User Segmentation: How to Find Your Product’s Best Customers Using Data

Entrepreneur and investor Jason Lemkin says that if you have 1 customer in a segment, you can get 10.

With user segmentation and a bit of data, you can find your business’s best customers to double down and find more. In this post, we look at how entrepreneurs can use data to find their product’s best customers.

Whether your product attracts the customers you were initially targeting or not, you want to make sure that the segments your business focuses on won’t limit its ability to grow.

How Poppulo Used User Segmentation to Find its Best Customers

User Segmentation: The Poppulo Case Study

Late last year, I caught up with Andrew O’Shaughnessy, the founder of Newsweaver, now Poppulo. We talked about the early days of the company.

Newsweaver started as an email marketing platform. They had customers, revenue, and were growing.

Looking through data and interacting with customers, they noticed that a very small number were using the tool for internal communications – to send announcements to employees, internal surveys, etc.

Looking closer, they realized that the internal communications segment was one of their most engaged and profitable.

This realization led them to rethink their product focus and target that market exclusively.

The customer pivot transformed their business. They went from a Red Ocean – an hyper competitive market like email marketing – to a Blue Ocean, a market with very little competition.

Making the non-obvious decision paid off for Poppulo.

It’s important to follow the money trail and find the biggest opportunity for your business. Even if you think you’re already acquiring great customers, strategically exploring user segmentation and customer segments can help solidify your positioning (and keep you from leaving money on the table).

How I Found Lean B2B’s Best Customers with User Segmentation

User Segmentation: The Lean B2B Case Study

We don’t need to look very far for another example…

I wrote Lean B2B to help B2B entrepreneurs; the book and its marketing made that fact pretty obvious. Yet, evaluating buyers a few years after publication, I realized that innovation consultants loved the book, found value, and were extremely willing to refer it to their peers.

For an author with limited time and resources, it made sense to use this insight to prioritize promotion efforts.

How to Use Data to Find Your Product’s Best Customers

You probably already have a sense of whether you’re targeting the right customers or not, and you know what great customers look like. It’s the perfect time to dive into user segmentation.

To find the best customers from your customer base, we’ll look for signals within your data or analytics.

Your first task will be to codify your definition of what a great customer is. We’ll then use that definition to segment your customer base.

Depending on the areas of focus of your business, you can look at:

  • Retention / Churn: Cancellation rate or monthly churn;
  • Advocacy: Net Promoter Score, word of mouth or virality;
  • Customer engagement: Repeat visits, time on site or activation rate;
  • Revenue or profitability: Customer lifetime value (CLV) or average revenue per paying user (ARPU).

You’ll convert these inputs into a recipe; a form of customer value score.

It’s important that this score is a very close proxy for customer value and customer success in your business.

Key Thresholds for User Segmentation

Once you have your recipe, you’ll define 3 thresholds (buckets):

  1. Your best customers: The first percent atop your rankings;
  2. The next best: Customers ranked within the first 2 to 10%;
  3. Your worst customers: The last 10% at the bottom of your list.

Depending on how technical you are, you might be able to find these customers using SQL, your CRM, database exports or people analytics in tools like Mixpanel, Amplitude or Intercom.

The reason why you focus on these 3 groups is that: your top percent represents your best fits. Your “fans”.

If you do this right, this segment will include the customers most likely to advocate for your business.

The next 10% gives you a good comparison point. It can also reveal some of the lowest hanging fruits to help you create an exceptional product experience.

The last 10 – and this one is optional – helps you define who you shouldn’t be targeting. There’s a lot to learn there as well.

With these less-than-ideal customers, you’re looking for the characteristics and habits of the people that were never really a proper fit for your company. You can use those to create a negative persona – an archetype or profile.

Going Beyond User Segmentation to Home in on Your Best Customer Segment

To dive deep and understand the breakdown of each of those segments, you can do a market segmentation analysis, doing interviews to refine your segmentation.

Since you’re targeting people you’ve already sold to – or have already convinced to try your product – it should be easier to get them to engage with you.

Depending on your customer base and how deep you want to go, evaluating your customer segments can take anywhere between 2 weeks to 2 months.

This may seem like a lot of time, but it’s definitely worth it if you are to make an important focus decision.

Company Focus = Growth: Here’s How to Focus Your Business to Win Your Market

Once you select a beachhead market, you have to put your entire company focus on it.

It doesn’t mean you need to drop your customers outside that segment, but there’s definitely a re-prioritization that needs to occur.

You want to put yourself in a “thought leadership” position as quickly as possible. The more customers trust that your company is an expert in the field, the more likely they are to buy from you.

To do this, you need to become one of them.

Prospects should be your friends.

Get to know them, spend time with them. You need to want to be with them, show that you care and demonstrate that you’re building for the long run.

Being an outsider is only acceptable in the early days.

