Customer segmentation is the practice of dividing a customer base into groups of individuals that have similar characteristics relevant to marketing, such as age, gender, interests and spending habits.
Companies using customer segmentation understand that each customer is different so targeting all their customers with one approach isn't effective. Instead, the organization's marketing efforts target specific, smaller groups with messages those consumers find relevant.
The goal of customer segmentation is to reach customers with a more personal message that is of interest to them and leads to more sales or customer conversions. Companies also hope to gain a deeper understanding of their customers' preferences when they examine what each segment finds most valuable. This approach lets them more accurately tailor marketing materials toward a specific segment.
Customer segmentation relies on identifying key differentiators so customers can be divided into groups that can be targeted. Information such as a customer's demographics, geography, psychographic and behavioral tendencies are considered when determining customer segmentation practices.
Segmentation analysis is a crucial component of the customer segmentation process. It involves examining smaller sections of a larger market to identify unique consumer needs within each segment. This process allows businesses to divide their target audience into appropriate segments based on criteria such as demographics, needs, priorities and common interests.
The primary purpose of segmentation analysis is to create subsets of a market that can be used in product development, sales and marketing strategies. By understanding these market segments, companies can develop more targeted and effective marketing campaigns. Demographic, geographic, psychographic and behavioral data are the four most common types of data organizations use for segmentation.
Customer segmentation can be done in several ways. For example, customer groups can be narrowed down to who the customers are and what they do or expanded to include more precise segments -- with each type having more granular factors. The segments an organization uses vary depending on its size and industry, and different segmentation approaches should be used based on these factors.
Examples of customer segments can include the following:
- Demographic segmentation. This includes factors such as age, race, religion, gender, family size, ethnicity, income and education level.
- Geographic segmentation. This encompasses what county, state, city and town the person lives in.
- Psychographic segmentation. This looks at social class, values, interests, lifestyle and personality characteristics.
- Behavioral segmentation. This considers tendencies, habits, spending, product use and desired benefits.
- Technographic segmentation. This covers technology the person uses -- mobile, desktop, software and application use.
- Needs-based segmentation. This includes requirements for a product or service for different customer groups.
In business-to-business (B2B) marketing, companies are concerned with decision-makers' job titles, the industry sector, whether the company is public or private, company size and location, buying patterns and the technology at their disposal, for example.
In business-to-customer (B2C) marketing, companies are concerned with particular customers' profiles, attitudes and lifestyles. They might also be concerned with geographic location. B2C companies that segment customers based on their geographic location can tailor offers based on regional events and preferences. B2C companies can also customize offers based on the predominant languages spoken in each region.
Approaches to B2B customer segmentation include vertical or horizontal alignments. In vertical segmentation, companies select certain industries or job titles that would most likely find their products appealing and then focus marketing efforts on those segments. This approach lets companies offer services that are fine-tuned to particular industries. For example, the needs of the financial services industry are different from those of healthcare. If each segment was offered customized services, adoption and satisfaction might increase.
In horizontal segmentation, companies focus on one job title across a range of industries and organizations. This puts a stronger focus on the needs of a particular job type or role. For example, a focus on chief financial officers can help create new product collateral, website messaging and email newsletters specifically tailored to that role.
Organizations can use the following techniques to segment customers:
- Decide what data to collect and how to gather it. Segment data is collected through either direct or indirect methods. Direct collection involves customer surveys, while indirect methods are insights gained from data that isn't directly obtained but can still aid in understanding potential customers, such as through social listening. Customers can also be segmented using predictive factors.
- Develop methods of data analysis for segmentation. Methods of segmentation and the analysis used should focus primarily on a customer's experience as opposed to only demographic factors.
- Establish effective communication among relevant business units about the segmentation. Customer segments should be organized by buying characteristics. Certain business units, such as customer service or marketing, should avoid having a narrow initial focus.
- Implement applications to effectively deal with the data and respond to the information it provides. An organization should be able to adhere to the new segments effectively while leaving room to broaden or narrow segments over time.
Customer segmentation has several advantages:
- Efficient use of marketing resources. Customer segmentation models help to allocate marketing resources more effectively and maximize cross- and up-selling opportunities.
- More accurate offerings. When a business's marketing campaign uses personalized messages, it's easier to include special offers that encourage customers to buy more products.
