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Customer segmentation is the practice of dividing your customer base into distinct groups based on shared characteristics (like plan type, company size, behavior, or revenue), so you can market, sell, and retain more effectively.
For SaaS businesses, the benefits of customer segmentation go well beyond personalized messaging: segmentation helps you identify which customer groups have the lowest churn, which segments generate the most expansion revenue, and where your marketing spend is actually paying off.
Rather than treating all subscribers the same, segmentation lets you focus your efforts on the customers most likely to convert, upgrade, or stay — and build smarter strategies around each group.
Baremetrics can help you develop this strategy. Baremetrics actually has a feature built directly into the product that will do customer segmentation for you. Check out this tool for segmenting customers, tracking growth by group, comparing groupings, and identifying the needs of your customers.
Here's what you need to know about what marketers mean by customer segmentation. You'll learn how these customer groups can help you avoid the one-size-fits-all approach and target customers the right way.
Want to know how Baremetrics helps you to use your data to learn about customer segments? Sign up today for a free trial!
What is Customer Segmentation?
Customer segmentation is the process of grouping your customers according to certain criteria. The four most common types of segmentation are:
- Demographic (B2C)/Firmographic (B2B): This looks at criteria like age, income, education, and family size (demographic) or number of employees, market share, and company size (firmographic).
- Geographic: This looks at where customers reside, from state all the way down to zip code.
- Behavioral: This looks at customers' interactions with your website, including time spent on page and number of visits before purchase.
- Psychographic: This is a sometimes intangible part of market segmentation. It groups customers by lifestyle, opinions, and personal values.
Your segmentation strategy helps you to create a more comprehensive profile of your individual customers.
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Pitfalls of Not Segmenting Customers
If you fail to divide your customer base into specific groups, you may still have a healthy ROI, a strong ecommerce strategy, and messaging that engenders brand loyalty. But they won't reach their full potential.
Not having a market research strategy that focuses on specific segments can negatively impact your company. Here are the common negative effects of an unfocused marketing strategy:
It's hard to meet customer expectations. Not every customer wants the same thing from your brand. If you look at your new and existing customers as a whole without taking into account what makes each one unique, you risk pleasing only a few. You can still get those other customers back, but it will cost you time and impact sales in the process.
You can miss out on key insights into the success or failure of marketing campaigns. Segmentation tells you who purchased your product and when. This gives you knowledge about the effectiveness of pricing strategies, targeted digital marketing ads, website landing pages, and more. Without segmentation, you'll have to settle for just one figure: your profit or loss.
You can waste money and resources marketing the wrong way to the wrong people. Those marketing campaigns may produce some success, but there is one way they will always fail your company: They didn't reach your target customers. If your campaign does not focus on market segments, you are talking to people who may never buy your product. That's a waste of your creative energy and marketing budget.
Product development may take longer and may not lead to profitability. Customer segmentation is not just about marketing. You can use this information at the product development stage by modifying your product to appeal to the customers or firms that are most likely to buy from you.
Benefits of Market Segmentation
Taking this all into account, the benefits of market segmentation come down to a few key points:
Higher marketing ROI through targeted campaigns: When you know which customer segments respond to which messages, you stop wasting budget on broad campaigns that miss the mark . Segmentation lets you tailor email campaigns, ad targeting, and content to the specific needs of each group, whether that's enterprise customers evaluating ROI or SMB customers looking for quick setup. The result is higher conversion rates and lower customer acquisition costs across the board.
Lower churn through proactive retention: Segmentation is one of the most effective tools for reducing churn in subscription businesses. When you can group customers by plan type, tenure, or usage behavior, you can identify at-risk subscriber profiles before they cancel. For example, you might find that customers on your entry-level plan who haven't logged in for 30 days churn at 4x the rate of active users. This gives you a clear trigger for automated retention outreach. Baremetrics lets you segment customers by these attributes and track churn rates for each group over time.
Smarter upsell and expansion revenue strategies: Understanding which customer segments upgrade most often and when helps you time upsell campaigns for maximum impact. Segmenting by MRR bracket, plan type, or tenure can reveal, for example, that customers who have been on your mid-tier plan for 90+ days are significantly more likely to upgrade than newer customers. This kind of segment-specific insight lets your sales and marketing teams focus expansion efforts where they're most likely to succeed.
Better product decisions based on who your best customers are: Customer segmentation isn't just a marketing tool, it shapes product development too. When you can identify which customer segments have the highest lifetime value, lowest churn, and strongest engagement, you have a clearer picture of who your product serves best. That informs decisions about which features to build, which pricing tiers to expand, and which customer profiles to prioritize in go-to-market efforts.
More accurate performance measurement: Without segmentation, you're measuring your entire customer base as a wholeand aggregate metrics can hide problems. A healthy overall churn rate might mask the fact that one customer segment is churning rapidly. Segmentation lets you break down MRR, churn, LTV, and conversion rates by customer group, giving you the granular insight needed to catch issues early and measure the true impact of campaigns on specific segments.
In summary, customer segmentation gives you the information you need to improve your marketing strategy.
How Cohort Analysis Extends the Benefits of Segmentation
Cohort analysis takes customer segmentation one step further by tracking groups of customers over time. Instead of just asking "who are our customers?" cohort analysis asks "how do customers who signed up in a specific month, or through a specific channel, behave over the next 3, 6, or 12 months?"
For SaaS businesses, cohort analysis is especially powerful for retention. You might segment customers by signup month and find that customers from Q4 have a noticeably higher 90-day churn rate than customers from Q2, which could indicate a seasonal difference in buyer intent, or a product or onboarding change that improved retention. You can also layer in additional filters: for example, comparing cohorts by plan type to see whether annual subscribers retain better than monthly subscribers over 12 months.
Baremetrics includes cohort retention reporting alongside attribute-based segmentation, so you can track how different customer groups perform over time without needing to export data or build custom spreadsheets.
How Baremetrics Helps
Many companies task their existing teams with the responsibility of compiling and sorting sales metrics into segments. This isn't cost-effective. Instead, turn to Baremetrics. Our tool helps you develop segment insights from your existing data. You can track changes on a rolling or month-to-month basis and gain insight into your customer groupings.
Ready to give Baremetrics a try? Sign up for a free trial today!
