Customer segmentation (also known as market segmentation) is a marketing practice of dividing a customer bases 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:
Customer segmentation processes 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.
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“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, 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:
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 than non-segmented campaigns.
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.
By segmenting potential and existing customers into specific sub-groups, businesses can get a better understanding of other things those customers could be interested in. This, in turn, promotes the expansion of new products and services relevant to their target audiences.
Customer segmentation can help businesses 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.
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.
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.
Customer segmentation analyzes specific data about customers 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:
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.
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