- Improved customer service. Customer service is improved as a result of customer personalization. This results in improved customer loyalty and retention. For example, marketing materials sent out using customer segmentation tend to be more valued and appreciated by customers who receive them, as opposed to impersonal brand messaging that doesn't acknowledge purchase history or any kind of customer relationship.
- Enhanced competitiveness. Customer segmentation identifies new and existing products that customers could be interested in and helps businesses improve products to meet customer expectations. These are all factors that keep a business ahead of competitors.
Value-based segmentation evaluates groups of customers in terms of the revenue they generate and the costs of establishing and maintaining relationships with them. This approach identifies the profit potential of each customer group, enabling companies to adjust their sales and marketing budgets accordingly.
Companies can also more effectively manage customers once they're divided into groups that share similar needs. Segmentation lets the business focus on what each kind of customer needs at any given moment. Large, small and niche customer segments can be targeted depending on the company's resources and offerings.
Businesses can follow these steps to create a customer segmentation strategy out of an existing customer base:
- Determine goals for customer segmentation. Use market research to establish customer-focused goals based on buyers' habits, such as if they're likely to make multiple purchases, where they exit during the customer journey and if they engage in a related online community. The development of buyer personas could help in this stage.
- Create customer-focused segmentations. This organizes customers into expected, ideal segments. More potential segments could appear while sifting through data. At this point, it's important to set boundaries for segmentations, such as the number of segments, the sources of data used and resources.
- Prioritize customer segmentations. Segments are organized from largest to smallest or most important to least important or by expected performance measures. This lets an organization begin targeting larger groups, more important or more profitable groups first.
- Collect and organize customer data. Collect data using methods such as customer surveys, social listening and traffic monitoring. Companies can use AI and machine learning tools to help organize customer data.
- Segment customers into groups. With the gathered data, place customers in relevant segments. Each segment should be large enough to still have an impact. Segments should include data such as location, age and product use. Companies can use marketing automation software to define and create customer segments.
- Market to user segments. Create a marketing plan for each segment. It should include the marketing messages, deals and products most valuable to making a customer group feel authentically engaged. Marketing automation software can help configure, schedule and execute campaigns for different segments.
- Check customer segmentation analysis regularly. The market and customers can change, making it important to review segments regularly.
Market segmentation is a marketing strategy that uses well-defined criteria to divide a brand's market share into smaller groups. Each group shares common characteristics that enable the brand to create focused and targeted products, offers and experiences. Customers served by market segmentation campaigns often perceive a brand's messaging and products as tailored to them.
Customer segmentation and market segmentation use similar criteria to create subgroupings. One difference between the two is that customer segmentation focuses on existing customers, while market segmentation focuses on target groups, including prospective customers.
Market segmentation typically divides an entire market to highlight preferred business areas. Customer segmentation includes only customers and seeks to create useful groupings within the segment of people who have already purchased from the company.
Marketing to customer segments involves tailoring strategies to address the unique needs and preferences of specific customer segments. This approach lets businesses create marketing campaigns that improve customer engagement and increase conversion rates.
To effectively market to customer segments, companies should follow these steps:
- Determine goals and establish clear objectives including organizing the customer base, managing targeted communications and identifying top sales prospects.
- Gather data including customer information from sales records, customer surveys and social media analytics and analyze patterns among different customer groups.
- Create buyer personas that represent each customer segment, including demographic characteristics, behavioral details and pain points.
- Develop targeted campaigns that resonate with each segment's needs and pain points.
- Choose appropriate channels to communicate with customer segments through their preferred platforms.
- Focus on segments that are more likely to buy or convert, optimizing marketing.
- Personalize the customer experience through landing pages, emails and support to resonate with specific customer segments and build brand loyalty.
- Continuously refine and update the campaign based on new data, market trends and customer feedback.
Customer segmentation tools help businesses personalize and optimize their sales strategies The latest versions of these tools are incorporating generative AI and machine learning in ways that help businesses in several areas:
- Analyzing large amounts of customer data.
- Improving accuracy with algorithms designed to automatically identify patterns in customer data.
- Providing more accurate analysis of customer segments for more personalized marketing.
When buying customer segmentation software, businesses should look for the following features:
- Data collection and analysis from multiple sources.
- Customizable segmentation options.
- Automation capabilities.
- Real-time updates on customer behavior.
- Integration with other marketing tools.
- Detailed reporting and analytics.
Learn about different customer segmentation methods that are designed to help organizations better identify their customers.