Customer Segmentation: How to Group Customers for More Sales

Key Takeaways

• Customer segmentation involves categorizing customers based on common traits, needs, behaviour, or worth.
• The best-segmented customers are those who are actionable and enable the business to alter its communication, offerings, channels, or experience.
• Effective segmentation is a continuous process that is based on solid information, well-defined objectives, and consistent evaluation of results.

Customers' requirements are never similar; each customer has his/her own requirements, purchasing patterns, budget, and expectations. By addressing all customers with a generic approach, marketers may find their message irrelevant and their sales efforts ineffective. Segmentation is a method through which the customer base can be divided and decisions made on their actual requirements.

What is Customer Segmentation?

Customer segmentation is defined as the technique of breaking down customers into groups based on relevant factors. These factors could be demographic variables, geographical variables, interests, technology adoption, buying habits, customer value, or special requirements.

The point of segmentation is not merely the creation of segments; good segmentation makes a difference to a business in terms of the decisions it makes. A good example would be an online store segmenting first-time buyers from repeat customers.

Such segmentation can aid marketing, sales, product development, customer care, and customer retention efforts if one message does not suffice for the whole audience anymore.

How Does Customer Segmentation Work?

Essentially, segmentation is the link between customer data and a business objective. The company acquires relevant data, discovers insights from it, categorises the customers based on the insights gained, and tailors their approach for each individual category.

For example, if a software firm realises that small business users and enterprise users utilise their service in different ways, one being concerned about ease of use and cost, whereas the other is more concerned about integrations and security measures. Segmentation would allow for more relevant communication with each customer.

The most effective segmentation involves categories that are measurable and distinct enough to be acted upon. The category that cannot be treated in a different way than others does not provide much value.

Also check: How Do Customer Engagement Strategies Build Real Loyalty?

Types of Customer Segmentation

Businesses may use more than one segmentation technique simultaneously, rather than only using one kind of segmentation.

Demographic Segmentation

This involves grouping people on the basis of age, income, profession, education, or family situation. This method may be effective where there is a product that varies in its attractiveness or price for different groups of customers.

Geographic Segmentation

The segmentation is done based on factors like the country, region, city, climate, etc. Geography is relevant to shipping, language, cost, laws, seasons, and the product being sold.

Psychographic Segmentation

This type of segmentation focuses on the interests, values, lifestyle, attitude, and motivation of customers. Two customers who share common demographic characteristics may have very different reactions due to various reasons.

Behavioural Segmentation

Behavioural segmentation considers the behaviour of the customers. This may include purchase frequency, browsing behaviour, email interaction, product use, shopping basket abandonment, support interaction, and past campaign responses.

Needs-Based Segmentation

Such an approach segments customers based on the problem they wish to solve or the outcome they seek. Such segmentation is especially useful for positioning since the segment relates to the actual needs of the customer instead of some superficial attribute.

Value-Based Segmentation

Customer segmentation can be done based on their economic value – purchase rate, average order value, total value, or growth potential. Such segmentation helps in the allocation of resources.

Firmographic Segmentation

In the case of B2B firms, the firmographics might consist of the industry of the business, its size, sales volume, location, and organisational structure.

How to Segment Customers?

Segmentation must begin with a question, not a spreadsheet. Decide how the segments should help you solve your business problem. This could involve solving a retention problem, prioritising sales prospects, driving repeat business, introducing a new product, or marketing.

Start With an Objective

Having an objective helps you figure out what data matters. For example, if you're trying to drive down churn, purchase history won't be the only factor that matters: you'll have to consider product usage, customer support activities, satisfaction, and renewals.

Collect and Clean Customer Data

Collect data from CRM entries, transaction data, web analytics, product usage data, survey responses, customer support interactions, and campaign interactions. Eliminate duplicates, fix obvious mistakes, and standardise the definition of fields before grouping customers.

Spot Patterns That Matter

Look for features and behaviours linked to the objective. Do not try to build a segment based on the ease of use of a particular data set. Consider if there's any reason why it would matter for your communication, offers, sales efforts, service, or product choices.

Construct Relevant Segments

Establish segments that are easily comprehensible and large enough for action. Very small segments may hinder the management of campaigns, whereas overly broad segments may not generate any difference. Establish a number that you can handle and improve as you learn more.

