There’s a good chance that not all of your customers buy from you for the same reason. Customer segmentation helps you identify the intent and buying patterns of specific groups of customers so that you can communicate with them more effectively.
Hyper-personalization is possible only when brands are acutely aware of their customer’s pain points, the decision-making triggers and the ways they interact with the products and this is where customer segmentation comes into the picture.
Importance of Segmenting Your Customers
Businesses segment customers into smaller groups for numerous reasons.
Improve the product
With a deeper understanding of customers’ choices and challenges, comes the clarity to build a product for them and deliver an outstanding customer journey. By segmenting customers, you can gather feedback and introduce features that solve specific problems. Ring sells a line of consumer security products and never misses an opportunity to collect feedback to improve their products:
Improve customer support
Customer preferences can be used to offer a superior support experience. At an age where post-purchase services have become a brand differentiator, this certainly helps you stand out.
Improve customer engagement
When customers feel understood and valued, they tend to stick to a brand. Segmentation and deep personalization improve customer loyalty and engagement along with the net promoter score (NPS).
Improve marketing campaigns
Brands shouldn’t use marketing campaigns to cast a wide net and hope to attract prospects. They have to be strategic in their approach. Apart from segmentation research, insights gathered from segmented groups can help you target qualified buyers and improve the campaign’s ROI.
Identify new opportunities
Successful businesses are incredibly agile in their approach to customer acquisition and portfolio expansion. By using the data from smaller groups of existing customers, you can find gaps in the market and make efforts to stay ahead of the curve.
Key Benefits of Customer Segmentation
Businesses may try to segment customers to meet certain goals, but there are surprise benefits that can come out of this process. According to a McKinsey report, scaled personalization campaigns can achieve a 20% higher customer satisfaction rate in retail and a 20%-30% more engagement rate among employees.
Consumers today have a low tolerance for unoriginal brand messaging so you have to stand out as a business, especially in an oversaturated market. Customer segmentation can help you refine your brand image by understanding how qualified buyers perceive your business. The more aligned you’re with your core segments, the better leads you’ll attract.
You can see one of many success stories of customer segmentation process done right below. Zomato is a food delivery app that is popular among working millennials and Gen Z. They run economic segmentation to offer a personalized experience to their most loyal customers:
By focusing on the spending capabilities of certain groups, you can optimize your price tiers and onboard targeted customers. This way you’ll save money not only in operations but also in sales and marketing.
Customer segmentation analysis helps you identify the marketing and sales channels that work the best for particular groups and improve communication metrics to deliver the final product.
Customer Segmentation Models
To successfully execute customer segmentation, you have to understand the major traits and backgrounds that influence choices.
- Demographic segmentation: Demographics such as age, gender, education, income levels, and marital status are the primary factors considered for segmentation. If your business has diverse customers, this might be a good point to start.
- Geographic segmentation: Businesses that heavily rely on locations use this model to segment people. Country, state, city, district, and even neighborhoods play big roles in purchasing decisions.
- Psychographic segmentation: Now we’re focusing on the internal factors impacting people’s choices. Groups based on shared cultural values, personality traits, idiosyncrasies, and interests can give you a targeted set of high-converting audiences.
- Behavioral segmentation: Behaviors such as impulsiveness, awareness of the brand, and purchase history can be clubbed together to create a separate segmentation model.
Apart from these major ones, factors such as devices used, the ability to use and understand technology, and the value of transactions can be used for hyper-personalized offers.
5 essential customer segmentation strategies
Since customer segmentation relies on various data points, it’s important to have a strategy in place. An effective customer segmentation strategy should help you accelerate implementation and make changes to your existing product or business model.
1. Determine your customer segmentation goals and KPIs
The very first step is to understand your goals. To know what you want to achieve, you need to take a look at the challenges your business is facing right now. Are you struggling to retain your customer base? Is your acquisition cost too high? Does your brand have a strong recall value? Note down the shortcomings and mark the areas that can be improved by segmenting people into groups.
