Customer Segmentation

Knowing who your customers are and their behavioral patterns, understanding how they like to be approached, and what makes them want or not want a particular product or service has become crucial for many of today’s businesses to be considered successful. 

If you are looking for ways to gather more information about your customers and improve upon your business relationship with them, you may want to take a look into what is called the customer segmentation process, which has proven to be successful, time and time again. 

Welcome to our guide to customer segmentation! 

What is customer segmentation? The customer segmentation definition 

Customer segmentation means separating your entire customer base into smaller, easier-to-manage customer segments. Segmentation helps you improve the quality of customer experience and create more effective and personalized communication and offers. 

Customer segmentation reveals essential details about your customers and helps you correctly identify the people that are similar in values, preferences, or buying patterns.

Segmentation can be done in accordance with parameters such as RFM scoring (Recency, Frequency, Monetary value), or their traits, habits, preferences, location, etcetera. 

Employing customer segmentation within your database will at times net you unexpected results that may shift your entire focus on spending your budget more efficiently to get better results per currency spent on marketing.

The Importance of Customer Segmentation

Companies perform customer segmentation because they want to optimize all processes that impact the brand-customer relationship and the customer lifetime value.

By using customer segmentation, your company can:

> Identify the best customers and focus on offering them the best treatment;

> Improve product assortment based on your top customers’ preferences;

> Create better communication, offers, loyalty programs, experiences, and products for your power customers;

> Increase customer engagement by leveraging the best-performing channels;

> Improve and prioritize customer service team’s activity

> Create lookalike audiences based on your top customers and improve the results of acquisition campaigns.

Identifying the best customer segmentation model for your business is one of the most important steps you can take for the healthy development of your company.

Customer segments examples and customer segmentation models 

If you want to benefit from proper SEO (search engine optimization) and to have efficient on-target email and social media campaigns, you have to start thinking about segmenting your audience. Customer segmentation research will help you better understand your audience and enhance the way you think your advertising over. 

Any information you can get about your customers and their segment definition can and will be helpful, as long as it’s legally obtained, with their consent. This information can be used to create a type of customer segmentation. B2C and B2B companies always gain the upper hand by handling their types of segmentation properly, even if the most basic of segmentation is applied (such as direct transactions data).

Other types of valuable data for segmentation involves:

> Segmentation by location

> Segmentation by products or services they purchased

> Segmentation by how customers found you

> Segmentation by the device used

> Segmentation by purchases number

> Segmentation by payment method

Beyond these essential pieces of data, businesses may want to collect more information to fine-tune their customer experiences and further segment customers. We’ll be talking more about this data in the following section: 

Types of customer segmentation 

Common customer segmentation models have different approach ranges that vary between simple and complex. 6 of the most important segmentation types will be included here:

Demographic segmentation

Gender is usually identified to create and deliver content based specifically on that segment. Parental status is also important. It can be derived directly from purchase details, or by intentionally asking for more information from customers.

Recency, frequency, monetary (RFM segmentation)

RFM is a method used to identify and analyze customers based on the Recency of their last purchase, the Frequency of purchases, and the Monetary amount spent. This is useful to identify your High-Value Customers.

High-value customer segmentation (HVCs)

Based on the RFM segmentation, any company will start wanting to know more characteristics about their HVCs, to be able to attract more similar customers.

Customer status segmentation

An indication regarding when was the last time one of your customers made a purchase is also necessary. Active customers are usually those who have made their previous purchases within the last 12 months. Lapsed customers haven’t bought anything for over 12 months.

Behavioral segmentation

Past behaviors tend to indicate future behaviors, such as spending more or less during special events, trusting some specific brands more than others, or any other rather personal reasons.

Psychographic segmentation

This segmentation type involves paying attention to your customer’s attitudes, beliefs, or personalities. All of these should be considered very important for the communication of your brand.

Customer segmentation analysis 

After gathering information about your customer bases, it’s important to know how to use the newfound data to your lasting advantage in marketing segmentation. No improvements can be made without customer segmentation analysis, rendering the information useless. Here is the usual actionable scheme:

1. List all Your Segments

If you have more than a few segments taken into account (and you probably will), listing and organizing them is the first step. Organizing them within your CRM (Customer Relationship Management) is crucial for efficiently running a customer segmentation analysis.

