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User Segmentation: How to Find Your Product’s Best Customers Using Data

by Etienne GarbugliOctober 29th, 2018

Too Long; Didn't Read

Entrepreneur and investor <a href="https://twitter.com/jasonlk">Jason Lemkin</a> says that if you have 1 customer in a segment, you can get 10.

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Entrepreneur and investor Jason Lemkin says that if you have 1 customer in a segment, you can get 10.

With user segmentation and a bit of data, you can find your business’s best customers to double down and find more. In this post, we look at how entrepreneurs can use data to find their product’s best customers.

Whether your product attracts the customers you were initially targeting or not, you want to make sure that the segments your business focuses on won’t limit its ability to grow.

How Poppulo Used User Segmentation to Find its Best Customers

Late last year, I caught up with Andrew O’Shaughnessy, the founder of Newsweaver, now Poppulo. We talked about the early days of the company.

Newsweaver started as an email marketing platform. They had customers, revenue, and were growing.

Looking through data and interacting with customers, they noticed that a very small number were using the tool for internal communications — to send announcements to employees, internal surveys, etc.

Looking closer, they realized that the internal communications segment was one of their most engaged and profitable.

This realization led them to rethink their product focus and target that market exclusively.

The customer pivot transformed their business. They went from a Red Ocean — an hyper competitive market like email marketing — to a Blue Ocean, a market with very little competition.

Making the non-obvious decision paid off for Poppulo.

It’s important to follow the money trail and find the biggest opportunity for your business. Even if you think you’re already acquiring great customers, strategically exploring user segmentation and customer segments can help solidify your positioning (and keep you from leaving money on the table).

How I Found Lean B2B’s Best Customers with User Segmentation

We don’t need to look very far for another example…

I wrote Lean B2B to help B2B entrepreneurs; the book and its marketing made that fact pretty obvious. Yet, evaluating buyers a few years after publication, I realized that innovation consultants loved the book, found value, and were extremely willing to refer it to their peers.

For an author with limited time and resources, it made sense to use this insight to prioritize promotion efforts.

How to Use Data to Find Your Product’s Best Customers

You probably already have a sense of whether you’re targeting the right customers or not, and you know what great customers look like. It’s the perfect time to dive into user segmentation.

To find the best customers from your customer base, we’ll look for signals within your data or analytics.

Your first task will be to codify your definition of what a great customer is. We’ll then use that definition to segment your customer base.

Depending on the areas of focus of your business, you can look at:

Retention / Churn: Cancellation rate or monthly churn;
Advocacy: Net Promoter Score, word of mouth or virality;
Customer engagement: Repeat visits, time on site or activation rate;
Revenue or profitability: Customer lifetime value (CLV) or average revenue per paying user (ARPU).

You’ll convert these inputs into a recipe; a form of customer value score.

It’s important that this score is a very close proxy for customer value and customer success in your business.

Key Thresholds for User Segmentation

Once you have your recipe, you’ll define 3 thresholds (buckets):

Your best customers: The first percent atop your rankings;
The next best: Customers ranked within the first 2 to 10%;
Your worst customers: The last 10% at the bottom of your list.

Depending on how technical you are, you might be able to find these customers using SQL, your CRM, database exports or people analytics in tools like Mixpanel, Amplitude or Intercom.

The reason why you focus on these 3 groups is that: your top percent represents your best fits. Your “fans”.

If you do this right, this segment will include the customers most likely to advocate for your business.

The next 10% gives you a good comparison point. It can also reveal some of the lowest hanging fruits to help you create an exceptional product experience.

The last 10 — and this one is optional — helps you define who you shouldn’t be targeting. There’s a lot to learn there as well.

With these less-than-ideal customers, you’re looking for the characteristics and habits of the people that were never really a proper fit for your company. You can use those to create a negative persona — an archetype or profile.

Going Beyond User Segmentation to Home in on Your Best Customer Segment

To dive deep and understand the breakdown of each of those segments, you can do a market segmentation analysis, doing interviews to refine your segmentation.

Since you’re targeting people you’ve already sold to — or have already convinced to try your product — it should be easier to get them to engage with you.

Depending on your customer base and how deep you want to go, evaluating your customer segments can take anywhere between 2 weeks to 2 months.

This may seem like a lot of time, but it’s definitely worth it if you are to make an important focus decision.

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