Data-Driven Customer Segmentation Strategy

Originally Published on December 15, 2023

Customer segmentation is the process of identifying common attributes/characteristics of customers and grouping them into specific buckets. That allows you to be more strategic about which customer groups you focus on to fuel business growth or how to optimize your product experience for particular customer segments.

Customers have different needs and pain points, come from different walks of life, and ultimately experience your product differently. A solid strategy helps companies improve experiences and drive stronger conversion.

Companies today realize that a one-size-fits-all approach to sales and marketing doesn’t work and turn to customer segmentation to help. The best way to segment customers is to develop a customer segmentation strategy backed by data. This article will cover the importance of organizing your customers into different segments and review some of the most common customer segmentation methods. We’ll also introduce steps to create your segmentation strategy and .

Customer segmentation strategy 101: Why should you segment customers?

Customer segmentation helps you better understand your current and potential customers, which enables your organization to:

Drive personalization

One of the main benefits of customer segmentation is obtaining great insight into your customer base. When you analyze and split customer data into segments, you unearth valuable information that makes it easier to reach them using more .

expect personalized interactions with brands and 76% express frustration when these expectations aren’t met. Research also indicates that to receive personalized experiences.

Segmenting users by different characteristics or events they perform in your product helps you better understand their needs and design personalized marketing campaigns that resonate with your target market.

Design and build better products

Customer segmentation is essential for product development. Understanding the typical customer journey helps you uncover friction points that could negatively affect the customer experience. Segmentation enables you to (power users, new users, etc.) and uncover improvement opportunities when building new products or redesigning existing ones.

Improve customer experience & loyalty

Customer segmentation equips your customer success teams with essential data to provide personalized attention to your uses. These frontline teams must understand the unique needs and characteristics of the customers they interact with, like their preferred communication channels, buying preferences, etc., and this data can only be gleaned through customer segmentation.

The improved customer experiences you deliver using segmentation data increase engagement among your client base. Better engagement means and, ultimately, customer loyalty. Your customer’s behavioral data can help you identify key attributes shared amongst your most loyal customers and then target and grow this segment to improve engagement and loyalty.

Align sales & marketing initiatives

Organization-wide customer segmentation research helps map your different buyer journeys. These journeys become blueprints that enable cross-functional collaboration to and sales initiatives that translate into seamless experiences for your customers.

Aligning your sales and marketing initiatives ensures these two functions work together to meet the needs of distinct customer segments and achieve your business goals.

Increase revenue

The overall goal of customer segmentation is to increase revenue—and all of the above ultimately contribute to it. The improved personalization efforts, product designs, customer experiences, and cross-functional collaboration all increase the likelihood of building a base of customers with higher .

The insight obtained from customer segmentation also enables price optimization and improved budget allocation. Different customer segments have different spending limits. Price optimization allows you to adjust your pricing based on your target segment, increasing the likelihood of sales.

Additionally, understanding your customers’ spending habits, including their peak spending periods, means you can optimize marketing strategies and production to avoid over-discounting or under- or over-producing.

Common ways to segment customers

Analytics and segmentation tools like empower organizations with data to organize their target audiences or customer segments in various ways. Some of the most popular customer segmentation models include:

1. Demographic segmentation: This segmentation method organizes users based on their demographic data, like age, gender, level of education, household income, and marital status. Knowing the income brackets of your different segments helps you develop more financially targeted outreach activities.
2. Geographic segmentation: This method splits customers based on their physical location, like zip code, state, city, or country. This enables you to adapt marketing efforts and sales activities to buyer characteristics common to different locations. For example, you could launch marketing campaigns to target location-specific cultural events and activities.
3. Psychographic segmentation: This method organizes customers based on psychological traits that influence how they experience your company. These include personality traits, political views, lifestyle, and hobbies. For example, you could target environmentally conscious customer profiles if sustainability is your product's unique selling point (USP).
4. Behavioral segmentation: This method segments your customers based on their interactions with your product. includes actions like on-page clicks, sharing social media posts, cart abandonment, and purchase history. For example, you can aim marketing messages to sell complementary products to customers who have recently purchased.

Ways to Segment Customers in Amplitude

The most successful customer segmentation strategies leverage technology to uniquely identify each user in-product at the point of data collection. For example, Amplitude employs a combination of device IDs, user IDs, and . Then, organizations can tackle customer segmentation in numerous ways in Amplitude.

Behavioral cohorts

Amplitude defines by user actions taken within a specific time period. They allow you to group different users based on the events they've triggered in your product.

Some examples of behavioral cohorts include:

• Users who watch three consecutive TV show episodes on the first day after signing up for a video streaming service
• Users who enable push notifications during onboarding
• Android users who abandoned their carts on an e-commerce site in the last month

Once you've created a cohort, you can add them as a segment in many Amplitude charts. Ultimately, this behavioral data reveals how engagement with your product affects retention, conversion, revenue, and other business outcomes you care about.

Example configuration of a behavioral cohort in Amplitude.

Predictive cohorts

are clusters of users grouped based on the actions Amplitude anticipates they will take some time in the future. With , organizations can create a predictive cohort by segmenting users by percentile likelihood. For example, whether they are in the top 10% likelihood to activate or the bottom 25% likelihood to churn.

Example of a predictive cohort in Amplitude.