For a technology company targeting the energy industry like Flutura, this meant immersing themselves in Houston, the “Silicon Valley of the Energy industry”.

Derick Jose and his co-founders did a lot of half-day Lunch and learns, they surrounded themselves with retired oil and gas SME veterans, did a lot of quick show and tell pilots and spent time where the customers were.

If you’re serious about winning your beachhead, you have to be part of the community.

How Wistia Found Their Company Focus

Wistia – Company Focus

For a company like Wistia, selling a video analytics platform to marketers, this meant understanding where marketers spent their time.

They managed to hone in on a niche marketing segment after trying to sell to artists, compliance departments in organizations, the medical device industry and telecom companies.

Once they found product-market fit, it became obvious that they needed to better understand their segment.

Wistia co-founder Chris Savage mentioned in an interview how they approached customers telling them they were thinking about sharing their blog posts on Hacker News, a startup news site.

The reaction they got was: “I’ve never heard of this website.” After asking more questions, they figured out that their customers typically read more industry publications and major newspapers, not tech blogs.

That helped them realize that they weren’t going to be able to reach prospects without digging deeper.

They had to figure out where their customers spent time, what books they read, what blogs they checked out, what movies they went to – everything about their micro-target.

From there, the decision-maker had to become these prospect customers when writing copy, deciding what videos to make, what features to build.

How to Create Company Focus Around Your Beachhead Market

Your beachhead has to be clear both internally and externally.

Defining what you’re not is a good way of reminding your whole team of your mission.

Take the time with your team to define your bad fits and your anti-personas. Make sure everyone understands what a bad lead looks like.

Working with the wrong clients does not help your reputation, your blood pressure, your work-life balance, or your business’s overall success.

One of the most important things in a startup is the decision-making process. If it’s clear on the inside who your startup is for, it limits the scope of discussions and enables your people to make quick customer decisions.

Spotfire – Company Focus

One of the better examples of internal alignment I’ve seen is Spotfire, a Swedish data visualization company that went from an un-focused horizontal model to targeting a vertical in the chemical and biology space.

Once that decision was made, president Rock Gnatovich repositioned the entire company around that vertical. His team was even informed not to take calls from prospects in other segments or customer groups.

Eventually, when Spotfire gained a dominant share of the chemical and biology segment, they revisited the messages from prospects outside their vertical.

After careful analysis, they expanded in the energy sector, which led them to open a sales office in Houston. Them as well.

What Having ‘Company Focus’ Means

As a founder, you have to be able to tell the difference between ‘never’, and ‘not now’.

Focus helps you attract the right opportunities, allows you to spend your marketing dollars in the right places, makes your sales targets less overwhelming, and makes your marketing more effective (Read: Why Your Fear of Committing to Niche Markets Will Kill Your Startup).

The more distinctly you cater to a particular customer segment, the more important it is that you emphasize the targeted population’s needs or preferences in your website copy and graphics.

To properly target your niche market, you must craft your product messaging in a way that attracts the attention of your beachhead.

This can be:

  • The testimonies you chooseWill target customers recognize themselves in the case studies you promote?
  • The value propositionDoes it reflect the pains of your beachhead customers? Does it connect with them?
  • The influencers your work withAre they influential in your target segment or just influential in general?
  • The images you useDo they fit your demographic’s worldview, education, gender, race, etc?
  • The tone, the style, and the language – Your tone and language will be different whether you’re targeting a 20-something group or CEO types.
  • The needsHow do you plan to meet their needs in your messaging?
  • The client list – Your prospects will project themselves in the customer you choose. Are they the right ones?
  • The blog postsDo they fit your ideal customer profile? Do they solve their unique pain points?
  • The values and the way your company is presentedHow can you make your company story connect with prospects? Does it feel like you’re ‘one of them’?

All of these elements will evolve over time as you make your way through the adoption curve.

Plan to tighten the messaging as you capture a bigger share of the market.

Businesses want to work with vendors that are in it for the long haul. Long-term commitment helps reduce their risk.

You have to commit and focus to create real growth velocity. Company focus is a big part of it!

Ideal Customer Profile: What Makes a Great Customer in B2B?

Ideal Customer Profile – What Makes a Great Customer in B2B?

© Control Alt Deceit: A Game of Lies, Betrayal and Questionable Business Strategies

Think of your ideal customers… What do they look like?

  • They found you organically. They cost next to nothing to acquire.
  • They have the problem you’re solving… When they land on your site, they go: “Oh, that’s for me.”.
  • They experience the value of your product right away; it gets them the business outcome they seek.
  • They barely use your support. Everything just makes sense for them.
  • They don’t churn. In fact, they want more of your product. More seats, more features, more usage. More, more, more.
  • They can’t help but talk about your product… with other companies, at conferences, on their blog. They’re happy to give insights into new opportunities.
  • Their business is growing. They don’t ever think your product is too expensive because it delivers on value.
  • They provide a never-ending stream of feedback. it motivates your team; your product can’t help but get better.

