In this article, we have uncovered the fundamentals of customer segmentation, how it differs from market segmentation, and how to do customer segmentation for your existing customer base.
But first, let’s understand why strategy and better targeting are essential for your business.
The Importance of Strategy and Better Targeting for a Business
Let’s be honest; companies no longer follow guesswork.
A business functions on a strategy that acts as a road map for it to follow until there’s a market shift happening. This strategy outlines the purpose of the business – budget, goals, target market, and mission statement.
It provides a comprehensive roadmap of how a business will establish itself in today’s dynamic marketplace.
With that, a business strategy typically includes a target market on which it needs to focus over time. But why not the market in general?
You see, the market is divided into several levels and types of customers. And identifying the right market mix helps to build lasting relationships with customers, thereby increasing the efficiency of your campaigns and bringing in positive conversions.
Simply put, strategic targeting helps you choose a more engaging section of the market rather than focusing on the generalized one.
Even social media takes market segmentation seriously.
Think about this: Who hasn’t purchased anything from social media they didn’t realize they needed until they saw it on their feed?
What is Customer Segmentation?
Customer segmentation is the process of dividing total customers into small groups based on specific characteristics, demographics, and behavior.
For example, in the B2B industry, companies choose to segment customers based on:
No. of Employees
Whereas, in the B2C industry, companies prefer dividing customers based on their:
Location (Region or country-specific)
Type of device used
Need for Customer Segmentation
Let’s face it; a common sales pitch won’t help you sell to every customer.
Customers are divided by age borders, unique characteristics, and natural behavior, and you can’t simply sell them by telling them they need it.
Instead, you need to convince them that they need it. And to do so, rather than targeting a generalized audience, you segment the pool of customers into individual buyer personas.
Then, you create specific marketing campaigns targeting those individual segments of customers.
That sounds like a perfect technique for achieving targets, right?
Below are some case studies and outcomes of customer segmentation from brands that will vouch for our technique.
#1. Supercharge Your Email Campaigns
Customer segmentation is not limited to retail or virtual stores. It’s deeply embedded into your social media marketing campaigns as well.
For instance, Mailchimp, a popular email automation service provider, surveyed its insights from segmented and unsegmented email lists.
Guess what? These were the key takeaways:
Campaigns run through segmented email lists had over 14% higher open-rate
Over 101% increase in clicks
Lower bounce rate
Lower unsubscribe and spam rates
The results were conclusive that segmented customer lists helped them create and deliver more personalized emails.
#2. Increase Return on Sales
McKinsey conducted a survey in the retail space in Europe. The report concluded that retail outlets that leveraged customer segmentation saw a 3 to 5% increase in sales revenue. But how did they do that?
Through customer segmentation, they determined what each customer was willing to pay (based on region and per capita income). In fact, they used these insights to create competitive pricing for their products.
Moreover, they also focused on targeted promotions, sell-up, and cross-selling strategies for each customer segment.
#3. Explore New Markets
Businesses want to expand, but tapping into a new market blindfolded would make it challenging to find opportunities.
Take this case study on Canon, for example. Canon’s professional photography equipment where highly in demand in its targeted customer segment. However, the company wanted to tap into the low-end digital camera market.
Factually, this could have been Canon’s worst decision if they hadn’t thought this through.
Luckily, they did!
Canon segmented the low-end target market and targeted the age group between 12 and 20.
Although it was an untouched segment by Canon’s competitors, the company launched a marketing campaign that played into children’s interest in photography.
Guess the results?
Canon snagged a 40% market share in the low-end digital camera market within a year of launching its campaign.
Types of Customer Segmentation
The old-school theory says customer segmentation is based on who they are and what they do. However, modern-day research accounts for various types of customer segmentation models:
#1. Demographic Segmentation
Demographics segmentation involves segmenting target audiences based on age, gender, income, marital status, and education.
#2. Behavioral Segmentation
Here you group people based on habits and behaviors, like their frequent actions, product use, the website they visit, and more. Typically, brands use this kind of segmentation to run better ad campaigns at the right time.
Try it out: View a product on amazon (just view). Then try opening your day-to-day apps. There’s a high chance you would see an ad for the same product running in one of your apps.
