Customer segmentation is an effective tool for businesses to closely align their strategy and tactics with, and better target, their customers. Every customer is different and every customer journey is different so a single approach often isn’t going to work for all. This is where customer segmentation becomes a valuable process.
Let’s begin with understanding exactly what customer segmentation is.
Customer segmentation definition
Customer segmentation is the process by which you divide your customers into segments up based on common characteristics – such as demographics or behaviors, so you can market to those customers more effectively.
These customer segmentation groups can also be used to begin discussions of building a marketing persona. This is because customer segmentation is typically used to inform a brand’s messaging, positioning and to improve how a business sells – so marketing personas need to be closely aligned to those customer segments in order to be effective.
The marketing “persona” is by definition a personification of a customer segment, and it is not uncommon for businesses to create several personas to match their different customer segments.
But for that to happen, a business needs a robust set of customer segments off of which to base it. Which leads us to the next section, distinguishing the difference between customer segmentation and market segmentation, so that your segmentation is as accurate as possible.
Customer segmentation vs market segmentation
In comparison to customer segmentation, market segmentation is more general and looks at all of the marketplace. Whereas market segmentation relates to the whole market, customer segmentation is your part of the market.
For example, if you’re in the business of selling vehicles and you typically sell to businesses, then your customer segment is B2B and you might compare customers that are likely to buy large commercial lorries, versus small business owned vans. These two customers have different needs, and depending on the correlation you find might then become two different customer segments for you to focus on.
However, if segmenting the whole market, then you might compare people that are in the market for a people carrier versus a sports car. Which is much broader.
In this instance, most market producers aren’t going to cater to the whole market so it is more effective to focus on the selling element. You’ll see a better pay off by targeting one or two focused customer segments, rather than the whole market.
Types of customer segmentation
There are different factors of segmentation that should be given careful consideration. These are not one-size-fits-all, and you should do what is right for your business.
Customer segmentation can be broken down into two types:
Segmenting customers based on who they are
The process of understanding who customers are typically focuses on demographics. This will include factors such as:
- Urbanization – are they city or rural?
- Relationship status
- Job type
Segmenting customers based on what they do
You can also segment customers based on how much they spend (share of wallet), how often, and what products (this allows you to see how much you can increase spend). This is more behavior focused.
Breaking this down even further, behavior can vary and you might want to look to separate as follows:
- Basket size
- Share of wallet
- Tenure (how long they stay with you)
- Longterm loyalty (a function of share of wallet and tenure)
As mentioned above, there is no single approach to use here. It varies on your industry and size. For example, in supermarkets it’s very unusual to get 100% share of wallet, so you might focus on behavior – such as what products they buy – so you can implement a strategy to get customers to buy more (quantity), or a more premium product.
However, in insurance 100% share of wallet is common and many companies incentivize customers to achieve this (such as discounts to add car insurance to their existing house and pet insurance). If you have 3 pets naturally you want (and it’s easier) to have them all on the same policy, rather than taking a policy three different times.
In financial services, it’s common to have nuances too. Generally, most people have one current account, but they might have multiple providers for savings accounts or credit cards.
Different approaches should be used to target different people, based on what is appropriate for that customer segment e.g. loss leading on an offer to get customers in-store, knowing the customer might buy more when there.
Why segment customers at all?
Customer segmentation is popular because it helps you market and sell more effectively. This is because you can develop a better understanding of your customers’ needs and desires.
The business impact of doing this is even more important, and effective customer segmentation will help you to increase customer lifetime value. This means they will stay longer, and spend more.
By better understanding the customer, and therefore being able to target them more effectively, you can drive greater loyalty. Instead of customers visiting Kiehl’s two times a year to get skincare products (with a big basket size), segmentation can give you insights that will help you get customers returning 5x a year with smaller basket sizes. Although each basket is smaller, you’ve increased customer loyalty because they are interacting with the business more frequently.
Little and often is disproportionately more effective than a one-off. It is a more predictive indicator of behavior too, which will help inform business decisions. Not only will it improve loyalty but it will increase the value of the customer, meaning the lifetime value of the customer will increase.
How to segment customers
Looking for advice on how to segment your customers? Look no further.
First up, look at industry-wide data on the marketplace, and then dig deeper and look at data on your own customer population. Now, look at subsets within your customer population. This is where you begin to segment, so look to see what ties certain customers together. What correlations do you find? How do you know if there is a correlation? Or how do you even find a correlation? Use this as a structure when looking at the data and try to see how they tie together.
- Who they are
- What they do
- What they want
Some products will have a stronger tie to demographics (like music), whereas products like food, for example, are for all. So bear this in mind when you’re digging into the data because it may or not be helpful to get very specific, it depends on your circumstances and objectives. Still not sure? We cover below a few questions to ask yourself so you know when to go specific with your segmentation or when it might be suitable to keep it slightly broader.
Using experience data is essential if you are to ascertain how these three factors correlate.
How do you get access to this experience data?
There are multiple ways in which you can collect experience data, and these are separated into direct or indirect streams. See below for a full list. Direct can typically involve surveys of customers, and a direct response. Indirect will involve insights derived from data that wasn’t directly obtained but can still point to important trends that will help understand any correlation in behavior within the customer base.
- Relationship surveys
- After-store visit surveys
- Post-purchase survey
- Product satisfaction survey
- Brand Tracking
Qualtrics can help too. Understand key trends and drivers of behavior with CustomerXM.
Once you have found what the correlations are and created your customer segments, then they should be used to determine your brand positioning, messaging, and your Go to Market strategy. These customer segments give you valuable insight into how to effectively meet your business objectives – because you know who to target and how to target them in a way that will grow your bottom line.
Customers do the customer journey in different ways, so a better understanding of how different segments behave will allow you to create journeys that cater to different segments and make it as easy as possible for customers to complete the journey.
By aligning your customer segments to your objectives these will help to guide you about how specific these customer segments should be. For example, a big brand, such as eBay, launching a new service offering that targets everyone will have a very different customer segment than a brand targeting only small, independent businesses.
When undertaking your customer segmentation and aligning these to your objectives, ask yourself what you want to achieve:
- Is it a competitive reaction?
- Is it a new product offering?
- Do we want to expand the market?
These will help to determine how specific your segmentation should be.
If you’ve never sold to a customer base before…
Firstly, understand what the addressable market is.
Then, determine how much of the market you can reasonably expect to get.
Finally, do customer segmentation to make sure that your messaging and positioning is meaningful for new customers.