Customer segmentation provides you with insights that help in providing value for both your customers and business.
Think about the last time you went to a department store. Do you remember how each corner had a specific theme and layout, with offers catered to that particular section? And each sales representative was experienced about their particular department, but knew enough to recommend you to explore other segments of the store? That’s just one example of customer segmentation.
What is customer segmentation?
Customer segmentation is the process of dividing customers into groups based on common characteristics so companies can market to each group effectively and appropriately.
In business-to-business marketing, a company might segment customers according to a wide range of factors, including:
In business-to-consumer marketing, companies often segment customers according to demographics that include:
There are a few more specific customer segmentation models, but first, we have to understand why businesses choose to segment their customers.
What is the importance of customer segmentation?
Customer segmentation can help inform your overall marketing strategy and messaging. As you learn the attributes of your best customers, how they are alike, and what is important to them, you can leverage that information in messaging, creative development, and channel selection.
An overall promotion strategy (i.e., our customers are deal seekers, therefore we should offer frequent deals) for sending promotions for specific segments can be made better with information from a broad customer segmentation scheme. You may find that certain cohorts of customers don’t require discounts when you use certain messaging, thereby saving you from having to offer a discount for those groups at all.
Most companies do not have unlimited marketing budgets, so being precise about how and where you spend is important. You could, as an example, target similar customers to segments of high value or those most likely to convert to get the most return from your marketing investment.
Did you know that $1.6 trillion was the estimated cost incurred by businesses due to lost customers in 2016? And, once customers leave, 68% of them don’t ever go back to the same brand again. If that doesn’t motivate you to retain your customers, maybe you should also consider that acquiring new customers is 5X as expensive.
Customer segmentation can help you develop more focused strategies to retain customers. For example, you may want to identify your top-paying customers and create exclusive offers for them. Or you may even want to re-engage people who haven’t purchased in a while. The possibilities are endless.
81% of consumers reported getting frustrated working with brands that don’t provide a good customer experience. A bigger concern is that 44% of customers who are unhappy with the experience will vent on social media. This can harm your reputation and your credibility. So providing an amazing customer experience needs to be a top priority for your business.
You can solve this problem by using customer segmentation. You can create various customer segments based on individual preferences and tailor your communication accordingly. Simple things like personalized product recommendations, discounts, or reminders about their wish lists can make a big difference.
Marketing messages sent to well-thought-out customer segments have seen 200% greater conversions than those sent to a general audience. If you can create well-defined customer segments based on common attributes, you can get better results from marketing.
For example, segmentation based on the lifecycle of a customer can help you send the right messages that matter the most to them. If you create customer segments based on the social channels they frequent, you can engage with them at the right place and time.
Tools such as Google Analytics, Matomo, or Yandex can help you create customer segments effectively.
Whether it’s D2C, B2B, Millennials or GenZ; it seems that there is a study or resource on every possible group of customers stating that relevant content is important to them. These customer segments are more likely to respond, buy, and respect the brand and feel connected if provided with relevant content. By performing some level of segmentation, you can ensure that the messages you are delivering via email, on site, through digital ads, or other methods are targeted and relevant to the individual seeing it. It is almost counter-intuitive to the hyper vigilance of data privacy to use so many pieces of data in this way, but with so many marketing messages coming at people today, no one has time for something that isn’t relevant to them.
Types of customer segmentation models
Common customer segmentation models range from simple to very complex and can be used for a variety of business reasons. Common segmentations include:
At a bare minimum, many companies identify gender to create and deliver content based on that customer segment. Similarly, parental status is another important segment and can be derived from purchase details, asking more information from customers, or acquiring the data from a 3rd party. 63% of marketers agree that audience segmentation is extremely valuable in providing a great customer experience. And, one of the most common types of customer segmentation is to segment customers using demographic data.
You can consider parameters such as age, generation, gender, education, occupation, income, marital status, or ethnicity to create customer segments.
It is easier to acquire and measure data for demographic segmentation than other types of customer segmentation. A simple way to gather data is to ask your customers or email subscribers to fill out a form like this.
Geographic segmentation involves grouping customers by country, state, region, climate, or market size. You need to tailor your messages to various geographic segments keeping in mind the local culture or weather.
