What is Customer Segmentation?

March 05, 2021

Customer Segmentation

Customer segmentation is a process that focuses on categorizing your customers and separating them into manageable groups based on specific traits and characteristics, including personality, demographics, income, and other factors. 

Overall, customer segmentation is an essential part of market research, offering a useful set of tools for thinking about and organizing your business’s customer base and your relationships with individual consumers. This guide will walk you through the nuts and bolts of customer segmentation and its key benefits.

What Is Customer Segmentation?

Customer segmentation is all about dividing customers into groups in a way that enables you to personalize your marketing outreach and services to boost sales and ROI. A nice side effect of this process is that your customers and users will likely feel better understood, boosting conversion rates and overall loyalty. So how exactly can you effectively categorize your customer base? 

Types of customer segments

Which segments you’ll use to break down your customer base depends on your business model. For B2B marketing, you’ll likely consider your customers’ particular industries (that is, what they do and sell), regional location, and company size. 

If you’re involved in B2C marketing, the most common segment types are often concerned with demographics, which include gender, age, regional location, marital status, and stage of life. These other segmentation models can also be useful: 

  • Behavioral. The behavioral model tracks your customers’ behavior — what actions do they usually take and how frequently do they perform them? What services or products are they most likely to interact with? And what kind of habits have they formed?
  • Psychographics. This is a fancy word for a psychological model that considers personality, values, and other interests that might not align strictly with demographic data.
  • Geographics. This segmentation model focuses more heavily on where high-performing members of your customer base are living or located, taking into account region, state, city, and town markers. 
  • Technographics. This model takes into account how and how much your customers are using technology, including whether they use apps, mobile devices, and desktops.

This isn’t an exhaustive list of customer segmentation models by any means. Other common types of segmentation include the needs-based model, which examines particular services that specific groups need or want, and the value-based model, which separates customers based on the differing ROIs they offer your company. 

Why Customer Segmentation Matters

Customer segmentation and customer segmentation analysis are a critical part of contemporary market research. By breaking your customer base down into data-rich subsets, segmentation allows you to personalize your marketing efforts, boosting your conversion rate while improving both communication and your product development efforts and enabling cross-team strategizing. 

  • For a clearer picture, here’s a list of some of the main benefits offered by customer segmentation:
  • Understanding your customers on a higher level, leading to more effective personalization and stronger targeted messages. 
  • Fine-tuning your communication channels, creating personalized campaigns that meet audience segments where they’re most likely to be, whether that’s email, radio, social media advertising, or elsewhere. 
  • Improving products and services and identifying fruitful areas and opportunities for expansion. 
  • Maximizing customer relationships, boosting loyalty with targeted content, offers, and interactions. 
  • Honing in on your most profitable users, focusing your energy where it counts. 
  • Using a tailored approach to perform better when it comes to upselling and cross-selling products and services. 
  • Developing responsive, streamlined customer service that anticipates user needs based on their segmented profiles. 

How to Segment Customers

Actually segmenting your customers requires knowing details about their lives, habits, and purchasing patterns. That means you need a solid trove of data before you can begin analyzing those patterns and breaking down your customer base into manageable subsets.

So how can you go about gathering that data? You can capture plenty of valuable information during transactions, including geographical location, products purchased, and other useful demographic info. For more specific information — such as marital status, age, and income — you’ll likely need to turn to other data-gathering methods, including surveys, focus groups, customer interviews, and general research studies. 

How to Perform a Customer Segmentation Analysis

Functionally speaking, customer segmentation is the first step in reaping the rewards of a more data-driven approach to marketing. Once you’ve gathered critical data on your customer base and segmented your customers into the appropriate categories, you’ll need to run a customer segmentation analysis to truly transform your marketing strategies. 

A well-executed customer segmentation analysis will provide your business with a clearer strategy moving forward and help you refine your current approach to marketing and outreach. Although you can choose among several different methods to perform a customer segmentation analysis, let’s take a look at three indispensable steps: 

Step 1: Identify top segments 

This step is the heart and soul of customer segmentation. Essentially, you’ll work to discern who your top-performing segments are and why they’re performing so well. Once you’ve identified these segments, the benefits are obvious: Customers who frequently use your service or make purchases are easier to upsell, and you can also focus outreach efforts on potential customers who fit into this segment. A marketing approach that focuses on these segments will save money and deliver a higher ROI.

Step 2: Make improvements 

One important thing to remember is that customer segmentation is a continuous process. You’ll want to constantly refine your approach and figure out how to expand your customer base in the most effective and financially rewarding way possible. 

Once you’ve determined which segments are your top-performing ones, you’ll want to use that information to improve your products and services, taking advantage of their full appeal. You might discover, for instance, that customers located in a particular region of the country offer a high ROI, even though you haven’t been focusing your advertising in that region. This would be a perfect opportunity to renovate your marketing strategy. 

Step 3: Gather feedback 

Once you’ve identified your top-performing segments and reconsidered your marketing strategy, you can collect additional feedback to further fine-tune your approach. Surveying and listening to your most satisfied and highest performing customers will give you a clearer picture of what you’re doing right and what could still stand to be improved. It can also help you readjust your segmenting to ensure it’s as accurate and effective as possible. The more specific your understanding of your customers’ habits, the more beneficial customer segmentation will be. 

Final Thoughts

Customer segmentation is an essential process that can help maintain the long-term health of your business, and it’s important to keep up with it. Consistently checking in on and reevaluating your segmentation efforts — especially after you’ve updated or substantially altered your product or service — will help your business stay on its toes. Likewise, making sure that your internal sales and marketing teams stay in communication about segmentation best practices will ensure your understanding of your customer base remains clear-eyed profitable.