Complete Guide to Customer Segmentation

What is Customer Segmentation?

Customer segmentation is a process of classifying or segregating all customers. In this process, customers are segmented under different category or groups based on certain common characteristics. These characteristics are based on various data associated with the customers.

Such grouping helps the businesses to better understand the statistics associated with the customers so that they can craft their product lines and marketing plan as per the identified customer segments.

Customer Segmentation Example

Customer segmentation is not limited to B2C businesses only. It is used by both B2C as well as B2B businesses. Let us try to better understand this with an example for each type of business.

If you are into B2B business, you may want to segment your B2B clients based on certain groups such as size of the company based on Turnover, Number of Employees, Location, etc. This will help you identify some B2B sales trends associated with your customers.

If you are into a B2C business, you may want to segment your customers based on age group, gender, marital status, location, profession, etc.

This process will help you better craft your marketing messaging based on certain demographics of your clients.

Why do we need to segment customers?

Segmentation provides a number of benefits for your business. Some of them are…

    1. Personalized customer experience

Segmentation helps you identify certain common trends among customers in the same segment. These trends can help you uncover certain patterns such as common purchase preferences, behavior, repurchase frequency, etc. Uncovering these critical business insights can help you plan out your inventory strategy, craft personalized marketing campaigns and improve customer experience.

    2. Identify non-relevant customer groups

It helps you identify the groups which you can ignore during your marketing campaigns. For. e.g. if you sell bikes and trying do a marketing campaign for bike accessories of Kawasaki Ninja, then it is obvious that you may want to ignore those set of customers who do not own that particular model of bike. You can avoid spamming the mail boxes of other people who might not be interested in such products, it will also keep your marketing costs in control.

    3. Better conversion ratio

If you are crafting a personalized marketing campaign, it is highly likely that customer interest will definitely resonate with your campaign. This in turn results in better conversion. For e.g. If you are trying to cross sell bike accessories used in long rides, to a customer who likes going on long ride, then it is highly likely that such customer may convert faster than the ones who do not prefer long rides.

Various types of customer segmentation techniques

There are a number of segmentation techniques. Some of the popular ones among them are…

    1. Demographic Segmentation

In this approach, the customers are segmented based on their demographic attributes such as age group, gender, marital status, education, etc.

    2. Geographic Segmentation

In this approach, the customers are segmented based on geo specific attributes such as the locality where they live, city tiers, climatic conditions of the geo location, etc.

    3. Psychographic Segmentation

In this approach, the customers are segmented based on their psychographic attributes such as their lifestyle and living, their interest, hobbies, their personal opinions, values, etc.

    4. Behavioral Segmentation

In this approach, the customers are divided into segments based on their behavior while interacting with your brand. For e.g. their usage behavior, their purchase frequency, their engagement with your brand on social media, their sentiment while on calls or emails, etc.

How to effectively segment customers?

   1. Identify the segmentation attributes

To start with customer segmentation process, start by identifying the customer attributes which are important and relevant for your business context. For e.g. If you are an educational institution, then you might be interested knowing the class in which the students might be studying, the age groups, their hobbies and interests, etc.

   2. Gather data points

Once you have identified the relevant attributes which you want to use, start gathering the data for these attributes. If you already have such data, then it’s good, otherwise you may be required to spend some additional time and effort in gathering these data. Depending upon the type of your business you may choose different ways of capturing data such as surveys, phone calls, secondary market research, etc.

You may need to use a good CRM software or spreadsheets to capture this data in a structured format. Additionally, you may include this as a standard operating procedure to document these attributes against your customer profile for future. You can do so by adding custom fields in your CRM tool to capture such additional attributes.

   3. Segment the customers using the defined attributes.

Once the data is ready, you can start segmenting your customers based on various attributes identified in earlier steps. If you use a CRM tool to store customer data, then it is a good practice to use Tags or Labels for segmentation. You can add tags to the customers based on the identified groups to reference and use them later.

   4. Craft business strategy based on the segmented groups

While grouping, you may realize some groups have very thin numbers of customers. These are the groups which you may safely ignore. Analyze your data to identify the groups with a sizable number of customers to craft your business strategy around such focused groups. The segmented groups can be used not just to devise marketing campaigns but can also be used in devising your overall business strategy which may include product development, financial allocations, inventory planning, etc.

I hope this article gave you a good understanding about customer segmentation. I look forward to hearing from you.