Sounds amazing, no?

Well, those customers exist. It’s your job to find them, and then, find more and more of them.

An Ideal Customer Profile Framework

Entrepreneur and consultant Lincoln Murphy talks about the 7 criteria that define an ‘ideal customer’ on his blog. He says of ideal customers:

  1. They’re ready
    They know they have the problem you’re solving. There’s a sense of urgency you can use to sell your product.
  2. They’re willing
    They’re ready to solve that problem. There’s a champion and a strong catalyst for change: a merger & acquisition, an investment, a request for proposal, etc.
  3. They’re able
    They have the money and authority to solve the problem. You want as few decision-makers as possible because the longer your sales cycle is, the more money you’ll need to raise.
  4. They can be made successful
    Your solution is not held back by technical limitations; it can solve the problem. Your Jury – the key decision-makers – personally stand to win. Someone might get promoted as a result of implementing your solution. There’s a clear ROI. Success can mean a lot of different things to organizations, but delivering value and making businesses successful is critical.
  5. It’s cost-effective to acquire them
    User acquisition is never an after-thought. You always need to know how you’re going to acquire customers. If you need to speak to the CEOs of Fortune 500 companies to get a deal done, you won’t be able to ramp up as fast as if you sell a more transactional solution to the CEOs of SMBs. You want to make sure you’re able to reach the right decision-makers quickly.
  6. There’s ascension potential
    There’s an opportunity to Land-and-Expand to sell more seats, licenses, features, etc; upsell and cross-sell are possibilities. You don’t want to be locked-in with your initial deal.
  7. There’s potential for advocacy
    If made successful, customers can spread the word with their friends or colleagues, refer your business, write testimonies, or more. However, some industries are opaque, and word of mouth won’t work. It’s always better to know that ahead of time.

Ultimately, it’s your role to define your organization’s criteria for what makes a great customer.

To go fast, ask yourself: how can you have maximum impact with what your business currently has or could offer within the next 3 months?

Don’t look too far ahead. You’re looking for the lowest hanging fruit; the ideal customer for your current product.

Why Ideal Customer Profiles Matter

Signing 10 customers that fit your ideal customer profile will be more impactful than signing a large number of random customers.

Customers will always ask for product enhancements. These requests need to align with your vision of the future.

Customers provide references. It’s important that those references attract the right kinds of customers.

Define your ideal customer profile, use outbound to contact them, and focus. The more value your product provides, the faster you’ll grow within your target segment.

The Best Technology Business to Start in 2018 is B2B SaaS

This content on the best technology business to start is part of the Lean B2B course 🔓. Learn to validate your B2B SaaS startup with the Lean B2B Course!

All of my jobs have been in B2C. I worked in retail, I worked in loyalty, and I’ve sold to musicians. Yet, every single technology business I started has been in B2B SaaS.

  1. I started a consulting company selling user experience and usability services to businesses.
  2. I built Flagback adding a layer on top of the web for quality assurance teams and agencies.
  3. The employer brand monitoring platform I was building at HireVoice was B2B.
  4. My current (new) startup is also in B2B SaaS.

Why the best technology business to start is B2B SaaS

I ❤️ B2B, and there’s a lot of reasons why B2B startups matter. Here are the top eight reasons why the best business to start in 2018 is B2B:

1. You get to leverage what you know

The company you’re working for might be Business-to-Consumer (B2C), but you’re working in a business. You get to see the problems, you build domain expertise, and you learn the industry. If you work in retail, you understand retail. If you work in finances, you start to understand finances, but you also build solution expertise; you learn how to build a product for that market or for someone with your job title in another company.

2. The opportunities are almost infinite

If you truly understand the Job to be Done, you can find opportunities. People in companies are constantly looking for an edge over competitors – internal or external. There’s always a desire to improve retention, have better employee engagement or increase the performance of the marketing funnels; there’s always going to be a need to make things better. If you truly own-in on a niche and understand the need, you can build something really exciting for businesses.

3. B2B SaaS markets can support multiple winners

Think about it, how many email marketing platforms do you know? I can probably name ten off the top of my head. In B2B, you can have multiple companies serving the same need for different types of businesses. You can target a niche, go upmarket, low market, mid-market, etc. Whereas, in B2C, markets tend to be winner-takes-all. Facebook has no real competition. They’re WhatsApp, Instagram and Facebook. What else is there after them?