You can use these cohorts for activation, retention, or engagement-based marketing to drive users to the next stage of a user lifecycle.

Implementing a customer segmentation strategy

Before beginning segmentation, you should have a well-designed customer segmentation. Your strategy should be based on your business objectives and will:

• Organize your customers better.
• Design and implement personalized sales and marketing messages.

You can design a customer segmentation strategy in five steps.

1. Set your customer segmentation goals

Start by thinking about what you want to achieve by segmenting your customers. This exercise helps you clarify your desired customer behaviors and the characteristics of your most valuable customers. For example, are you looking for loyal customers? Customers who make repeat purchases? Customers who use a specific function in your platform?

The answers to these questions will guide you in organizing customers and determining the data types needed.

2. Collect the data needed for your segmentation process

You’ll need to collect, analyze, and organize customer data to segment your customers. The data you collect depends on the segmentation method you choose.

Demographic segmentation requires data like education level or monthly income, whereas more complex segmentation techniques, like psychographic segmentation, require more nuanced data on customer values or lifestyles.

You gain more insights about your customers as you collect data, which helps you refine and prioritize your segmentation projects. Leading product analytics platforms, , increase efficiency by enabling you to manage all this data in one place.

gather all your customer behavioral data in one spot to segment. Then, you can from your customer relationship management (CRM) tool or other platforms using APIs. Connecting all your data sources in will help you build richer customer segments to analyze and leverage.

3. Segment your customers

Now, it’s time to segment your customers. With a variety of segmentation options, choosing the right ones can be tricky. When determining how to organize your customers, you should consider the following:

1. Pick the right-sized segments: Ensure that your segments are targeted enough for your sales and marketing efforts to be effective and large enough to be profitable. For example, if you sell solar panels, you might target a particular town in Arizona because it gets plenty of sunshine, and market research indicates few have already invested in solar energy. But if the town has a tiny population, investing time and effort in outreach might not be profitable.
2. Choose valuable segments: Your target audiences should have high lifetime value, which you can determine with metrics like Average Order Value. If Segment A spends $100 per order while Segment B spends $200, it makes more sense to target Segment B.
3. Understand and harness the relationship between data: Sometimes, you need to look at how two data segments interact to get an accurate picture of your customer’s situation. Let’s say you identify a psychographic segment of environmentally conscious users who seem like an excellent fit for your product made of recycled materials. But, upon evaluating their demographic data, you find they have a lower average income than some of your other segments. Targeting these customers might not make sense since this particular product is more expensive than others in your offering.

4. Target your sales and marketing efforts to your chosen segments

Once you’ve identified your customer segments, you need a plan to reach these groups—specifically, the sales and marketing tactics you will attach to each segment.
For example, if you target a segment of customers who subscribed to your newsletter but haven’t yet made an online purchase, email marketing is probably the best way to reach them. You might want to send blog posts or links to webinars highlighting the benefits of using your product or service.

Analyzing customer segments in five steps

Your segmentation strategy continues beyond implementing your sales and marketing campaigns. You need to analyze how your outreach activities perform and whether or not they impact your customer segments’ behaviors. Performing regular customer segmentation analysis will help you constantly improve how you communicate with your target audiences.

To perform regular customer segmentation analysis, follow these five steps:

1. Confirm that your customer segments are still valid

Customer behaviors, purchasing habits, and expectations change due to shifting trends, market fluctuation, and global events.

It’s essential to collect data continuously to stay attuned to such changes. You should also ensure you’re collecting data from the best sources. If you’re looking for lifestyle information on Facebook, but your customer segment has switched to Instagram over the past year, you must refocus your data collection methods.

2. Ensure your customer segments are helping you achieve your business objectives

Compare your customer segments' performance with your goals and KPIs, and also compare each segment side by side. Which segments are meeting expectations? Are your target segments still valuable, or should you consider new ones?

3. Confirm that your segmentation process still aligns with your sales and marketing objectives

Your sales and marketing teams interact with your customer segments daily and have valuable, first-hand information about the effectiveness of your customer segmentation strategy.

You should converse with your teams regularly to gather information to bolster your segmentation analysis. You can also collect data using surveys, focus groups, and one-on-one interviews with relevant stakeholders.

4. Solicit customer feedback

Gathering feedback from your customer segments provides qualitative insight into how they experience and perceive your sales and marketing outreach and how you can improve it.

You can collect customer feedback using surveys, social listening, and direct outreach from your customer support team.

5. Put your findings into action

Your customer segmentation analysis aims to remove friction and optimize your segmentation strategy, and the previous four steps should give you the information needed to do so. The first step is communicating these findings across the company to reinforce alignment between your sales, marketing, and customer success teams.

With all the relevant stakeholders, devise a plan of action to put your findings into practice and to each segment.

How to supercharge your segments with Amplitude CDP

The value of a data-driven customer segmentation strategy can’t be overstated. With the steps covered here, you should be on your way to developing a customer segmentation strategy that delivers higher-performing sales and marketing campaigns, improves product offerings, and optimizes customer service—all to enhance customer satisfaction and loyalty and drive revenue.

Technology can make your customer segmentation process efficient, easy, and seamless. , which is fully integrated into Amplitude Analytics, can help your product and marketing teams proactively improve data quality, analyze and discover new audiences, and sync data across their marketing and data stack.