Customer Segmentation Strategy: Types, Software & How-to Guide

According to the 2024 State of CX Personalization Report by Medallia, customers who go through very personalized experiences rate their overall satisfaction as 9.4 out of 10. By developing a customer segmentation strategy, you can build the right segments, analyze their behavior, and set tactics to reach them through tailor-made initiatives.

In this article, we’ll explore definitions, customer segmentation models, benefits, and how to design a customer segmentation strategy that boosts product engagement. Let’s begin.

TL;DR

Customer segmentation is the act of grouping customers based on shared characteristics, such as purchasing behavior, values, or location.
Customer segmentation differs from market segmentation as it focuses on dividing existing customers, while market segmentation separates the entire available market.
There are different types of customer segmentation, including:
– Demographic—age, gender, income, marital status, etc.
– Geographic—location, climate, and language.
– Behavioral—usage, purchase history, and loyalty.
– Psychographic—psychological traits, values, hobbies, and lifestyle.
– Technographic—preferred device and operating system.
– Firmographic (for B2B)—company size, industry, and annual revenue.
– Needs-based—feature needs, pain points, motivations, and issues.
A customer segmentation strategy is a systematic approach to building and analyzing customer segments while using tactics to achieve goals.
Benefits of customer segmentation strategies include:
– Improved customer experience.
– Increased customer retention.
– Better product development.
– Targeted marketing strategy.
Follow these steps to create an effective customer segmentation strategy:
1. Set customer segmentation goals.
2. Collect customer data.
3. Segment your customers.
4. Implement tactics based on goals.
5. Track customer segments’ behavior.
6. Improve the strategy based on insights.
Examples of customer segmentation strategies include:
– Building personalized onboarding plans for new customers.
– Improving satisfaction among existing customers by adding in-app communication.
– Triggering proactive support based on real-time data to simplify product adoption.
Customer segmentation software recommendations:
1. Userpilot to build personalized user experiences and track segment performance.
2. HubSpot to segment email lists and build targeted marketing campaigns.
3. Qualtrics to separate users into groups based on feedback survey answers.
Track customer behavior, build segments, launch in-app initiatives, and analyze their performance with Userpilot. Get a demo.

What is customer segmentation?

Customer segmentation is the process of grouping customers based on shared characteristics that allows you to provide them with personalized experiences.

For example, segment customers based on their purchasing behavior so you can present each group with exclusive offers that match their buying habits.

Customer segmentation vs market segmentation

Customer segmentation is a subset of market segmentation.

Market segmentation separates the entire market based on similar characteristics, usually for market validation, whereas customer segmentation divides your existing customer base into smaller segments.

Types of customer segmentation

There are different ways to segment customers based on shared factors. Some customer segmentation examples include:

Demographic segmentation. Divide customers based on age, gender, income, marital status, education, and job.
Geographic segmentation. Segment customers based on their location so you can localize their experience.
Behavioral segmentation. Group customers according to how they interact with your product. Take a look at their usage rate, loyalty, or purchase history.
Psychographic segmentation. Segment customers using their psychological traits, such as hobbies, values, lifestyle, social status, and interests. You can collect this data through surveys or user interviews.
Technographic segmentation. Segment users based on the technology they use. This includes device type, operating system, and preferred browser.
Firmographic segmentation. Group companies according to their organizational characteristics, such as firm size, industry, and revenue. This is helpful for B2B marketing, sales, and product strategies.
Needs-based segmentation. Build specific customer segments based on the needs or problems they are looking to solve. For example, group customers who use your product for team collaboration or personal productivity.

What is a customer segmentation strategy?

A customer segmentation strategy is a systematic approach to identifying different customer segments, analyzing their behaviors, and creating an action plan that allows companies to personalize the customer experience.

Benefits of customer segmentation strategies

These are the key benefits of a customer segmentation strategy:

Customer segmentation strategy benefits — Key customer segmentation strategy benefits.

Now, let’s see how a customer segmentation strategy leads to these benefits.

Improved customer experience

Analyzing how each segment reacts to your strategies allows you to tailor interactions and offers based on their customer needs and preferences. This information lets you develop custom solutions and content to keep them engaged.

Increased customer retention

Personalizing the customer experience for each segment makes customers feel that you understand them. By catering to their requirements, users will likely stay loyal for longer, which can positively impact customer retention.

