User Segmentation: Guide to Understanding Your Customers
When you know who your customers are, where they come from and why they act the way they do you have the ability to focus on efforts that lead to more loyal customers, more conversions and more revenue.
User Segmentation: the act of segmenting customers with shared characteristics into groups to refine analysis based on certain parameters and better understand the people who are using your product or service. The end goal is to identify actionable data that can be used to improve your products/services, marketing, website and/or app by personalizing the experience.
Why User Segmentation Matters
Every company can benefit from knowing more about the people who purchase their products or services. It’s impossible to tailor marketing campaigns and products to each unique individual, but customers today expect intuitive and user-friendly interfaces from sites and apps that “just work” for them.
User segmentation is a manageable way to personalize the experience to achieve long-term product success. Dividing customers into segments based on characteristics they share makes it much easier to find meaningful information in the data to target customers and meet their needs more effectively.
Businesses can utilize user segments to:
- Figure out who the most valuable customers are and where they come from
- Know where to focus marketing efforts to attract more high-value users
- Identify purchasing trends
- Predict future purchases
- Find underserved customers
- Nurture relationships by offering custom solutions that meet specific needs
- Inform product development
- Identify incentives that encourage conversion and repeat business
- Understand pricing sensitivity and create a more profitable pricing strategy
The sum of each user segment’s likes, dislikes, behaviors and characteristics offer clues as to what they want and how to communicate with them. These insights can be used to make changes that improve your product features, messaging and marketing to better meet users’ needs.
One of the most powerful takeaways of user segmentation is ways to customize product offerings for different groups of customers. Doing so can help maximize profits within the various user segments. You may even find you need to develop a new line of products to become more competitive or capture a larger share of a target market.
Creating Customer Profiles
Customer segmentation also allows teams to develop customer profiles, also known as cohorts, which is a list of characteristics, behaviors and interests of each segment. Profiles provide direction for product and marketing teams to develop or improve products with a group of users clearly in mind.
Here’s a consumer profile example for a fitness app:
- Demographics: Female, aged 25-45
- Psychographics: Loves cycling classes
- Behaviors: Uses the app more than 5 times per week
Whenever the team is developing new features, the Fit Fiona cohort helps them identify with the end user and keep their needs in mind. Once the feature is released they can measure how the Fit Fiona cohort responds to new features. They can even assign scores to different cohorts to determine their lifetime value and measure the ROI of marketing campaigns.
Communicating effectively with users is a data-driven art. Understanding what users want takes tools, time and the right metrics.
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How User Segmentation is Measured
The most meaningful user segmentations are discovered through research. It’s only through analytics that a website or app’s product team can know why certain features or pages resonate with certain users. But how do you go about gathering the data? And what metrics should be measured?
Before you get started it can help to ask yourself the 5 Ws:
Who – Basic user demographics that are high-level and verifiable, such as sex and age.
What – This refers to what users do on your site or app. What they have already done, what they are doing currently and what are they likely to do in the future. The latter helps you identify loyal customers that have the highest customer lifetime value. There is an endless selection of events that can be tracked, so you may want to focus on revenue generating activity to begin with. What questions also provide insight into motivations, product feature gaps and experience levels of users.
When – When did a user make a purchase, sign up for an email list or first visit your site? How often does a user login or make a purchase? When actions occurred and how frequently is another way to segment user groups. For many businesses, seasonality is a factor, which is another “when” element.
Where – Location of users can be where they physically live and/or where they come from online. For example, whether a user finds a website through an affiliate or Google. Actual location tells you a lot about a customer’s local environment, geographic diversity, culture and more.
Why – Why do customers want or need your product? Why did they purchase from you? These are the types of “why” questions that can be answered with user segmentation data.
Types of User Segmentation Data
Numerous data points go into creating user segments. In addition to considering the 5 Ws, here are a few types of data teams might want to capture on their users:
- Demographic data: A user’s social data, gender, birthday, language, location, marital status, occupation and income.
- Firmographic data: Like demographics but for businesses: age, employee count, revenue, industry, location and business model (B2B or B2C).
- Psychographic data: A user’s interests, attitude, beliefs, affiliations, lifestyle, values and socioeconomic status.
- Behavioral data: A user’s actions such as visits, taps, clicks, time on site and conversions. Don’t discount negative behaviors. Not all user behaviors are positive. Sometimes customers churn, abandon their shopping carts or downgrade subscriptions. By analyzing the events that preceded these actions, such as a service interruption or a new feature release, companies can identify areas of friction and improve those parts of their site or app.
