Customer segmentation in marketing
Oluwamayowa G.
Growth and Product Marketing Leader | Expert in driving customer acquisition, revenue growth and market share.
It’s quite common for a business to offer products or services that are used by different groups of people, for different reasons.
For example, an e-commerce store may serve individuals who make small monthly purchases for use in their home, and also serve businesses which make large purchases during holidays to give to its employees.
Because these are two very different customers with different reasons for patronizing this e-commerce store, the same marketing strategies, channels and content are unlikely to have the same results for the both of them.
The best results would be achieved by grouping customers with similar characteristics and traits into the same bucket, and creating marketing strategies for each bucket. This process is what is referred to as customer segmentation.?
It differs from market segmentation, which covers the entire market, as customer segmentation is specific to a business’s existing customers. For example, our e-commerce store may not serve retailers who make regular wholesale purchases. So while that group may appear as a market segment, they would not be considered as a customer segment.?
Benefits of customer segmentation
As we’ve agreed earlier, segmentation is crucial to effective marketing. One of the more popular and effective strategies in marketing these days is personalization, and customer segmentation helps you achieve this at scale.?
By grouping customers with similar characteristics together, you are able to personalize marketing activities for each segment, such as emails with more valuable content to each segment, or landing pages that speak directly to the needs of that segment.?
Another benefit of customer segmentation is that it helps you to further understand what the problems are for your customers, and this insight can help you improve the product experience for each segment.?
A savings app can generally know that its customers use it to save money, but when they create customer segments based on age, they can learn that their younger customers save towards their education, while their older customers save towards buying a new house or car. They can then use this information to seek out partnerships that would help their customer segments achieve their respective goals even faster.
One thing to keep in mind about segments is that they aren’t stagnant.?
Depending on your criteria for segmentation, your customers may move in one way, or back and forth between segments. A business that serves vacation rental owners may choose to segment its customers based on number of properties they own. Customers may either buy more properties and move into another segment, or sell some properties and move into a lower segment.?
So with this in mind, it is important to keep up to date with your customers and ensure that they are in the right segments and are receiving relevant communication.
If the movement between segments is one-way, such as an age-based segment, you’re able to predict what the customer will need next and offer it to them when they need it, increasing the customer lifetime value.
Customer segmentation models
Different types of criteria can be used to create customer segments. These criteria are referred to as customer segmentation models. Let’s run through a couple of popular models below.?
Demographic segmentation: This involves grouping your criteria by who your customer is. This could be their age, gender, income, religion etc. For example, an e-commerce store may segment its customers by gender, so it can highlight specific products in its monthly newsletters.?
Geographic segmentation: This is a model that segments customers based on where they are located. A restaurant chain with multiple outlets may choose to segment its customers by location to where it makes the most revenue and use that insight to decide where to open its next outlet.
Psychographic segmentation: This includes, among other things, the things that your customers value or believe in, and their reasons for using your product. A ride-sharing app may find out through a customer survey that 70% of its users use it primarily because its cheaper than owning their own car, while only 5% use it because they want to meet other people. This insight can help improve product messaging and go-to-market strategies.?
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Behavioural segmentation: This model explores how your customers behave in relation to your product. This can include why what products or services they purchase, and how frequently they purchase them. A company that provides multiple APIs to other businesses may choose to segment its users based on each API, or the number of total API calls made.?
As you can see, there’s so much data that can be used to segment customers. Which then poses the question, how do you get the data you need to segment customers?
An easy way to collect demographic information is during the signup process. Customers can be prompted to provide this information as part of their on-boarding process.?
Businesses can also obtain information directly from customers through surveys, interviews, and feedback.?
Behavioural information can be obtained directly from your product, as well as through third-party product and web analytics tools.
Customer segmentation analysis
After creating your customer segments, you need to compare them with various performance metrics to be able to determine the value of those segments. This is called customer segmentation analysis.?
Typically, common business KPIs are used as these performance metrics, such as number of customers, average revenue per customer, and churn rate.?
A sample scenario: A company that helps tech businesses to recruit developers may choose to segment its customers by industry. By analyzing these segments against the total number of customers, it may reveal that 145 of its 300 clients are in fintech, with only 5 in biotech.?
This analysis can inform the company’s marketing strategy, as they may choose to produce more fintech related content to strengthen their position in that segment, or they may introduce a special discount for biotech companies in order to drive up their customer numbers in that segment.?
Customer segmentation analysis identifies the segments that matter most, and helps to identify loyal customers and at-risk customers.
Tools for Customer segmentation
Typically, any CRM like Salesforce or HubSpot is good enough to create some level of customer segmentation. All you need to do is to be able to add labels to your contacts and pass information from your product to the CRM.?
There are however dedicated tools for customer segmentation like Qualtrics and Twilio Segment, which promise a deeper level of understanding of your customer segments, with advanced analytics and all that fancy stuff.
Summary - and a note of warning
Before I end this article, it is important to note that customer segmentation is not perfect and has its limitations and drawbacks.?
Customer segmentation may oversimplify user behaviour and comes with the risk of ignoring differences within the segments. Using broad demographic segments like gender, for example, may lead to ignoring deeper insights that might explain user behaviours within the segment.?
Regardless, the positives outweigh the negatives, and so I say unto thee: Go forth and segment your customers.?