What is customer segmentation?
Customer segmentation is the process of breaking down your customer base into distinct groups based on common characteristics. There are various types of segmentation, so you can choose the one best suited to you as a business based on the information available to you, the resources and the goals you have for your business.
Why should you use customer segmentation?
By gaining a better understanding of your customers, you will be able to better connect with them through personalised communication and improved customer service. The effects of this are extremely valuable, here are the most important benefits of using customer segmentation:
Improve your brand
The best way to improve your brand is with a complete understanding of who uses your product and why. With this knowledge, you can tweak and adapt your product to suit customer requirements.
Embrace new opportunities
Customer segmentation highlights the channels that are your most profitable, which means you can optimise the resources that you have, spending them in ways that will provide the best ROI.
Succeed in your industry
Customer segmentation gives you the opportunity to personalise your customer service, enabling you to get ahead of the competition. As you become more accurate with your marketing, the better the expectations will be that are associated with your brand, meaning you stand out as exemplary in your own industry.
Specialised self-promotion
Customer segmentation will enable you to craft more engaging messages, developing higher-quality relationships between you and your customer base. Better communication means improved customer retention.
Does it work?
Yes! Mailchimp found that customer segmentation led to a higher ‘opened’ email rate (14.31%) and 100.95% more clicks than non-segmented campaigns. Whilst this might be true, only 15% of B2B companies feel they understand their customer base and only 19% say they understand the service that matters the most to their core segments. So when it is used, it works!
When should you use it?
Customer segmentation is most effective when it is maintained and updated on an ongoing basis. This means that as your customer base grows and changes, you can adapt your messaging and campaigns accordingly. The different teams in your business can all use customer segmentation for different purposes. For example, in marketing, you can use it to tailor campaigns to different types of buyers, as well as re-engage customers via targeted paid ads. Your customer support team can use segmentation to identify not just loyal customers, but also customers at risk of losing interest, which your product team can interpret to recognise active vs non-active users.
When should you not use it?
If you provide products or services for a more nuanced and narrower customer base, where your customers are all similar in needs and characteristics, customer segmentation may not be of much benefit to you, as your customers will likely fall into the same category. This undermines the concept of customer segmentation, hence why it may not always provide valuable insights for your business.
The different types of Customer Segmentation:
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Type of Segmentation
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Suited business types
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Required information
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Notes
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Demographic
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B2C, B2B
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Age, gender, income, job type
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A good starting place means you can personalise messaging to professional ‘pain points’. Links to needs-based segmentation once you have gone far enough with data collection.
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Psychographic
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B2C
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Interests, beliefs, personality
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Due to it being based on how people think, this is much harder to use without specialised software. Monitoring online activity is one method, though then it becomes more like behavioural segmentation.
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Geographic
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B2C, B2B
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Location, weather, local customs
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Best for businesses where the location will have a high impact on demand (e.g. clothing). Good for businesses wanting to send messages out over different time zones.
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Behavioural
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B2C, B2B
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Actions a person has taken with your business
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Broadens your understanding of which content your subscribers are interested in, making any consequent messaging you send them
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Value-based
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B2C, B2B
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The financial value of customers (the money they have brought into your business)
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Helps you make the best use of your budget and focus your efforts on more profitable outcomes. Good for businesses looking to maximise ROI.
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Needs-based
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B2C
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Emotional, physical and financial needs
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Assumptions are fairly easy to make. For example, a furniture company can assume it is sensible to sell a low-cost desk to students.
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Technographic
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B2C, B2B
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Type of software customers use
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Enables you to tailor messaging to include the CRM a customer might be using. Can play a major role in your marketing campaigns in improving the ROI.
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Tips for maintaining the benefits of customer segmentation
- Constant communication between departments on your findings is critical, relaying information for other teams to use, whether that be in marketing or product development
- Keep on top of the needs and requirements of your customers, even be ahead when you can, and anticipate changes in consumer behaviour (e.g. plan promotions and offers around Black Friday)
- Finding the right type of segmentation can take time, the best way to do it is to try lots of different types and see which one suits your business best
- Be prepared to invest time and money into it, there is lots of great software out there that can help – use it!
Finally...
Whether you are looking to grow your business, develop your product, tailor your marketing or just gain a better understanding of your audience, customer segmentation is the way to go. Committing time and money towards it may seem daunting at first, but you will be seeing results in no time. Part of the customer segmentation process is constantly updating and amending your data, so whilst you may not be met with instantaneous results, consistently putting time and effort into the process will not go unrewarded.