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 according to geographic, demographic, psychographic, behavioral and other characteristics. The key to effective segmentation is to divide customers into groups based on predication of their value to the business and 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?

Customer segmentation process consists of the following steps: collecting and analyzing customer data, determining the right criteria for customer segmentation, selecting the most attractive segments and developing unique marketing strategies for each segment.

Types of Customer Segmentation

When it comes to B2C customer segmentation, there are 4 basic approaches:

• Demographic segmentation breaks down the market into segments 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 such as their purchasing habits, occasion or timing, product/ service usage, benefits sought, buyer journey stage, user status, loyalty level.

For B2B customer segmentation, there are three main approaches:

• Priori or firmographics segmentation uses a simple classification method based on publicly available characteristics such as 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

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, or even most of your customer base, 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 on customer interest have a 74% higher click rate on average than non-segmented campaigns.

Improved offerings

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

Ability to expand

By segmenting potential and existing customers into specific sub-groups businesses can get a better understanding of what else those customers could be interested in, which allows expanding with new products or services relevant to their target audiences.  

More retained customers

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

Price optimization

Being able to identify the social and financial status of customers makes it easier for businesses to determine appropriate pricing for their products or services that their customers would consider reasonable.

Increased revenue

Spending less time, resources and marketing efforts on less-profitable customer segments, and more on a company’s most successful customer segments ultimately results in increased revenue and profitability as well as lowered sales costs.

How to Segment Customers

Customer segmentation requires gathering specific information – data – about customers and analyzing it in order to identify patterns and group customers into segments. Some of that data can be obtained from purchasing information (geography, company, job title, products purchased etc.) or by asking customers to fill out a customer evaluation form. For more advanced data analysis, there is a number of customer segmentation tools (like Google Analytics, Kissmetrics, Segment, Piwik, Yandex etc.) that can be used. Many content marketing tools also have 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. Comparing segment size with the average revenue generated by each segment allows you to determine which customer groups are more profitable for your business. Considering that around 80% of company sales come from 20% of customers, it’s critical to identify those high-value segments in order to prioritize your marketing efforts and adjust your products or services to better meet their needs.