Experiment and Improve

Try various approaches to your segments and gauge the results against your initial objective. If a segment fails to differ in behaviour or fails to react to a specific approach, it is irrelevant.

How to Ensure That Customer Segments Stay Useful?

The segment should have more meaning than just a label. Explain why this segment is created, who belongs there, what makes it different from others, and what should happen after classifying.

Write down the criteria for your segments so that marketing, sales, and customer service departments use the same definitions. Next, evaluate the segments according to new customer behaviour.

It is also necessary to keep in mind privacy and data quality. Companies must treat customer data responsibly, not collect unnecessary information, and comply with all privacy regulations. Bad quality or outdated data will lead to wrong segmentation and ineffective communication.

Benefits of Customer Segmentation

The benefit of segmentation comes from making customer decision-making more precise.

• First, it might provide relevance in the sense that messages and offers can be formulated on the basis of the characteristics and behaviour of the particular segment rather than generic communication.
• Second, it can facilitate resource allocation, such as sales teams focusing on prioritising accounts in accordance with fit, value, and buying cues, and service teams providing support relevant to customer needs.
• Third, segmentation can help identify patterns hidden by an average customer.
• A company can realise that one segment has an exceptionally high level of repeat purchases, while another is interested but does not convert.
• Finally, segmentation can aid in retaining customers through identifying their reasons for purchase, engagement, or requests for assistance.

Why is Customer Segmentation Important?

The behaviour and expectations of customers do not necessarily match all the time. While a customer who has just found a product will need some education, another one who has been loyal for a while will react positively to loyalty incentives or upgrades that he needs. Sending them the same message can be a mistake.

Segmentation can serve as a common decision-making framework. Rather than talking about what "the customer" needs, it becomes possible to talk about what group of customers is discussed and what information there is on the matter.

Nevertheless, it does not work automatically. Wrong criteria selection, outdated information, unnecessary complexity, and assumptions that are not backed up with data can ruin the effectiveness of customer segmentation.

Customer Segmentation Examples

An e-commerce clothing firm might divide its customer base into first-time shoppers, repeat buyers, and lapsed customers from the previous year. For each of these groups, the firm might send different types of messages, such as onboarding information for the first-time group, early access to certain products for the repeat buyer group, and an appropriate reactivation message for the lapsed group.

A B2B software firm might segment its customer base based on company size and technology environment. An enterprise organisation that uses multiple platforms would be best served by messages about integration, while a small business would prefer simplicity.

A subscription firm could segment its customers based on both value and behavioural attributes. A customer with low usage and high value would trigger a message aimed at preventing cancellation.

These customer segmentation examples help explain how the use of a characteristic depends on a business action.

Must Read: Proactive vs Reactive Customer Service: Which Approach Wins?

Building a Customer Segmentation Strategy

A proper customer segmentation process must have a linkage of four things: the objective, information, segments themselves, and the results of the process. It is important that the team understands what the purpose of each segment is and what difference it will make due to it.

Evaluate performance and not the initial segmentation itself. Customers may switch from one segment to another depending on their needs, financial resources, involvement, and many other factors.

Conclusion

Customer Segmentation breaks down an entire customer base into groups that the business can understand better and serve better. This can be done through the selection of the right criteria, use of valid data, and ensuring that each segment is connected with a specific action.

FAQs

What type of data should be used for segmenting customers?

The most suitable data will vary depending on the objectives of the business. The data can include purchasing habits, browsing behaviour, demographics, geographic data, customers' needs, level of interaction with the business, etc. The data should be precise and reliable.

How many segments should there be in one business?

There is no exact number of segments for all companies, as each business has its own objective. The number of customer segments should allow identifying the differences in the needs of customers and their behaviour while making the marketing process more manageable.

How to know if a customer segment is effective?

A customer segment is considered effective if it is well-defined and can be measured. The segment should be large and distinct from other segments to make it valuable for the business to make decisions regarding its messages and offers.

Can customer segments change over time?

Yes. Customer needs, behaviours, purchasing patterns, and life stages can change. Businesses should regularly review their segments and update them when new data shows that existing groups no longer accurately represent customer behaviour.

What is the difference between segmentation and personalisation?

Segmentation groups customers who share similar characteristics or behaviours, while personalisation tailors an experience to an individual customer. Segmentation can provide the foundation for personalisation by helping businesses understand different customer groups.

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