When Michael Dell, founder of Dell computers, was 16, he sold subscriptions for a local newspaper in Houston. He figured out that two demographics bought newspapers more than others: those who just purchased a house and newly married couples. Dell hired his friends to find these people and created personalized letters for these high-value segments. By using segmentation he was able to sell thousands of subscriptions that year and made $18,000, which was more than his teacher did.

Before marketers considered it buzzworthy, entrepreneurs have been using customer segmentation to grow their businesses.

What is Segmentation?

Market segmentation identifies subsets of a market based on demographics, needs, priorities, common interests, or other psychographic or behavioral criteria to better understand and communicate with a target audience. Through segmentation, you can garner more demand as your messaging resonates more with your market and grow your customer base by understanding what drives their purchases.

Segmentation is crucial for success. Organizations with great customer segmentation had 10 percent higher profit than organizations whose segmentation missed the mark over a 5-year period, according to Bain & Company. In the same study, 81 percent of executives say market segmentation is a critical element for increasing profits, yet only 25 percent believe their companies use it effectively.

Learn more: What is Market Segmentation?

Below are three examples of organizations that used segmentation to increase their revenue.

Best Buy

Electronics retailer Best Buy remodeled a group of its stores and trained store clerks to focus on its new segments, which included the customer personas of Buzz (the young tech enthusiast), Jill (the suburban soccer mom who usually does the shopping for the family), and Barry (the wealthy professional man).

To create an exceptional shopping experience for “Jill”, a Best Buy in Santa Rosa, California created new express checkout lines, nooks that are set up with rec rooms so mom and kids can play with the latest tech toys, a new display with Barbie, SpongeBob SquarePants, and Hello Kitty electronics, and an expanded selection of home appliances. They also decorated the entrance of the store with pink, red, and white balloons, so it’s festive from the moment she enters.

In the Washington D.C. area, Best Buy has given “Barry” an elevated experience by providing leather couches in front of large TV’s with high-quality sound.

Stores that implemented those changes reported sales growth above 9%, more than double the growth rate of stores that didn’t remodel and train.

Best Practice: Common customer segmentation strategies combine transaction data with survey research to create detailed profiles of the ideal customers. It’s important to always test the data to ensure you’re targeting the right segments.

Mercedes Benz

Automaker Mercedes Benz wants their content seen by people who desire luxury and have the money to purchase their cars. They identified younger Gen X and Gen Y as important buyers, but most of their current buyers are much older.

Mercedes Benz leveraged customer segmentation to engage with a younger buying group by creating a more affordable model and advertising during the Super Bowl and other prime-time ad slots. The result? The company’s campaign captured a younger buyer (an 11-year drop based on previous campaigns), had more than 300,000 models of the car built in the online portal, and garnered record web traffic.

They also created Generation Benz, an invite-only, online community created to engage Generation Y customers who love the brand. This informal social media hub also serves as a research community for Mercedes Benz to gain insight into the thoughts and lifestyle of the demographic. In addition to surveys, this is a great way to get informal data about your target demographics by analyzing participants comments and interactions with each other.

Best Practice: Your customer segments should be accessible. Understanding your customers and being able to reach them are two different things. Your segment’s characteristics and behavior should help you identify the best way to meet them. For example, you may find that a key segment is resistant to technology and rely on newspaper or radio ads to hear about store promotions, while another segment is best reached on your mobile app. One of your segments might be a male retiree who is less likely to use a mobile app or read email, but responds well to printed ads.

American Express

Credit card giant American Express wanted to differentiate themselves and re-energize their product line. They used segmentation analysis to group their customers by income, spending, travel frequency, shopping preferences, lifestyle characteristics, etc. In the end, they decided to focus on the deeply loyal, high-spending customers. These “points junkies” were business executives and management consultants who loved to accumulate frequent flyer and hotel guest points.

They created additional card options for this points-driven segment, and these cards are among American Express’s most popular and profitable products. Additionally, they’ve gone on to offer cards with rewards in other categories like gas and groceries.

American Express uses a combination of demographic and psychographics when segmenting their products, such as social class, values, education level, income level, marital status, and occupation.

Best Practice: When creating your segmentation survey, you’ll want to ask a mix of psychographic and behavioral questions. We recommend no more than 15 questions for this portion of the survey. The easiest way to quantify these types of responses is by using a matrix.

Conclusion

Great market segmentation gives you the insights you need to understand your market more effectively and craft compelling sales and marketing strategies for each of your segments.

While deep segmentation analysis has seemed out of reach for many organizations, software tools make these rich insights available to anyone.

For more information on creating customer segments for your organization, download our free Qualtrics e-book How to Drive Profits with Customer Segmentation today.

eBook: How to Drive Profits with Customer Segmentation

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