4. Software spending is growing

We’re in the golden age of tech. Businesses are still transitioning to the Internet, and software spending is growing. Businesses use more and more tools. I was recently speaking with a company that uses 80 tools to manage their business. They’re still thinking about getting new products, and why shouldn’t they? If they can automate a task or improve a business process, and the return on investment is there, it just makes sense, no? A lot of job functions are still underserved. Marketing or development may be well covered, but there’s still a lot of other functions in companies that can be helped. Think archiving, purchasing, operations, etc.

5. Legacy vendors still control the market

Legacy software companies like Oracle, Microsoft and SAP control a market cap of 83%, and own 93% of all software revenue. This means that only 7% of all software revenue is in SaaS; the bulk of the revenue is still legacy software. A lot of products will probably transition to more Software as a Service models, and there’s a lot of things that will need to evolve in terms of tools to give better service and better results to businesses.

The Best Technology Business to Start in 2018 is B2B SaaS

6. Profits are cool again

After the bubble burst in 2008, a lot of investors realized that they can’t keep investing in high-growth companies that don’t necessarily have business models. There’s less and less investment in companies that are just acquiring users, growing and then eventually thinking about monetizing. Monetization is a key part of it. It’s easier to bootstrap and build a sustainable business in B2B because you’re expected to sell, have sales and be sustainable. You can’t just acquire all the businesses and then someday try and convert these companies into customers. It doesn’t work like that in B2B.

7. The innovation industry is booming

If you look at the US, the Asian or the European markets, there’s more and more people working in innovation in businesses because companies have started feeling the heat. They realized that their business models need to change. One way for them to do that is to acquire startups that can help them leverage an advantage over competitors. This increases the odds of successful exits for B2B entrepreneurs. If you build a meaningful product, it might not become a sustainable business, but maybe a company will need it to build or expand its product offering.

8. B2C incumbents are going B2B

Last, but not least, B2B is becoming cool-er. Because of the consumerization of enterprise software, business users have come to expect the same kind of user experience that they get in B2C in B2B. More and more exciting B2B SaaS products like Slack, Box or Intercom are coming up each year, and they’re attracting more and more attention. Even companies like Dropbox and Facebook are slowly transitioning to more B2B services because they realize there’s a lot of money in B2B.

As an entrepreneur, if you’re willing to dig deep into the value chain and the needs of the market, you can find opportunities for breakout products. You just need the patience and the dedication to do the research. There’s countless opportunities in B2B, and that’s why it’s truly exciting. :-)

More on B2B SaaS

How to Identify Follow-on Markets (With a Great Bowling Analogy)

How to Identify Follow-on Markets (With a Good Bowling Analogy)
© Control Alt Deceit: A Game of Lies, Betrayal and Questionable Business Strategies

Let’s talk about bowling…

If you imagine the move from early adopters to the mainstream audience as a bowling alley where each pin represents a niche market…

As you knock over a pin – or capture a significant share of that niche – you can move on to adjacent markets… and then knock them over.

But, to be successful, the key is to make sure that the next pins you hit are related to the ones you’ve already knocked down so that awareness, word of mouth and case studies travel from one pin to the next. That way, you don’t have to start from scratch every time you enter a new market.

This approach is what Geoffrey Moore, author of Crossing the Chasm, calls the “bowling pin” strategy.

Facebook is a company that executed this strategy really well.

Facebook started at Harvard and then spread to other Ivy League colleges, before eventually reaching the general public.

If they had started out with 1,000 users spread randomly around the world, the service wouldn’t have been very useful.

But having the first 1,000 users at Harvard created value for students. Those students had friends at other colleges, which allowed Facebook to jump from one college to the next.

Much like in bowling where it’s much harder to hit a split – when the pins have clear separation – then to hit adjacent pins, you want to make sure your follow-on markets are related.

How to Find Follow-on Markets That are Related

To find the next “pin”, it’s important to understand what you’ve already created and be aware of new or emerging opportunities.

What have you built? What came up as you were winning over your initial market segment?

  • Did users from other segments sign up despite your marketing’s focus being on a completely different market? Were some of those user groups larger than others?
  • Did any of those users find real value in your product? Were there segments that showed equal – or maybe superior – performance than your target market customers (churn, engagement, NPS, return on investment)?
  • Did users from other market segments contact your team wanting a slightly different product or solution? Did they have the budget to pay for custom development?
  • Did your team build authority or visibility that can be leveraged to enter in a new market?
  • Did your team gain knowledge or insights that can be used to strategically expand in a new segment?
  • Have customers recommended your product to companies outside of your target market? Have those companies found value using your product?

You’re looking for the intersection between the easiest segment to capture and the greatest strategic benefit for your organization.

Which segment opens most doors? Which segment strengthens your position of leadership? Which segment helps your finances the most?

At this point, since you’re building from a position of strength – with revenues and an established company – you can prioritize longer-term opportunities.

Ask yourself: which follow-on markets will help you knock down pins #3, #4, #5 and beyond? Find the best customer segment and do it! :-)