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What is customer segmentation?

Last updated

11 May 2023

Reviewed by

Hugh Good

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Customer segmentation is the process of dividing customers into distinct groups. You can divide them by demographic categories, purchasing habits, geography, or other valuable data points. 

Dividing customers in this way means your company can provide them with a more personalized experience. It can also more effectively target its marketing efforts. 

This post will examine ways to segment customers and what to do with that information.

Customer segmentation vs. market segmentation

It's important to understand the difference between customer and market segmentation

Market segmentation focuses on all potential customers of a market. However, each company will attract a different type of customer. 

Using customer segmentation, you can see exactly which types of customers your company appeals to and lean into them to improve results. 

Why segment customers?

Segmenting your customers provides your business with several advantages:

  • More efficient business processes 

  • Improved profitability 

  • Boosted customer satisfaction

  • Better competitiveness in the market

Deliver 1:1 experiences at scale

Personalization is an integral part of marketing. Customers don't want to feel like a number on a spreadsheet. However, once a customer base gets past a certain size, it’s not feasible to know each person individually.

Customer segmentation minimizes this problem, allowing you to put customers into similar groups who are likely to respond similarly.

Improve brand loyalty and customer lifetime value

Customer segmentation allows you to provide personalized experiences, products, and services. You'll be able to meet the needs and preferences of your customers more accurately. The result will likely be a more loyal customer base that spends more with your business and recommends your company.

Stay on top of changing customer needs

Customer needs and preferences are constantly evolving. When you make customer segmentation a routine process, you can stay ahead of these changes. 

This results in a more agile company that's resilient to changing market dynamics. 

Increase marketing efficiency and effectiveness

Not every customer responds to marketing the same. Some may prefer a professional tone, while others may respond better to a more casual tone. 

Understanding the difference between various groups will allow you to market to them more effectively. This approach also lowers customer acquisition costs and increases conversion rates.

Create a competitive advantage

The best way to stay ahead of the competition is to differentiate your company in the marketplace. 

When you focus on understanding your customers, you can develop more specific products, marketing messages, and customer experiences

These extra levels of personalization will appeal to customers in a way that less-informed competitors can't. 

Customer segmentation models

Only your imagination limits the data points you can gather on a customer. However, a few distinct models describe the data categorization:

Demographic segmentation

This type analyzes demographic characteristics such as: 

  • Age

  • Gender

  • Income

  • Education

  • Family status

For example, a company that sells clothing for teenage girls can target its marketing to their specific age and gender demographics.

Geographic segmentation

This analyzes geographic location, such as country, region, city, or zip code. 

For example, a fast food restaurant with different regional offerings and prices can customize its menu for groups of customers based on where they live.

Psychographic segmentation

Psychographics are personality traits, values, interests, and lifestyles. 

For example, a company might use its customers’ interests and lifestyles to guide new product decisions across different groups.

Technographic segmentation

This investigates customer technology usage, such as devices, apps, and online behavior. 

For example, a company advertising its app can ensure it reaches relevant customers with compatible devices.

Behavioral segmentation

This segmentation looks at behaviors such as purchase history, brand loyalty, and response to marketing campaigns. 

For example, an online retailer can use previous purchases to make better recommendations to different customer segments.

Needs-based segmentation

This analyzes specific needs or problems, such as customers’ desire for convenience, price sensitivity, or product quality. 

For example, a grocery store might use this information to stock products more in line with what specific customer segments want.

Value-based segmentation

This explores attitudes toward value, such as willingness to pay for premium products versus preference for low-cost options. 

For example, a company can use this data to align its pricing structure with specific customer segment expectations.

Segmenting your customers

Now that you know the reasons to segment customers and the types of segmentation possible, it's time to put that theory into practice. 

The first step is to perform the segmentation. 

Accessing customer data for analysis

You need to access relevant, accurate, and up-to-date customer data to segment customers effectively.

You can draw on two main sources of customer data for segmentation analysis:

  • Direct data: Your company collects this directly through customer surveys, feedback forms, online profiles, and purchase histories. 

  • Indirect data: You get this from other data providers, such as public records, surveys, social media, and online activity tracking.

Direct vs. indirect data

Direct and indirect data have strengths and weaknesses, so it’s vital to know which to use and when. 

Direct segmentation provides detailed customer data, allowing for more personalized marketing efforts. Because it comes directly from customers, it's more relevant to your target market than indirect data. 

Collecting direct data involves customers in the process, boosting engagement and loyalty.

The downside is that collecting direct data is time-consuming and can be expensive. These limitations can result in data from a smaller pool of your existing customers, leading to shallow insights. You're also responsible for controlling for potential biases as the data collector.

Indirect segmentation addresses some of the problems with direct data. It's generally more cost-effective, allowing you to collect more data. Some data providers can give you real-time data, enabling a more agile marketing approach.

Of course, these benefits come with drawbacks. Indirect data is often less detailed and relevant than what you can collect yourself, limiting the personalization aspect.

Creating rich customer segments

Customer segmentation is only useful when it provides meaningful information. That’s where detailed customer profiles come in. Identifying and focusing on the most important variables will help you create a better segmentation. 

Once you've gathered the data, you can look for emerging patterns and trends. You'll create the richest segmentation by carefully identifying these patterns to capture unique group characteristics.

The final step is to ensure you've interpreted the data correctly so the groups respond according to the segmentation’s prediction. Repeat this process routinely to stay ahead of changes.

Using the segmentation

With your customers segmented, it's time to see how your company can use that data. 

We've already looked at a few examples, but let’s take a more detailed look at how you can use customer segments:

Targeted marketing

Each customer segment will have unique preferences and respond better to different marketing. Splitting your marketing efforts into segments allows you to tailor your message accurately. 

Additionally, you can more precisely target advertising to display your products to the people most likely to purchase them.

Product development

Your company's long-term success requires products to evolve with the market. While it's essential to change with the market, changing according to your customers’ needs is better. Better meeting the needs of existing customers will improve your product-market fit and drive more sales.

Pricing strategies

One of the most powerful growth levers at your disposal is a pricing strategy that aligns with how willing your customers are to pay a certain price. 

You can use customer segments to decide which products and features to offer at which price points and what those price points should be. This ensures you don’t leave money on the table or price yourself out of the market.

Channel strategies

You can't sell to customers if you can't reach them. Your customer segment data may reveal that the target you're after spends more time on a different channel than you've been prioritizing. 

Understanding where your customers are making purchases and consuming ads will help you reach them better.

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