It’s also less expensive to retain customers than to acquire new ones. Hence, proper segmentation and healthy retention rates allow you to install upselling techniques and generate revenue through customer expansion strategies.

Better product development

By segmenting customers, you can get deeper insights into their pain points, needs, and desires. This allows your product development team to prioritize features and identify friction points to solve.

Another way to improve your product development is by using your most engaged users as testing participants. For example, you can make new feature announcements and roll out features to them first. Then, ask them to share feedback on the functionality, iterate on it, and launch it to your complete customer base.

Targeted marketing strategy

Another benefit is that you can use the collected data to build more targeted marketing strategies. For example, you can determine which type of content each segment interacts most with and send out campaigns in their preferred format.

Also, by knowing who your customers are based on the segments they belong to, you can craft marketing campaigns that resonate with them by appealing to their interests or purchase behaviors.

A step-by-step guide to creating an effective customer segmentation strategy

Let’s explore the six steps to creating an effective customer segmentation strategy.

Step 1: Set customer segmentation goals

Determine how you’ll measure your strategy’s performance by setting goals. Also, set KPIs to track progress.

Examples of business objectives include:

Improve retention rate by offering a more personalized customer experience.
Optimize marketing efforts and spending by focusing on the most responsive segment.
Personalize product recommendations based on segment-specific preferences and behavior.
Increase customer loyalty by catering to your users’ needs.
Improve the free-to-paid conversion rate by personalizing your onboarding.

Some KPIs you can use are:

Step 2: Collect customer data

Adopt qualitative and quantitative collection methods to gather customer data. Quantitative data tell you what your user does, but qualitative insights explain why they behave in such a way.

You can get quantitative data by looking at your product analytics or by conducting usability tests, heatmap analysis, or in-app event tracking.

Data tab with event analytics on Userpilot — Event analytics in Userpilot.

Usually, to collect qualitative data, you’ll need to conduct user surveys, interviews, or focus groups.

Building an NPS survey on Userpilot — Build an NPS survey in Userpilot.

Step 3: Segment your customers into groups based on data

Once you’ve collected the information, you’ll need to analyze customer data to segment customers. You can adopt any type of customer segmentation mentioned above.

Examples of customer segmentation can look like this:

Disengaged customers who answered 3 or less in the customer satisfaction score (CSAT) survey.
New accounts of over 500 users.
Loyalty segmentation based on net promoter score (NPS) survey answers.
Active customers who use your product at least four times a week.
New customers who use your product primarily for the task automation feature.

User segmentation view on Userpilot — Creating segments in Userpilot.

Step 4: Implement different tactics based on the goals

Now that you’ve built your segments, define which tactics you’ll use to achieve your goals. For example, if your goal is to improve your free trial conversions, a useful tactic could be to trigger personalized flows based on their welcome survey answers.

Some other tactics include:

Building personalized email marketing campaigns to drive users back into the app.
Offering a direct line of communication to unsatisfied customers.
Triggering in-app walkthroughs for the first time a customer uses a feature.

Step 5: Track how different customer segments behave

Now, it’s time to track and analyze the impact of your tactics on each of your customer segments. Use product analytics to understand user behavior and determine whether your initiatives are working.

Some example reports include:

Trends report. Track how different segments perform specific events over time to identify patterns.

Trends report on Userpilot — Trends report in Userpilot.

Funnel report. Track how your segments move across the funnel and identify any friction points that cause them to abandon the flow.

Funnel analysis report view on Userpilot — Funnel report in Userpilot.

Path report. Visualize different paths segments take within your product.

Path analysis report on Userpilot — Path analysis report in Userpilot.

Retention report. Discover how well you manage to retain different segments.

Walkthrough of building a cohort-based retention report on Userpilot — Walkthrough of building a cohort-based retention report in Userpilot.

Step 6: Improve your strategy based on insights

Your strategy, like your product, will likely go through many iterations. This will guarantee that it works. So, make sure to conduct analyses to determine which actions are helping you reach your goals. Then, make improvements based on the gathered insights.

For example, imagine your onboarding flow is confusing for 30% of new accounts. They say that the instructions aren’t clear to them. You’ll only be able to offer an improved experience after iterating on your guidelines and making them easier to understand for this segment.

