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 who 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, etc.
Employing customer segmentation within your database will deliver unexpected results that may shift your entire focus on spending your budget more efficiently to get better results per currency spent on marketing.
Customer Segmentation Importance and Benefits
If you’re wondering why you should segment your customers, the answer is simple. By not looking into segmented customer data, you’re missing out on a goldmine of conversions and revenue opportunities from your target market and beyond.
We’ll briefly explain the importance of customer segmentation and why you should start treating your customers differently in all the possible marketing touchpoints.
Know Who Your Customers Are
First of all, segmentation helps you find out who your customers are and the most relevant types of customers.
You’ll get to compare segments with one another and see where most of your sales are coming from. This will make it easier for you to dig into each segment more and create customer personas based on the statistics that you have.
Improve Your Messaging
Then, having the right segments and personas defined helps you speak their language. This way, your marketing messages will be much more persuasive.
Let’s say that one of your personas for your natural therapy products is the 50+ lady living in the countryside who believes in natural cures.
You’ll target her with a different message and on a different channel than the ones you’ll use to reach a young mother living in the big city. Different lifestyles, different habits, different channels and messages.
Craft Personalized Campaigns and Ads
Also, proper segmentation gives you a lot of room for personalization. Using the right tools, you can personalize the offers, the messages, the ads, the landing pages, and so on.
Ultimately, all these steps will lead to more conversions, more revenue, and a better retention rate. Plus, they can even contribute to an improved customer satisfaction rate.
When you show your customers that you care about their specific case, they’re much more likely to return and become loyal.
Types of Segmentation Variables
Segmentation variables fall into a few big categories, including demographic, geographic, psychographic, and behavioral data.
This one is based on variables such as gender, age, marital status, education, occupation, income, family size, etc.
Based on demographic data that you have about your customers, you’ll be able to target them with different products and offers based on their gender and age.
This type of segmentation is essential in fashion, cosmetics, and even electronics because the needs and preferences of your customers can be very different according to their age and gender.
Most e-commerce analytics tools have predefined reports for these segments. But you can take things up a notch by creating custom reports that are even more relevant to your business.
Such a custom report based on demographic data can be something like “women between 30-40 with a high income”.
This method means looking at clusters based on where your customers are located: urban vs rural, specific cities, cities grouped by the number of inhabitants, international customers, etc.
This can help you refine your existing segments, turning the example above into two segments:
- “women between 30-40 with a high income, who live in cities with more than 300.000 inhabitants”
- “women between 30-40 with a high income who live in cities with less than 3000.000 inhabitants”.
If you have an online business based on geographical segmentation, you can display personalized testimonials.
By showing visitors from a specific city or area the opinion of a current customer in their area, you will increase their trust and likelihood to purchase from you.
This one looks at the lifestyle of your customers, their social class, and personality traits.
An example of psychographic segmentation (with a demographic basis) is the generations known as millennials, boomers, or X, Y, and Z.
Usually, when we talk about these generations, the demographics matter less than the psychographics and behavioral aspects that they have in common.
Let’s say you sell electronics and you have a brand new device in your inventory. The first ones to break the news are the customers in your “early adopters” segment because they always search for the newest products.
And lastly, this is a way of segmenting your customers based on the way they use your product, how often they buy it, the reasons why they buy it, and the perceived value of your brand.
Behavioral segmentation also sheds some light on your consumer segmentation and the relation between your brand, product, or service and the people who actually use it, who can be different from those who make the purchase decision.
Based on their behavior, you could segment your e-commerce customers into clusters such as frequent buyers, heavy users, light users, occasional buyers, etc.
This will help you create tailored offers for them, knowing how often or how much of your product they usually buy and use.
Now that you’ve defined your potential segments based on demographic, geographic, behavioral, and psychographic aspects, you can build your customer segmentation strategy.
Proper customer segmentation starts with deciding on the data points that you want to collect and how you will collect it.
This is based on the primary segments that you’ll want to have.
Also, this first step will make it easier for you to choose the most relevant option out of all the potential segmentation models you could work with.
Then, the next step is the actual gathering of data.
The more data, the more data types, and the more sources you have, the better.
Just start with what you have, and try to identify potential new ways and tools for segmentation as you get more experienced at this.
After you’ve collected sufficient data, you will start defining clearer segments and even more advanced ones.
The trick here is to focus on segment relevance.
This can be determined based on segment size and value.
Looking at segment size will help you find and analyze information such as where most of your customers live, to notice trends, or whether the marketing campaigns in the past have had any impact on the segments they were targeting.
Segment value will tell you how much revenue your business is getting from a specific group of customers.
Don’t be surprised if you see that the biggest segment doesn’t also have the biggest value.
Based on segment size and value, you can prioritize your resources in your next marketing campaigns.
The final step of your customer segmentation strategy, after looking into the numbers, is making marketing and business decisions based on the insights you have.
Thanks to the segmentation model above, you can optimize your marketing strategy and improve customer retention.
Types of Data Needed for Customer Segmentation
Gather Quantitative Data
If you’re working for an e-commerce business, you can start doing a thorough analysis of your Google Analytics account and identify some relevant segments.
You can start with basic demographic segmentation by age, gender, marital status, and geographical location and then move to behavioral variables.
You can create custom segments based on other KPIs, such as your business costs.
For example, if you offer free shipping, but it costs you more to ship in certain geographical areas, then you can group the customers and visitors in those areas in specific segments.