For instance, if you’re selling project management software, you’ll have widely different use cases for millennials and baby boomers. By segmenting customers and prospects into different groups, you can gain precise knowledge and tweak your product accordingly. Saga sells holiday packages specifically to the older generation and their marketing materials promote the relaxed and hassle-free experiences they offer:
Once you know what to achieve, establish the KPIs to measure the performance at the end of the day. The good part is that there’s no fixed guideline to set your goals. Businesses serve in different markets and industries which makes each segmentation challenge unique to that particular company.
2. Identify Pain Points
Identifying why people buy from you or why customers are canceling their memberships should be crucial to your segmentation strategy. By being aware of the pain points, you not only position yourself as a solution-based company but also find new opportunities or segments to serve.
There are three types of customer pain points brands are dealing with today: financial, workflow, and customer support.
Financial pain points cover unsustainable price tiers, the lack of value in relation to money spent, ancillary expenses, and longevity. Workflow pain points included process complications that are unjustified. This can be confusing UX, difficult to implement concepts, or lack of support materials. Finally, if your support is hard to reach, involves a long waiting time, or returns with low-quality solutions, customers might find it difficult to keep using your products. By offering quick and easy solutions, support channels become a brand differentiator in themselves.
You can address the pain points by doing market research. Don’t just rely on customer data from surveys or polls, try having one-on-one conversations with customers and conduct interviews to learn about the issues they are facing.
3. Create Customer Personas
A customer persona is a hypothetical representation of your ideal customer. You can have multiple personas based on the industry, demographics, or the type of products sold.
The traits of your ideal customer should align with your business but it’s difficult to find real people who match your customer personas. That’s why evaluating buyers and nurturing them into ideal customers is important. Reveal by Omniconvert is a product that demystifies customer behaviors across channels and identifies the most profitable ones. You can use the tool to reveal key customer data and inform the strategies that help you nurture relationships and improve customer lifetime value (CLV). Reveal uses RFM segmentation and integrates with popular tools such as Shopify to generate new data on customer interaction. Here’s a snapshot of Reveal at work:
4. Reach out to your segments
Now that you know the pain points of your potential customers and have well-defined personas, it’s time to reach out to people. Manually reaching out to specific segments is a challenging, time-consuming, and error-prone process. For instance, if you’re reaching out via email, you have to not only collect their addresses but also verify them to make sure you’re not emailing to old, inactive inboxes. This is an important step because wrong, irrelevant email addresses can increase your bounce rate and limit your deliverability.
You should use an email verifier tool to trim down your email list so that you reach out to only qualified buyers. Your email should have a short, precise, and click-worthy subject line and preheader text. The email copy should lead with relatable incidents and tones that are dictated by the pain points and segmentation models discussed above. Use short paragraphs to improve readability and always end with one strong call to action. DeFeet knows its customers and does a marvelous job at reaching out to them:
5. Analyze your customer segmentation strategy
Analytics is key to a successful customer segmentation strategy. You have to periodically communicate with sales and support teams to understand how the segmented customers are reacting to the new methods.
You should also ask customers what they think of the deeper level of personalization offered to them. The survey data can be used to iron out any chinks in the armor and soon you’ll have complete visibility over your segmentation strategy.
What once was a luxury is now gradually becoming the standard way to improve and maintain customer relationships. It’s not just enough to have a good product—businesses that segment customers to offer them more personalized experiences will succeed going forward. By following the above steps you too can improve customer retention and drive down marketing costs.
Frequently asked questions about customer segmentation
Successful customer segmentation is done by identifying goals and establishing KPIs, discovering the pain points, creating customer personas, reaching out to segments, and analyzing the metrics to fine-tune the strategy.
A successful customer segmentation strategy has five key steps: determining customer segmentation goals and KPIs, identifying customer pain points, creating customer personas, reaching out to segments, and analyzing strategy metrics.
The 4 customer segments are:
1. Demographics (age, gender, economic status, etc.)
2. Geography (customer location)
3. Behaviors (purchase triggers, brand awareness, etc.)
4. Psychographics (personal traits, cultural values, etc.)
Customer segments are identified by analyzing the marketing segmentation models (demographics, location, behaviors, personality), finding the pain points, creating ideal customer personas, and reaching out to people who share similar traits.