successful businesses are usually dominant in this segment. While businesses can generate high revenues by selling to SMB at scale, experienced venture capitalists only value a business when it achieves success in the MM segment.
Customers in the Enterprise segment have over 1,500 employees. This segment has complex internal decision-making processes, but is able to generate much higher sales revenues.
Enterprise sales are large and complex endeavours. The sales process involves numerous customer stakeholders and requires large and diverse sales teams. These teams must allocate resources to effectively service customer stakeholders spread across different departments with diverse interests. Due to the complexity of managing these accounts, the initial sales contract can include ongoing professional service fees in addition to the product or service costs.
Businesses that experience early success with large Enterprise deals can struggle later on because these large-scale clients can drive businesses to shape their universal product or service around the needs and expectations of a few large key players. Conversely, scaling SMB and/or MM customer segments forces a business to continuously innovate and adapt their offering to find product-market fit.
Contact us for more information on how we can help you segment your customers.
Next up in this subscription sales series is an article on understanding your customer market.