The Importance of Segmentation

In go-to-market organizations, segmentation is how the team thinks of the markets they serve, how they organize internally, and should ultimately drive all product development and resource allocation decisions. Building an effective segmentation model for the business is one of the most important responsibilities of a leadership team [1]. Without a unified understanding of segmentation, it is hard for teams to build and serve customers well. Imagine marketing and sales prioritizing different audiences and industries, giving conflicting feedback to product and engineering, while finance ignores the squabble and reports data from its own, separate perspective. When teams push in divergent directions, it wastes calories and resources and makes everyone feel bad.

When the entire company aligns its efforts around a common understanding of the market, and pushes in the same direction, real progress becomes possible. Marketing tailors programs by segment to generate qualified leads. Business development and sales are trained and eager to work them. Product knows exactly who they are building for and all core business KPIs are aligned with a clear market-based north star.  Just like company values, segment prioritization should come from the top. How a company invests in itself will be determined by how well each segment is growing. Leadership can use segmentation as a strategic tool to communicate the health and direction of the business to their team and the board. 

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Role of Revenue Operations and Finance

Revenue operations and finance are responsible for running segmentation scenarios and advise on how to re-carve the business as the company grows. And the entire company can better understand the competitive landscape if there is a clear roadmap between where there is overlap today and how that might change based upon prioritization. It’s important to understand the tradeoffs of competing segmentation models. The work is just getting started when a new segmentation model is defined. The downstream impacts affect every team: new org charts, new marketing campaigns, redrawn territories, updated hiring priorities, quota and comp plans, enablement, and more. When the downstream impacts are so massive, leadership has a responsibility to get it right before holding the whole team accountable for executing on the plan. Getting it right starts with total addressable market (TAM). 

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Understand TAM

TAM is the most important input to segmentation. A small market puts an artificial cap on a product’s growth. No matter how great a product is, growth will be capped by the segment’s available market and ability to pay. To build a meaningful TAM model it can be helpful to work with a TAM consultant. Their perspective will be more neutral than the internal team and the best are able to develop a nuanced understanding of different markets, how saturated they are with competing products, and how effectively those products are serving the market. The outcome of the engagement will give you a clear picture of the relative size of different markets, how much opportunity there is for products like yours, and how penetrated the market is by incumbent competition. 

If a consulting engagement is not possible, there are ways to build less nuanced understandings of the market. In the United States, the Bureau of Labor Statistics and Census.gov provide macro data on industries and employment. Pairing this with talking to as many users as possible, conducting market research interviews, will help you form a more clear understanding of the market size and the current competitive landscape.  

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Understand Current Performance by Industry

In addition to external data sources, if you’re at the point where you need to start or change segmentation, you should have a trove of customer and usage data to help give context to the macro TAM indicators. For many firms, the biggest initial challenge here is around data quality. Key account information such as industry, firm size and location is crucial to seeing the big picture within your own business, but if that data is missing for a large percentage of records in your CRM it will be difficult to deeply understand where you’re having success and why.

Fortunately, we live in a golden age of data enrichment. If the CRM is a mess, guide revenue operations to prioritize a project to clean up the existing data and build processes for ongoing quality and enrichment. This investment now will guide better segmentation decisions immediately and help you understand the business better long-term. Additionally, understanding your current customers are critical. Understand their pains and why they chose you over the competition.

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Territory Carving

Segments can be used to help teams understand where they are having success, where they are underperforming or under-penetrated.  There are many ways to carve a business, and here are two recommended ways:

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1. Firmographic (based on industry, company size, revenue or employee) – To segment by employee size, split a triangle into three pieces horizontally.  The small triangle on top is “enterprise”, middle is “mid market”, bottom is “SMB”.  Exactly where the lines are drawn along the y-axis depends on your needs and how fast you are growing in each piece versus the required velocity at which to grow.  A common delineation for SMB is 1-100 employees, Midmarket is 101-1000 and Enterprise is 1000+ employees.  
2. Geographic (based on country, state, region, county, zip or area codes) –  If you’re mostly doing business in America, the US could be broken down into West, East, South, Central.  Rest of world could be organized by Asia-Pacific (APAC), Europe, Middle East, and Africa (EMEA), and Latin America (LATAM).

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Once you have a good understanding of firmographic and geographic segmentation, it’s fun to squint and think bigger for the company.  Proper segmentation can reveal how teams and strategies are performing over time, offering insights into the overall health and future trajectory of the business.

Once leadership has communicated their shared vocabulary and strategy with the team, everyone can now rally behind their part in growing each segment. Leadership chooses which segment to protect, to invest and to push harder on. Sales and marketing is aligned with their efforts on talking to customers in those segments. Finance and revenue operations reports on performance and leadership will adapt as new data flows in. Product and engineering prioritizes products to align with GTM needs. The ultimate goal of segmentation is to optimize growth and maximize return on investment. 

[1] Segmentation should not matter for early stage startups.  These companies will have one segment.  

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