Another example could be that you launch a new feature to a particular customer segment but only 3% of users interact with the said functionality. This data shows that you need to conduct further research and determine why that’s happening. After, you may need to reevaluate the users in that segment or change your communication strategy.

Examples of customer segmentation strategies

You’ve seen how to build a customer segmentation strategy, now let’s see examples of how these come to life.

Create personalized onboarding for new customers

This first example starts by launching a welcome survey for users to fill out as soon as they sign up. Use the answers to assign newcomers to matching segments and trigger a personalized onboarding flow.

For example, if a new customer answers that they’re somewhat familiar with the platform, you can trigger a short app walkthrough as part of the user onboarding.

However, if the user qualifies themselves as beginners, you can trigger an in-depth guide. This allows you to win your customers from the beginning by showing that you value their abilities and care about their needs and time.

Set triggers for a personalized onboarding flow — Building a personalized onboarding flow in Userpilot.

Improve customer satisfaction among existing customers

Since it’s less expensive to retain new customers than to acquire new ones, you need to keep them satisfied. So, properly segmenting your customers based on their in-app behavior or feedback lets you build strong connections across the customer lifecycle by offering targeted solutions.

For example, if you have customers who left poor feedback and contacted your customer support team more than once in the past month, you can assume they’re unhappy with your product. With this information, you can contact them directly to help them solve their problems and increase their satisfaction.

Also, with access to segment behavior, you can offer real-time personalization by triggering in-app personalized tips or exclusive offers after your customers attempt certain actions. For instance, offer support through an in-app tooltip after they’ve made three mistakes. This shows that you truly understand their needs and minimizing effort can keep customers satisfied.

Trigger personalized tooltips to support users who are struggling to complete tasks — Trigger personalized tooltips to support users in Userpilot.

Trigger proactive flows based on real-time data

Use auto-capture functionality to automatically collect real-time data on user interactions. This allows you to trigger proactive flows, such as in-app messages, tips, and notifications. Offering real-time personalization and timely support allows you to reduce friction in the user’s experience and increase their engagement.

Auto-capture functionality in Userpilot.

You can also offer proactive customer service and redirect the user to self-service resource centers or tutorials that solve their current issues. For example, include a resource center button at the bottom of the page that’s accessible at all times.

How to build a resource center on Userpilot — Building a resource center in Userpilot.

Customer segmentation software that can help you drive retention

To segment your customers efficiently and systematically across time, you’ll need a customer segmentation tool. Here are three that we recommend:

1. Userpilot: Best for creating a personalized user experience

Userpilot is an all-in-one, no-code product growth platform. It allows you to segment your customers, build personalized product experiences, and track how users behave with its analytics.

Leyre Iniguez testimonial for Userpilot.

With Userpilot, you can:

Add different properties and conditions to segment customers.
Analyze how different customer segments behave.
Auto-capture real-time engagement for customer segments.
Launch surveys for different segments to gather user feedback.
Create flows for different segments.
Do A/B testing.

To create a new segment in Userpilot, simply go to the ‘People’ tab and click ‘Create a new segment’.

With Userpilot, you can also add conditions to build specific segments.

Filter your data based on multiple conditions in Userpilot.

2. HubSpot: Best for segmenting your email list

HubSpot is a customer platform powered by AI. It offers solutions for different areas of the business, such as marketing, sales, and operations. When it comes to customer segmentation, HubSpot allows you to launch targeted email marketing campaigns.

HubSpot's email segmented lists view — HubSpot’s email segmented lists view.

If you integrate HubSpot with Userpilot, you can send more targeted emails by using the customer segments you had previously defined in Userpilot.

3. Qualtrics: Best for segmenting customers based on survey data

Qualtrics is a customer segmentation research tool that allows you to launch studies and surveys and segment customers based on their answers.

You can also choose how to communicate with each segment based on their preferences. It also comes with AI and machine learning functionality that suggest segmentation ideas.

Segment creation on Qualtrics based on survey data — Qualtrics segmentation.

Conclusion

You can make your users feel more engaged and loyal to your brand by implementing a customer segmentation strategy. Through this customer segmentation process, you can analyze the performance of each of your segments towards KPIs and define tactics to wow them with a highly personalized user experience.

However, to execute a good strategy, you need the right tools. Userpilot is a no-code, all-in-one solution that lets you track your customers’ behavior in real time, build segments, launch in-app initiatives, and track their performance—all in one place. Get a demo.