I’m just going to come right out and say it. It might break some hearts, but it’s important to get this out there. Customer segmentation and tiering are not the same thing! If you’re sitting there thinking, “of course, I know that. Don’t be silly!” Then, I’m relieved. But I still see far too many Customer Success leaders (yes, even smart ones!) using the terms interchangeably. Be sure you’re making a real distinction between segmentation and tiering in your Customer Success strategy. If you’re reading this and thinking, sure, they aren’t exactly the same, but they’re so similar, why do I have to treat them differently? Well, I’ll tell you.
Segmentation and tiering are both foundational to a thriving CS organization. On their own, each establishes a framework from which you build other essential CS capabilities. Because they are so closely related to one another, they tend to blend together, but we shouldn’t confuse the two. Each ties directly into the design of your customer engagement strategy in separate yet complementary ways.
Number one and number two in the Customer Success Maturity Model
Like bread and butter, pb&j, or milk and cookies (anyone else hungry?), segmentation and tiering go great together. They pair so well and are such critical building blocks of any CS program that they sit in the coveted number one and two spots on the Customer Success Maturity Model. They are the very first two capabilities necessary to build a functional CS program, laying the groundwork for your whole strategy.
Number one is segmentation. It’s one of the very first things you should do when you launch a Customer Success practice. You’ve got to know how you’ll be dividing up your customers ahead of making decisions about broader engagement strategies. Choosing the right segmentation approach for your CS organization has far-reaching effects, like how well you balance your team’s resources and the effectiveness of your digital CS capabilities down the road. Best practice is to name segments based on their defining characteristics like Enterprise, Mid-Market, Growth, SMB, and Emerging. Alternative naming conventions focused on product set, like Lite, Core, and Pro, can also work well in some business models.
Number two is your engagement model. This is where tiering comes in. Tiering is the process of organizing those customer segments you created in number one into their appropriate engagement models. Your tiers and engagement models then inform how and when both CSMs and technology interact with customers based on their tier level. Tiers can and should be named by their engagement model, like high-touch, mid-touch, and tech-touch. I’m going to say that part one more time – the type of “touch” customers receive should only be used in naming tiers, not segments.
Segmentation and tiering often get conflated because you might divide your customers into groups based on how much you think you should engage with them, essentially tiering them at the same time. A common practice is defaulting to segmenting customers by contract value (a method we think is outdated for several reasons). Naturally, you then assume the highest value customers should fall into the highest engagement tier, and that’s the end of it. But there’s so much more to customer segmentation and tiering than meets the eye.
Segmentation is getting snazzier
CS organizations group customers into segments based on common characteristics such as industry/vertical, number of employees, geographic location, annual revenue, contract size, the list goes on and on. According to TSIA, 87% of Customer Success organizations have a customer segmentation system, but their 2022 book Digital Hesitation: Why B2B Companies Aren’t Reaching Their Full Digital Potential points out that the most frequently used characteristics to group customers for CSM coverage are still account size and geography, at 83% and 64%, respectively.
With the technologies we have available today, our digital CS capabilities can (and should) be much stronger than before. They are brimming with unrealized potential. We can collect a lot more information about our customers and the best ways to interact with them, including more complex elements like communication preferences and detailed personas. We should be leveraging our advanced analytics to take a data-driven approach to customer segmentation, including factors like growth potential and industry or vertical. It opens the doors to more personalized engagement, even as we scale and grow.
Take tiering higher
Tiering organizes your customer segments into the appropriate engagement models, taking a top-down approach to allocating time and resources (both human and digital) appropriately. But this isn’t as simple as drawing boxes around Enterprise and long-tail customers, assigning tech touch to the latter, and moving on. Developing an effective tiering strategy will likely take some trial and error, iteration, and a bit of creativity. Even something small, like getting creative with tier naming conventions, can be effective. Like a SaaS text message company the ESG team recently worked with, whose engagement tiers are primarily based on product usage. They have aptly named their tiers Low Adopter, Low Rider, Grasshopper, and High Performer. I especially like this because while the names add a bit of levity, they’re still clear enough for someone who’s new to your organization or works outside of your department to get the gist of what they might mean.
There’s also another whole component to engagement tiers that some may be forgetting. According to Gartner, “The goal [of tiering] is to ensure profitable sales growth by allocating the appropriate investment into each customer relationship.” Tiering customers should be based not only on the common characteristics identified during segmentation but also on financial analysis and modeling of your customer base to ensure fiscal responsibility in serving portions of your customer base. At ESG, we call this a capacity plan. It’s the bottoms-up counterpart that validates or invalidates the assumptions made in segmentation and the initial portion of your tiering exercise. It does require some detailed financial modeling, which may not be everyone’s favorite activity (but does present a perfect opportunity to bolster that relationship between CS and finance). However, it’s well worth the effort in the long-run.
So, what, exactly, do we get out of all this work? Well-structured, data-driven segments and engagement tiers are proven to maximize the effectiveness of Customer Success, reduce Client Acquisition Cost (CAC) and Cost to Serve (CTS), and improve team productivity and retention. According to TSIA’s Digital Hesitation, “Those organizations that do it well have an average retention rate improvement of 9% and an average expansion rate improvement of 7%.” I’ve really just scratched the surface in this article on how to utilize these foundational components of CS to reach those kinds of results. For more detail and practical application of how to effectively build segmentation, tiering, and capacity models, I hope you’ll join my colleagues Sheik Ayube and Jordan Olivero for their session on “Financial modeling for Customer Success: from the top down and the bottom up” at ChurnZero’s 2022 BIG RYG Customer Success Leadership Summit.