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What Is Customer Segmentation?

Jordan Beier
Jordan Beier

Improve the efficiency and focus of every department in your business with customer segmentation.

  • Businesses often struggle to deliver a focused message that resonates with each unique customer.
  • Dividing the audience into segments helps personalize every customer journey through differentiated messaging.
  • Market differentiation targets the right consumers with the right messages to elevate your brand position.
  • This article is for small business owners and marketing professionals who want to learn how they can acquire new customers and improve brand loyalty with customer segmentation.

Your business serves a wide range of customers with unique interests and needs. One message will not appeal to everyone, but businesses cannot personalize marketing campaigns for each customer. Instead, marketers group their customers into segments. Customer segmentation allows businesses to prioritize and engage with their most important customers through marketing differentiation. 

What is customer segmentation?

Customer segmentation is the division of an audience into targeted groups with shared buying characteristics. Each customer segment purchases your product to fulfill the same needs and often communicates through similar channels. The drivers behind a customer purchase shapes product, sales and marketing decisions. Personalizing your message can have a huge impact on your bottom line, as customers are 75% more likely to buy from businesses that deliver targeted marketing.

Customer segments can be binary and wide – for example, customers who are subscribed to an email newsletter, and those who are not. They can also be focused and narrow – splitting the single and married subscribers, for example. Segments give context to a customer base, and that context explains how segments of an audience can best be engaged.

 

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Data from the above example of newsletter subscribers might indicate a communication disconnect. Perhaps unmarried subscribers are likely to make multiple purchases, but married subscribers rarely complete a second digital transaction. That data would suggest that a new strategy might be better to convert those married subscribers.

Michael Solomon, professor of marketing at Saint Joseph's University and author of the upcoming The New Chameleons: How to Connect with Consumers Who Defy Categorization, suggests current marketing trends are adapting to search for narrower, more accurate segments.  

"When you think about media, with the exception of the Super Bowl and Olympics, you'll never have a huge number of people tuning in to the same thing," Solomon told Business News Daily. "Consumers don't really want to be hemmed into these categories anymore."

Ideally, your marketing team creates a plan that optimizes engagement to every individual as their own segment. The best plans pinpoint your best customers and personalize their customer journeys as much as possible.

"You have to choose your sweet spot if you're a small business and really figure out who is your ideal customer," Solomon said.

Key takeaway: Dividing your target audience into groups – customer segments – grants insight into every aspect of your operation. Customer segmentation helps businesses earn greater market share, identify their best customers, and then reach those customers through their most effective channels. 

Why should you segment your customers?

Proper customer segmentation increases revenue through differentiation, according to Steffen Schebesta, CEO of Sendinblue.

"Segmentation and personalization go hand in hand," Schebesta said. "You want to make sure you create segments that are relevant and actually different from one another."

Businesses that tailor their offerings to customer segments achieve 10% higher growth rates than those that fail to personalize their messaging. Segments identify the best customers and where they are most accessible, and they can always scale in scope as your business grows. Marketing, sales, product development and customer service teams can all hone their processes through differentiation driven by customer segment data.

Messaging

A focused message is not static. It always retains your brand voice but is tailored to resonate with different customers. Ideal market differentiation stands out because only your business can deliver that exact message to a customer.

Beyond the wording of the message, differentiation guides its full delivery. Customer segments inform which marketing channels should be prioritized for each group. Certain customer segments may never see an email, but they always engage with your Facebook posts. Segments that engage with one channel most may be driven to purchase a specific color, signaling that any channel-specific marketing should highlight that color.

Product development

Product development teams can tailor the product to better suit customer desires. If their most profitable segment purchases for one feature, the product development team can enhance or prioritize that feature to expand its largest revenue market.

More profitable leads

Some segments don't provide enough revenue to offset their required resource investment. Sales and marketing teams can shift their focus to more profitable sectors, cutting back on costs and increasing profit.

Customer loyalty

Your customer service team can leverage a deeper understanding of your customers to provide assistance linked to their specific pain points. Improving the customer experience will promote brand loyalty and overall customer satisfaction.

Discovery of new customers

Research might offer surprising results. A feature that was an afterthought for you might be the largest factor in purchase across several segments. New segments may emerge as loyal customers who were not the intended audience of the product, which could redirect your entire business in a more profitable direction.

Experimentation

Experimenting with different strategies could either drive away customers or generate record revenue. Friendlier email subject lines or more targeted push notifications could improve brand loyalty or drive recipients to the "unsubscribe" button. Rather than risk these changes over your entire audience, you can implement them across smaller segments. A sweeping overhaul will rarely succeed everywhere, but improvements in multiple segments will enhance overall efficiency.

Precise forecasting

Studying your target audience allows you and your other analysts to better forecast upcoming market trends. This enables more precise planning that wouldn't have been possible without research-backed confidence.

Key takeaway: Customer segmentation differentiates your brand in the marketplace. Segments will help your sales team engage stronger leads, inform your customer service team on how to enhance brand loyalty, and deliver a focused company message to your target audience.

What are the types of customer segmentation?

All customer segments can be categorized into five major groups. Consider these the guiding factors of any audience: the who, what, when, where and why.

