Customer segmentation

What is customer segmentation?

Customer segmentation (also known as market segmentation) is a marketing practice of dividing a customer base into sub-groups. It could be according to geographic, demographic, psychographic, behavioral, and other characteristics. The key to effective segmentation is to divide customers into groups based on; the prediction of their value to the business. After that target each group with different strategies in order to extract maximum value from both high and low-profit customers.

In a broad sense, customer segmentation tries to answer the following fundamental questions:

  • What are the main groups of customers that our business serves?
  • Who are our most and least profitable customers?
  • Which aspects of our products/services appeal most to our customers?
  • What are our customers’ needs?
  • How can our products/ services ease our customers’ pain points?
  • How can we improve our offerings to increase customer satisfaction?
  • What are the best communication channels to engage our customers?
  • What is the effectiveness of different sales channels that we use?

Steps in market segmentation:

  • collecting and analyzing customer data
  • determining the right criteria for customer segmentation
  • selecting the most attractive segments
  • developing unique marketing strategies for each segment

Types of customer segments:

B2C customer segmentation:

  • Demographic segmentation breaks down the market into segments. It is based on variables like age, generation, gender, race, ethnicity, marital status, family size, education, occupation, and income.
  • Geographic segmentation divides the target market on the basis of location. Such as; country, state, city, region, as well as various geographic factors (climate, cultural preferences, populations, etc.)
  • Psychographic segmentation allows categorizing customers by their shared personality traits, values, beliefs, attitudes, interests, lifestyles, and social classes.
  • Behavioral segmentation involves grouping customers by the way they interact with a brand. For instance; their purchasing habits, occasion or timing, product/ service usage, benefits sought, buyer journey stage, user status, or loyalty level.

For B2B customer segmentation:

  • Priori or firmographics segmentation uses a simple classification method based on publicly available characteristics. For example; industry and company size (either by the number of employees or annual revenue.)
  • Needs-based segmentation groups customers according to validated needs they express for specific products or services being offered.
  • Value-based segmentation differentiates customers based on the economic value they present to a business. Both in terms of completed and potential sales.

Why segment customers?

“Selling to people who actually want to hear from you is more effective than interrupting strangers who don’t.”

 Seth Godin –  American author and former dot com Business executive

When using a one-size-fits-all approach to marketing, even the smartest strategy may not bring the desired results. No matter how effective your marketing efforts are to some, they could fail with others. This is where customer segmentation comes in to play. If done right, it can bring numerous benefits for businesses:

Better marketing campaigns

Customer segmentation enables businesses to craft more focused marketing messages, customized to each particular segment. According to a Mailchimp survey, campaigns segmented based on customer interest have on average, a 74% higher click rate. This is in comparison to non-segmented campaigns.

Improved offerings

Have a clear idea of who your customers are and what they want to get out of using your products/services. It allows you to fine-tune and optimize your offerings. Thus being able to meet customers’ needs and expectations, which would further result in improved customer satisfaction.

Ability to expand

Segment potential and existing customers into specific sub-groups. As a result, businesses can then get a better understanding of things customers could be interested in. This, in turn, promotes the expansion of new products and services relevant to their target audiences.  

More retained customers

Customer segmentation can help businesses develop more targeted customer retention strategies by identifying a company’s top-paying customers. Therefore, creating personalized offers for them, or re-engaging those who haven’t purchased anything in a while.

Price optimization

Identify the social and financial status of customers. It makes it easier for businesses to determine appropriate pricing for their products/services that their customers would consider reasonable.

Increased revenue

Spend less time, resources, and marketing efforts on less-profitable customer segments and more on a company’s most successful customer segments. As a result, it increases revenue, profitability as well as lowers sales costs.

How to segment customers?

Customer segmentation analyzes specific data about customers in order to identify patterns and group customers into segments. However, some of that data can be obtained from purchasing information (geography, company, job title, products purchased, etc.). Or on the other hand by asking customers to fill out a customer evaluation form. For more advanced data customer segmentation analysis, there is a number of tools that can be used. For instance; Google Analytics, Kissmetrics, Segment, Piwik, Yandex, etc. Many content marketing tools have also built-in segmentation and targeting features.

Experts suggest that customer segments should be:

  • Easily and clearly identifiable
  • Measurable
  • Large and valuable enough to be profitable
  • Accessible by promotion, communication, and distribution channels

Once the segments are defined, it’s important to estimate the size and the value of each segment. Compare segment size with the average revenue generated by each segment. It’ll allow you to determine which customer groups are more profitable for your business. Let’s consider that around 80% of company sales come from 20% of customers. It’s critical to identify those high-value segments. Therefore, being able to prioritize your marketing efforts and adjust your products/services to better meet their needs.

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