#3. Psychographic Segmentation
Psychographic segmentation dives deeper into your beliefs. It groups consumers based on psychological characteristics, including personality, habits, beliefs, and interests.
Ideally, brands use this segmentation model when they want to build a deep physical association with the customers. For example, Coca-Cola associated itself with happiness and joy.
#4. Geographic Segmentation
Geographic segmentation means dividing customers by location – country, state, region, city, etc. This is an ideal segmentation when you want to focus or expand your business in a particular region.
#5. Technographic Segmentation
Around 63% of the online traffic comes from smartphones and tablets, while the rest comes from desktops and laptops.
No wonder why this segmentation model is more prevalent in today’s world.
This model divides customers based on tech usage – mobiles, desktops, tablets, apps, software- and other gadgets used to surf the web.
#6. Firmographic Segmentation
The firmographic segmentation model involves creating subgroups simply around the decades or eras your consumers were born.
And it makes sense – someone born in 1980 will be at a different stage of life, with different needs and concerns, than someone born in the 2000s.
#7. Need-Based Segmentation
It’s a common segmentation model used by brands that divide the customer base based on needs. The segmentation begins with a simple question: Who NEEDS your product, and who doesn’t?
#8. Value-Based Segmentation
This segmentation uses reverse psychology, where companies segment customer groups based on the economic or monetary impact they create on the business.
Businesses often confuse the market and customer segmentation, so let’s clear that out for you.
Market vs. Customer Segmentation
While both the terms are often used interchangeably, market and customer segmentation are two different chapters of the same book – Conversions.
Among both models, market segmentation takes the higher road with a broader overview of targets across a market. It involves slicing and dicing the overall market based on general subgroups like age, income, education, habit, and needs.
In B2B settings, market segmentation is based on the company size and revenue.
In contrast, customer segmentation is a rather granular approach focusing on individual customer characteristics.
But the dissection goes deeper to parse customers into various personas.
Ideally, customer segmentation is a flawless approach for marketers to create buyer personas. Because it can help you build an in-depth customer profile.
How to do Customer Segmentation
We have divided the customer segmentation process into five simple steps:
Step 1: Plan Your Customer Segmentation Project
For any business to succeed, planning is a must.
You aren’t going out analyzing ten and thousands of people in one shot. And so, you need to be clear on the process’s objective, scope, and deliverables.
For the most part, at the end of this segmentation process, you would have the following:
A list of top customer segments in your target market
Additional insights into these segments
Individual customers persons within the segment
Step 2: Review Industry Data and Market Analysis
Once you have a plan in action, start with fresh market research. And no, the age-old files on your PC won’t help because that data is outdated.
So, perform thorough market research on industry trends and consumer behaviors.
Try finding answers to subjective questions such as:
The stage will use the perfectly extracted data to determine the customer segment.
To begin with, analyze both qualitative and quantitative data and identify common trends – reasons for purchasing/not purchasing a product, an increase in engagement rate, or other common interests.
Then, evaluate these trends in the context of other factors, including demographics, geography, psychographics, and technographic, to segment your customers into groups.
And that’s it; you can further use visualizations to present this data in an easy-to-understand format to investors and stakeholders.
Let’s now look at some resources that’d help you understand customer segmentation better.
#1. Marketing Customer Analytics, Segmentation, and Targeting
This Udemy course has over 6,000+ registered participants and an excellent rating of 4.4 from 2,000+ students. It’s an all-in-one, self-paced course to learn customer analytics, segmentation, and targeting.
The above course is your go-to choice if you want to use segmentation to boost conversion. Here’s what you’ll learn from this course:
The book constitutes some evidence-based best practices for customer segmentation while staying put to organizational goals. Besides, its all-inclusive self-assessment tool lets you see which customer segmentation areas need attention.
#3. Customer Segmentation – A Complete Guide (Second Edition)
Tanish is a digital marketing geek and a super creative writer. He has been researching, analyzing, and writing about digital marketing for 4 years. Before stepping in to the world of Digital Marketing, he was an engineer. In his free time,… read more
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