- Technographic data: Technologies a company or user uses, such as CRM, marketing system, or ERP provider.
Steps to Creating User Segments
So how does a team use data to segment its user base? Let’s explore how a user segmentation platform like Mixpanel can help identify the best metrics, collect data and help you analyze the information.
The customer segmentation process consists of four steps:
1. Track User Events and Engagement
To segment customers, companies need a way to view all users and the actions they take. But getting a grasp on an entire audience isn’t always easy. Most sites and apps aren’t built to analyze themselves, and it can be difficult to track individual user journeys, much less compare two different user segments.
A customer analytics platform is often the answer. Mixpanel, for example, integrates into a site, an app or both to pull user data that the site or app isn’t able to capture. It offers a user-friendly interface that allows teams to save data reports, track funnels and message users, all in one platform. These tools make it possible to create user segments.
Here are metrics teams can track using an analytics platform to define user segments:
- Acquisition source
- Customer lifetime value (CLV)
- Average visits per user
- Customer journey milestones
A site might be able to use its website’s analytics to determine how many users merely visit a web page versus how many watch a video on the web page. But which users are which? What screenflow do they typically follow? How can the team send a message to just users who subscribed to a free service but never returned? To draw meaningful distinctions, the site needs a way to separate visitors by their characteristics and behaviors.
2. Use Analytics to Generate Reports
Using either an Excel spreadsheet or a user analytics platform’s reporting features, teams can aggregate, save and share data for different user segments. Teams might generate reports to:
- Compare the usage rates of paid and free users
- Measure the retention rate for users acquired from social media
- Determine which actions taken during a free trial make users more likely to purchase
- See whether usage increased after a new feature release
Reports help you visualize the data and find actionable information. They are also necessary for tracking data over time. With Mixpanel reports are generated automatically and can be customized or exported to Excel for deeper insights.
3. Identify User Segments Based on Business Goals
One of the ways reports provide actionable information is helping identify user segments. As we mentioned before, segments are only useful if they’re tied back to business priorities such as revenue. If teams know what they want their users to do, they already have an idea of how to segment users based on the data collected.
User segmentation can be divided into some of the following types:
- Paid vs. free users: Paid users are often more advanced, more committed and easier to retain than free users, who are likely to treat the app as a commodity and present a higher churn risk. Segmentation allows teams to retain the former while converting the latter.
- New vs. returning users (and frequency of return): New and returning users fall into very different stages of their customer journey. Returning users have found enough value in the service to come back. New users, on the other hand, haven’t yet found the value. If teams know that all returning users watched one particular video, they can embed that video in the welcome journey to help new users get hooked.
- Time spent on site/app: If users choose to spend their time on a site or app it’s a powerful signal that they love the app. If they don’t spend time, that’s also a useful signal. By segmenting users by the time they spend, teams can learn which features, factors and content are correlated with higher engagement to surface new ideas for driving increased usage.
- Conversion: What’s the difference between a user that has subscribed and one that hasn’t? Or between a user that has purchased once or ten times? Conversion is different for every business, but it’s critical to know. By analyzing users that have passed a conversion checkpoint, teams can isolate the characteristics their most prized users share and use that information to convert more of them.
Every team will have its own idea of what data is most valuable to capture. Any piece of data companies track on their users can be useful in segmentation, so long as those distinctions tie back to the business’ goals.
If the goal is for users to make a purchase, one segment could be for users who have purchased. Another could be for users who haven’t. A third could be for those who have purchased repeatedly. If the goal is to increase app usage, teams could segment by time spent in-app to isolate their power users within the sea of occasional visitors.
Not sure which metrics are most meaningful for segmenting users? An analytics platform like Mixpanel can highlight the most frequently occurring events and suggest the metrics a team should track based on the incoming data.
4. Make Changes Based on the User Segment Data
By comparing one user segment to another or the total user population, teams can identify meaningful differences. This provides teams with a roadmap for building a better product.
For a mobile fitness app a team might find that its most valuable users are more likely than the average user to finish setting up their profile. The team can then rearrange its onboarding flow to make sure that every new user completes their profile.
An enterprise financial services app might find that users that came from sales-generated leads have a greater lifetime value than self-provisioned ones. The user segment data suggests the team should focus more marketing dollars on sales enablement.
Taking the time to analyze users and create segments is only beneficial if you act on the information. Once changes are made, you’ll need to continue to closely monitor the data to make sure your insights were accurate. The more data you gather the more you’ll learn about your customer base and the better your products will become.
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