For example, Porsche offers different kinds of product mixes based on the geographic region they cater to. They offer a higher percentage of convertibles in their product mix to consumers from the warmer south or southwest regions of the US compared to the north.
Modifying your offerings and marketing messages for different geographic segments provides greater value to consumers and encourages them to buy.
Recency, frequency, monetary (RFM)
RFM is a method used often in the direct mail segmentation space where you identify customers based on the recency of their last purchase, the total number of purchases they have made (frequency) and the amount they have spent (monetary). This is often used to identify your High-Value Customers (HVCs).
High-value customer (HVCs)
Based on an RFM segmentation, any business, regardless of sector or industry, will want to know more about where HVCs come from and what characteristics they share so you can acquire more of them.
At a minimum, most companies will bucket customers into active and lapsed, which indicates when the last time a customer made a purchase or engaged with you. Typical non-luxury products consider active customers to be those who have purchased within the most recent 12 months. Lapsed customers would be those who have not made a purchase in the last 12 months. Customers may be bucketed even further based on the time period in that status, or other characteristics.
Past observed behaviors can be indicative of future actions, such as purchasing for certain occasions or events, purchasing from certain brands, or significant life events like moving, getting married, or having a baby. It’s also important to consider the reasons a customer purchases your product/service and how those reasons could change throughout the year(s) as their needs change.
Behavioral segmentation involves segmenting customers based on the way they interact with your brand.
Perhaps you can create a segment for consumers who have added products to their cart but did not complete the checkout. Or ones who didn’t even add any products to cart but simply browsed. You can also group by products or services they bought or showed interest in.
Some common variables that determine behavior segmentation include:
Also, the lack of a behaviour such as an incomplete survey form or an abandoned cart allows you to re-engage consumers using personalized messaging.
For example, Amazon has mastered the art of targeting their customers based on their recent purchases and recently viewed products.
Psychographic customer segmentation tends to involve softer measures such as attitudes, beliefs, or even personality traits. For example, survey questions that probe how much someone agrees or disagrees with a statement are typically seeking to classify their attitudes or perspectives towards certain beliefs that are important to your brand.
Once you have these segments, you can build the right product, set the right distribution and positioning, and match the right sales motion to each customer, while also refining your segments over time. Done well, it’s a model that gives anyone at your company an immediate understanding of your customers.
Lifecycle or Customer Journey-Based Segmentation
Apart from understanding buyer preferences and interests, you also need to know which stage of the buying process they are in. This type of customer segmentation is called lifecycle or customer journey-based segmentation.
You can create various segments such as consumers who have visited your online store but haven’t made a purchase. Or customers who have bought only once in the last 12 months or haven’t bought in the last 12 months.
Customer journey-based segmentation provides you with a powerful approach to target them with more relevant and useful recommendations.
For example, the following screenshot is that of an email from Old Navy, sent to customers who haven’t visited the website for a while. As you can see in the email, they offer irresistible offers and discounts to encourage customers to make a purchase.
How to develop a customer segmentation strategy?
Step 1: Setting Up Your Customer Segmentation Project
As with any project, preparation is essential. Without it, your initiative will lack focus and direction, which can ultimately take you off course. So let’s make sure your ducks are in a row.
To determine your best current customer segment, begin by defining the project and planning for it appropriately. To do that, you need to first have a crisp understanding of its:
Step 2: Analyzing Customer Data
In this section of our guide to customer segmentation we’ll cover everything you need to develop effective research criteria and successfully manage the data collection process.
The next step in the best current customer segmentation process is to develop a formula or set of criteria to measure the attractiveness or value of each customer in your customer base. This formula is determined by the actual economic benefits or net profits/loss that customer has generated over its lifetime. It creates an objective measure that can consistently and objectively be used to compare customers in different segments.
Step 3: Data Collection
The next step is to build a comprehensive list of ways of using the customer characteristics you have identified to distinctly classify your current customer base by attractiveness. This is done using inputs and recommendations informed by the company’s staff, experts, and customers, as well as research on competitors. It is important to be as comprehensive as possible because effective differentiating factors can go beyond typical schemes such as company industry, company size, or geographic region.
Managing the Data Collection Process
Best practices for managing a research team:
Step 4: Analysis and Prioritization
This section in our guide to customer segmentation will help you conduct the data analysis necessary to evaluate and prioritize your best customer segments.