After an analysis of their specific LTV, you can decide whether adding a shipping fee for some of your geographic segments is a good idea or not.
A smarter level of segmentation is based on intersecting various variables with the information you store about your visitors and customers and then generating a more complex segmentation analysis.
For example, you can create a segment only with the visitors who have seen a certain campaign landing page or have reached the middle of the funnel but didn’t convert.
This will help you target them accordingly to persuade them to take the next step.
Look into Qualitative Data
You can gather it through customer surveys, by reading product or company reviews, or even by listening to call center recordings.
Qualitative data will take your insights to a more refined level.
In most cases, they’re a great source of information based on meeting customers’ expectations and the extent to which you are meeting them.
Looking into qualitative data can tell you whether a specific segment considers your product too expensive or has a specific need that your product solves, which may be different from what you’re advertising now.
It’s safe to say that analyzing qualitative data is an effective way of measuring customer success and can impact not just your marketing segmentation but your entire business strategy.
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 customer’s 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 how your customer database would positively receive future products or services.
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 must redo your customer segmentation because your customer base will change.
Always ensure you remain relevant and address the correct audience to achieve customer success!
A type of segmentation worth doing by any business is one based on the Recency, Frequency, and Monetary Value of its customers.
We’ve discussed RFM and why it’s important to group your customers based on how recently their last order is, how frequently they order, and how much they spend.
By analyzing your customers based on the RFM model, you could realize who the 20% of the customers who bring you 80% of the revenue are.
Once you know what your VIP segment looks like (the segmentation according to the monetary value), you can address those customers differently, maybe more personalized or with tailored offers.
Then, you can go and look for other defining characteristics of the VIP customers. You’ll be able to use those traits to draft an extended audience that fits the profile and that you can target in order to expand the pool of top revenue customers.
Don’t Overcomplicate Your Segments
As you start experimenting and creating your first customer segments, you might find yourself attracted by the idea of cross-checking different variables and hypotheses and creating an enormous number of potential groups.
However, creating segments that are too narrow or simply provide information that you can’t use is just a waste of resources.
Be creative, but don’t force it. Just focus on what actionable and impactful insights that you can get from a segment that is big enough to matter.
Effective data management is an important aspect to keep in mind when you start segmenting your customer information. Otherwise, you’ll just end up with reports crowded with small, irrelevant segments, and your actions won’t have a real impact.
Is B2B Segmentation Different?
Segmentation is used in B2B just as it is in B2C.
The main differences are the variables you’ll consider when creating the categories you want to reach.
For example, B2B customer segmentation usually takes into consideration job titles.
In this case, if you sell software, you will draft your segments based on the job description – CTO, IT Managers, or Tech leads could be some of your segments.
To further refine them, you can give a score to each job title according to the decision-making power that each segment has.
So you know who you should try to reach prioritarily.
When you’re targeting businesses, your segments will consider the size of the business, the estimated or reported yearly turnover, the business location, or even how the decision-making process happens.
But it’s not just about the Whats and the Whos.
The timing is also important.
For example, some companies have a limited timeframe for contracting new services.
In this case, you can segment the businesses you want to target based on how often you have a selling opportunity window with them, such as at the beginning of each business quarter or year.
If precision is the lock keeping you away from profits, then customer segmentation is the key to opening that lock.
Understanding your customer segments opens you to heightened precision, targeted marketing, increased revenue, and amplified brand awareness.
Embrace customer segmentation, and precision becomes your advantage.
Then check out Omniconvert Reveal – the first Customer Intelligence platform built with Customer Lifetime Value in mind!
Reveal allows you to create RFM segments that update automatically, enabling you to connect with your customers on a level that transforms casual transactions into lifelong partnerships.
What Is Meant by Customer Segmentation?
Customer segmentation means separating your entire customer base into smaller, easier-to-manage customer segments.
What Is the Main Purpose of Customer Segmentation?
By knowing all of these details about your customers and correctly identifying the people with similar values, preferences, or buying patterns, you can improve the quality of their experience while increasing your overall revenue.
What Are the Main Customer Segments?
The main customer segmentation models are derived from:
– Demographic analysis
– Recency, Frequency, monetary (RFM) analysis
– High-value customer (HVC) analysis
– Customer status analysis
– Behavioral analysis
– Psychographic analysis
How Is Customer Segmentation Done?
Customer segmentation is done by collecting as much information as possible about your clients to fine-tune your customer data. This can be done through many means, such as direct surveys or gathering purchase history data. Having a CRM can greatly help with your customer segmentation.
What Are the 4 Types of Customer Segmentation?
The four most frequently used types of customer segmentation are: demographic, geographic, psychographic, and behavioral. Companies use one segmentation type or combine them to identify their focus for marketing, sales, and customer service efforts and initiatives.
What Are the Types of Customer Segmentation?
The most common types of customer segmentation are behavioral, demographic, geographic, and psychographic. Companies combine multiple strategies to help them improve the customer experience and increase their lifetime value. Whatever method you choose, make sure you validate it and adjust it to help you reach your goals.
What Is a Customer Segment Example?
Let’s say you want to use RFM segmentation to identify your most valuable customers. You’re going to give a score for Recency, Frequency, and monetary to everyone in your customer base. The people with the highest RFM score are your top customers or your Soulmates, according to our CVO methodology.
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