What is customer segmentation? The customer segmentation definition
To be able to know who your customers are and what are their behavioral patterns, to better understand how they like to be approached, and what makes them want or not want a certain 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.
So what is customer segmentation? Welcome to our guide to customer segmentation!
Customer segmentation means separating your entire customer base into smaller, easier to manage, customer segments. This can be done in accordance with parameters such as an 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. By knowing all of these details about your customers and by correctly identifying the people that are similar in values, preferences, or buying patterns, you can improve the quality of their experience, and create more effective and personalized communication and offers.
Customer segments examples and customer segmentation models
If you want to benefit from proper SEO (search engine optimization), and if you want 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.
To be honest, any information you can get about your customers and their segment definition can and will be useful, 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 useful data for segmentation involves:
- Segmentation by location
- Segmentation by products or service they purchased
- Segmentation by how customers found you
- Segmentation by the device used
- Segmentation by purchases number
- Segmentation by payment method
Beyond these basic 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:
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 last purchase within the last 12 months. Lapsed customers haven’t bought anything for over 12 months.
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.
This segmentation type involves paying attention to your customer’s attitudes, beliefs, or even their 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 when it comes to marketing segmentation. Without customer segmentation analysis, no improvements can be made, 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), which 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 be able to 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 an 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 the age, income, and occupation of your customers. 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 directly increase your conversion rate. Even the product development team can gain precious insights about what future products or services would be most likely to 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 bases will change. Always be sure that you remain relevant and address the correct audience to achieve customer success!
Benefits of Customer Segmentation
To put it simply, 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 software tools also speeds up the process greatly, thus being able to get the insights you need in a matter of hours.
● Helps to target: your marketing team will be able to 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 rather make a 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 obvious that brand awareness also has a lot to gain from this because customers will remember you like that special company.
Short FAQ section
Customer segmentation means separating your entire customer base into smaller, easier to manage, customer segments.
By knowing all of these details about your customers and by correctly identifying the people that are similar in values, preferences, or buying patterns, you can improve the quality of their experience, while increasing your overall revenue.
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
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 information from Party software. Having a CRM can greatly help with your customer segmentation.
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