In order to help you identify your best current customer segments, we’ve broken the process down into five clear steps. Check in weekly as we walk you through each step, from setting up your project to performing customer data analysis, executing data collection, conducting customer segmentation analysis and prioritization, and implementing the results into your organizational strategy.
The next step in the customer segmentation process is to analyze and validate the segmentation hypotheses you have identified. This analysis will require significant data about your current customer base, so you will need to develop a data collection plan and a research process.
Once the necessary data have been collected, you can analyze and validate each of the hypotheses, helping to identify whether a segmentation idea is right or wrong. Having done so, it is also important to analyze the relationships between validated hypotheses. The synthesis of these segmentation schemes is an overall segmentation of the best customers that incorporates each of the validated segmentation hypotheses. That results in segments that are not only analytically proven to be attractive, but also intuitive and targetable for the purpose of developing and executing a segment-focused strategy against them.
Step 5: Presenting and Incorporating Feedback
Our guide to customer segmentation concludes with tips for successfully presenting your findings to stakeholders and translating your data into action.
In order to help you identify your best current customer segments, we’ve broken the process down into five clear steps. Check in weekly as we walk you through each step, from setting up your project to performing customer data analysis, executing data collection, conducting customer segment analysis and prioritization, and implementing the results into your organizational strategy.
The last step in the best current customer segmentation process is to apply the customer quality measurement discussed in the first step to the aggregate customer set in each of the identified segments. Doing so will allow you to ensure that the customer segment(s) with the best overall customer quality is/are identified.
You are then ready to present your findings to your stakeholders.
How to deliver a better customer experience through customer segmentation?
Drive-Up Retention Rates
A typical American business will lose 15% of its customers every year. However, you may also have heard that 80% of your future profits will come for just 20% of your existing customer base. Customer retention is an essential part of any successful business and failing to keep your customers can result in a huge loss of earnings. It’s been estimated that companies lose more than $136 billion every year just from consumers switching to another brand. So, how can you use customer segmentation to drive up retention rates?
By segmenting your customers, it’s easier to keep them happy. You know which marketing tactics are more likely to work with each segment. This means you are providing higher quality suggestions that are more likely to be well received. You can also perform market research with each of your segments to make actionable goals about which direction your company should go. Do you have a lot of customers aged 18-24? Do they prefer dealing with customer service on the phone? Or do they prefer Live Chat? Which device are they using to access your website? Does your website perform well on that device? These are all questions you can consider when developing your customer retention strategies.
Make Yourself Visible During Key Times
If you have customers who celebrate a particular holiday, for example, Eid, Hanukkah, Christmas, or Diwali, you may want to tweak your marketing to reach out to these customers. This has the effect of many customers feel appreciated. The same is also true for special occasions. Your customer may have a birthday or wedding coming up and you can tailor your communications to suggest purchases they may benefit from.
Offer Well-Timed Discounts To Drive Sales
If you have identified a cluster of customers who have recently abandoned their shopping cart, you may be able to convince them to purchase by offering them a discount on the products in their cart. Interestingly, women are slightly more likely than men to pay attention to discounts and promotions. You may want to offer more aggressive discounts to your female customers.
Bring Old Customers Back
According to one report, 30% of small business owners estimate that 15-20% of all first-time customers don’t return. Sometimes the customer has just forgotten about your business and it’s your job to attract them back. By segmenting your customers, you can easily identify one-time customers and design a strategy that will bring them back. You may be able to offer them a large discount or a free item if they buy a product over a certain price.
A More Personalized Experience
By segmenting your customers, you identify trends with each group and this allows you to deliver a more personalized message to its members. For example, if you identify one segment as Students, you may want to send them a marketing email around Finals and offer them something to ‘de-stress’, help them study, or whatever else. The point is that you’re connecting with them on a personal level.
Beat The Competition
Understanding your customers allows you to provide a better customer experience which will keep consumers coming back to you. Companies who don’t segment their customers will find themselves falling behind as you race ahead. One study found that 65%-75% of new products fail to meet their revenue targets. A key reason that this happens is that the business has failed to understand what their customers really want and have gone for a one-size-fits-all approach.