Who: Demographic (B2C) / Firmographic (B2B)

Demographics provide basic customer identifiers – simple snapshots of a consumer through their individual, factual attributes. Although not the sole indicator of buying interest, demographics are the foundational segmentations that you will always use. They define your target market in the broadest sense. Common demographic attributes include occupation, age, gender, income, ethnicity and education level.

Companies specializing in B2B sales replace individual demographics with company firmographics. Firmographic data covers the same concept – the core attributes of a company, such as its industry, number of employees, or revenue.

Where: Geographic

Geography is sometimes considered a demographic component, but experts often analyze it separately because of its many subdivisions. Every business will be limited in the geography it can serve, but location can often lead to unique products that could not exist elsewhere. Climate and local customs govern what products consumers need, and seasonal changes can inspire sales and special opportunities. Federal laws and responses to public threats such as COVID-19 can also alter buying habits and consumer practices.  

What and when: Behavioral

Behavioral segments define what customers do with your product and when they use or read about it. Marketers are especially interested in what a customer is doing when they see an advertisement and how they interact with a brand. Data indicating customer behavior includes their engagement rates across multiple marketing channels and social media interactions. Several subdivisions dive further into specific patterns.

Transactional behavior measures what a customer purchases, and where that purchase occurs. Loyalty programs and customer feedback measure the drivers of repeat purchases. Marketers evaluate these transactional behaviors to determine where different audience segments communicate with the brand, be that in person, online or on social media.

Technologic segments track customers' behavior when they are using those online platforms. Website analytics can report how long a customer spends on your website, when they access it, if they are a new or first-time visitor, and if any other website served as a referral agent.

All behavioral segments provide a more complete picture of the customer journey. Whether or not a consumer makes a purchase, this information can help you tailor your brand's message and product to align with consumers' expect.

Why: Psychographic

Behavioral segments prompt more questions than they answer. Psychographic segments attempt to answer the "why" behind those questions.

All other segment data is rooted in fact. These data points create the outline of your buyer persona. Emotion and feeling define psychographics and provide the color to that image, giving your business the opportunity to inject personality into its messaging. Psychographics consider the lifestyle of a consumer, the values and opinions that inform their decisions. They are the personalization of the data you gather – how you can connect your brand with the people of your audience, not just their statistics.   

Key takeaway: The four primary categories of customer segmentations are demographic, geographic, behavioral and psychographic segments. Decide which combination of those categories will create the best customer segments for your process.

How to define your customer segments

One of the most difficult elements of customer segmentation is to select which data from a large set will create the most useful segments. Segments are researched through questions, which often stem from your overall marketing plan. Certain strategies will help you focus those questions and ensure the effectiveness of your segmentation process.    

1. Perform a product analysis.

Assess your product. Define its function, target audience and unique selling points. You should already have an idea of who will purchase it and why, but a more detailed analysis will provide more specific segments. Consider a SWOT analysis to fully explore your market share and branding opportunities. 

Solomon suggests using the market as an impetus for creating a product. "Identify an unmet need that people you can reach [have], and then work backwards to develop the offering that's going to fit their needs."

2. Craft your buyer persona.

Create a buyer persona with as many specifics as possible to guide all your segmentation questions. Do any groups among your audience already fit its description? Reconsider the purpose and messaging of your product if you find the original persona is not representative of your customer segments.

Supplement your buyer persona with additional targets. Ask questions and write several hypotheses. Who else benefits from your product? On what social media pages do most customers see your product? Which channels provide the highest engagement rates? Use the variables to guide the data you collect and the segments you expect to develop.

3. Collect market data.

Leverage the four types of customer segments to create detailed customer profiles. Combine public records and general research of market categories with customer profiles and purchasing information you already have to compare demographics and geography. Conduct surveys, focus groups and interviews to ascertain behavioral and psychographic data.

4. Compile segments.

Compile your data into the segments. The original hypotheses should serve as a guide to find relevant differentiating factors. Segments should be organized by buying characteristics – the drivers that most influence a sale among those groups, and always actionable elements you can incorporate into your marketing plan.

Avoid too narrow of an initial focus; start broad. You can focus and increase your segments when you have the time and staff to study those micro purchasing decisions.

5. Focus on your current customers.

All of this actionable data will leave you with a storm of possibilities for how to acquire new customers and, hopefully, even more measurable questions to address next in your segmentation research. Before focusing on those new possibilities, remember to account for the lifetime value of the customers you already have.

"One of the biggest mistakes a lot of companies make is that it's much more expensive to acquire a new customer than to keep an old one," Solomon said. "If I acquire a customer, it's not just what he or she is going to buy from me today, but what they will buy over a lifetime."

Key takeaway: Create precise customer segments with guiding factors such as product analyses and buyer personas. Look ahead for opportunities to focus your segments further.

Image Credit: fizkes / Getty Images
Jordan Beier
Jordan Beier
Business News Daily Staff
Jordan covers marketing, social, and technology for business.com and Business News Daily as a junior writer based in New York City. He graduated from Tulane University with a bachelor's in marketing, and he still misses that New Orleans cooking.