2. Identify Your Analysis Criteria

Defining your criteria for the analysis is very important because it is only then that you’ll start to see actual results and shifts and compare results over time. You can consider the following:

> Segment growth

> Customer Lifetime Value

> Churn rate

> Net Promoter Score

3. Analyze Results

Your KPIs (Key Performance Indicators) must govern your customer analysis. What are your best-performing segments? What to do with them? What is your lowest segment growth? Is it worth doing something about it? Do you have a good or bad churn rate?

These are all questions that need to be answered, and to help you do so, there are plenty of performant software pieces out there. Having the right tools is most important after having a proper CRM, preferably directly connected to a survey platform.

4. Take Action

Once your analysis is done, it’s time to take action.

Customer segmentation strategy

Taking action, as suggested, is professionally called creating a customer segmentation strategy. It, too, has processes and steps you must further undertake:

Defining your customer segmentation end-goals 

The customer segment strategy process should be part of the larger strategy of your company and align with your long-term goals. These goals may vary depending on the size of your business, the industry you’re in, and the kind of customers you want to please. This is why there is no one-size-fits-all approach. You’ll need to adapt your strategies to what your company is currently trying to promote. 

Segmenting your customers according to your channels 

Always strive to know what customers prefer to use for keeping in touch with your business, be it via email, text messages, Facebook, Instagram, Twitter, etc. Also, go for demographic segmentation to know your customers’ age, income, and occupation. Knowing all these will help you create an Ideal Customer Profile and then use it to target your paid advertising campaigns. 

Use the different segments wisely in your entire company 

Your marketing team’s marketing automation efforts will benefit greatly from the customer segmentation analysis. The sales team will also more than likely use them to increase your conversion rate directly. Even the product development team can gain precious insights into what future products or services would be most likely be positively received by your customer database. 

Always be ready to adjust your strategy 

Your customer segments will never remain the same over longer periods. If and when you bring new products or services to the market, you will have to redo your customer segmentation because your customer base will change. Always be sure that you remain relevant and address the correct audience to achieve customer success! 

How to segment customers

Each segmentation model offers you various variables that help you define your segments. 

For demographic segmentation, you could combine gender, income, and marital status to target brides-to-be. 

For behavioral segmentation, you can analyze Recency, Frequency, and monetary values, and identify your new customers that placed high-value orders, a segment that includes your high-potential customers who might become your top customers and brand ambassadors.

To help you decide how to segment customers, here are some questions you must answer before choosing a model and a direction:

What is your goal?

You have to know why you need to segment your customers to choose one model or combine several ones to meet your goals. Are you using segmentation to achieve long-term goals or just to improve sales during the end-of-season campaign?

What segments will help you meet your goal?

Is your goal attracting more customers like your best customers? Your answer might be RFM segmentation. Is your goal increasing sales among engaged young women with incomes above average? Demographics will help you shape your segment.

How will you reach your segments?

After defining your segments, you must find the best ways to approach them, define the customer journey map, and choose the right channels, messages, and timing. Keep in mind where your customers are in their journey, activity, and satisfaction level.

What results did you get with your segmentation?

Look at the results of your marketing, sales, and customer service efforts built on your latest segmentation approach. Did you get close to your goals? You need to evaluate your segmentation strategy and look for tweaks.

Benefits of Customer Segmentation 

There are more benefits of customer segmentation, but the main ones are that customer segmentation directly increases your CLV (Customer Lifetime Value) and your revenue. Paying attention to customers segmentation: 

● Increases precision: more accurate insights and predictions can be found by studying your customer segments. Using automated customer segmentation tools also speeds up the process greatly, thus getting the insights you need in a matter of hours.

● Helps to target: your marketing team will target specific groups with custom-created messages, thus allowing you to align with exactly what your customers need and are looking for. This will increase overall conversions and improve customer loyalty.

● Increases your revenue: customers will instead purchase when they’re delivered exactly what they need and what they want to hear. Segmenting customers and customizing messages will lead to more opened emails, thus increasing your sales.

● Increases your brand awareness: Customizing your content shows that you care about each of your types of customers, creating a more comfortable atmosphere for conversions or repeated purchases. It is evident that brand awareness also has a lot to gain because customers will remember you like that special company. 

Frequently asked questions about customer segmentation

Would you like your clients to stick to your brand? What about increasing your Customer Value? You’re in the right place.

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