Customer segmentation is the practice of dividing a customer base into groups of individuals that are similar in specific ways relevant to marketing, such as age, gender, interests and spending habits.
Companies employing customer segmentation operate under the fact that every customer is different and that their marketing efforts would be better served if they target specific, smaller groups with messages that those consumers would find relevant and lead them to buy something. Companies also hope to gain a deeper understanding of their customers' preferences and needs with the idea of discovering what each segment finds most valuable to more accurately tailor marketing materials toward that segment.
Customer segmentation relies on identifying key differentiators that divide customers into groups that can be targeted. Information such as a customers' demographics (age, race, religion, gender, family size, ethnicity, income, education level), geography (where they live and work), psychographic (social class, lifestyle and personality characteristics) and behavioral (spending, consumption, usage and desired benefits) tendencies are taken into account when determining customer segmentation practices.
Customer segmentation procedures
Customer segmentation, also called consumer segmentation or client segmentation, procedures include:
- Deciding what data will be collected and how it will be gathered
- Collecting data and integrating data from various sources
- Developing methods of data analysis for segmentation
- Establishing effective communication among relevant business units (such as marketing and customer service) about the segmentation
- Implementing applications to effectively deal with the data and respond to the information it provides
Benefits of customer segmentation
By enabling companies to target specific groups of customers, a customer segmentation model allows for the effective allocation of marketing resources and the maximization of cross- and up-selling opportunities. When a group of customers is sent personalized messages as part of a marketing mix that is designed around their needs, it's easier for companies to send those customers special offers meant to encourage them to buy more products. Customer segmentation can also improve customer service and assist in customer loyalty and retention. As a by-product of its personalized nature, marketing materials sent out using customer segmentation tend to be more valued and appreciated by the customer who receives them as opposed to impersonal brand messaging that doesn't acknowledge purchase history or any kind of customer relationship.
Other benefits of customer segmentation include staying a step ahead of competitors in specific sections of the market and identifying new products that existing or potential customers could be interested in or improving products to meet customer expectations.
Importance of customer segmentation
Not only do companies strive to divide their customers into measurable segments according to their needs, behaviors or demographics but they also aim to determine the profit potential of each segment by analyzing its revenue and cost impacts. Value-based segmentation evaluates groups of customers in terms of the revenue they generate and the costs of establishing and maintaining relationships with them. It also helps companies determine which segments are the most and least profitable so that they can adjust their marketing budgets accordingly.
Customer segmentation can have a great effect on customer management in that, by dividing customers into different groups that share similar needs, the company can market to each group differently and focus on what each kind of customer needs at any given moment. Large or small, niche customer segments can be targeted depending on the company's resources or needs.
In B2B marketing, companies are concerned with decision-makers' job titles, the industry sector, whether the company is public or private, its size, location, buying patterns and their technology at their disposal, for example.
In B2C marketing, companies are concerned with particular customers' profiles, attitudes and lifestyles. B2C companies may also be concerned with geographic location. B2C companies who 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 likely find their products appealing and then focus marketing efforts on those segments that they feel are most ready to buy. The benefit of vertical segmentation is that companies can offer services that are fine-tuned to particular industries. The needs of the financial services industry are different from those of the healthcare industry. If each segment was offered services customized to that industry, adoption and satisfaction might increase.
In horizontal segmentation, companies simply focus on one job title across a wide range of industries and organizations. The benefit of horizontal segmentation is a stronger focus on the needs of particular job titles or job roles. For example, a focus on Chief Financial Officers (CFO) can create product collateral, website messaging and email newsletters specifically tailored to that role.
Customer segmentation vs. market segmentation
Companies can use marketing automation software to define and create customer segments. The customer segments can be based on demographic data, psychographic data and activity-based data such as actions that users took on a website. Companies use marketing automation software to configure, schedule and execute campaigns for particular customer segments.
Customer segmentation is different from market segmentation. An example of market segmentation is grouping customers by the products or services they purchase. A company may perform market segmentation based on distinct lines of business such as software, professional services and training. The company can then allocate resources to each market segment and employ separate marketing and advertising activities to each.
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JANIFEST
Segmenting your market can radically increase your profits.
How do you know your product or service is really hitting the mark with all of your customers? While some of your customers find a new product feature delightful, others may detest it.
After all, you may have thousands, even millions of customers and they're all different, with often very different preferences, tastes and thoughts.
Market segmentation can help you to divide your customer base into groups of people with similar desires. This means that you can tune your product, services and marketing strategy to meet each segment's specific requirements.
In this article, we'll take a deeper look at market segmentation, as well as the benefits of using it, and how you can apply it to your organization.
Market Segmentation: Definition and Benefits
Market segmentation is the process of dividing your target market into clearly defined subgroups of consumers who have common charactistics and priorities. When you identify these segments, you can tailor your marketing strategy so you are better able to meet your customer's wants and needs.
This approach enables you to focus your marketing and sales efforts where they're most likely to pay off, thus maximizing your return on investment. Tailoring products and services to market segments can also help to increase customer loyalty and engagement.
Even if you sell the same basic product to all customers, you can use market segmentation to develop packages of products or services that are tailored to each group that you identify.
In many cases, marketers intuitively understand who their subgroups are. However, a formal analysis is useful to ensure that you don't overlook an important segment – particularly as products develop over time.
Market Segmentation: An Example
A fitness center, with thousands of customers, wants to improve it's marketing strategy and product offering. It begins by analyzing it's customer base using market segmentation.
The fitness center already knows that its daytime users are mainly parents and retirees. To appeal to parents, it could advertise family-friendly facilities on billboards, leaflets or targeted websites.
The fitness center also explores how it can improve its product offering to meet the needs of its parent customer base. One option could be to offer childcare services and fitness activities for older children while their parents work out. It also considers offering a reduced price for customers belonging to this category in the afternoons, to boost attendance during the quieter period of the day.
Another customer segment identified by the fitness center is retirees. These customers have entirely different expectations and needs.
To meet the needs of this segment, the center considers employing personal trainers who specialize in helping older adults keep fit, or running special exercise classes during the day.
These new products could then be advertised on channels that older customers tend to prefer, such as the radio, local newspapers, or targeted websites and social media groups. The fitness center also considers offering lower-priced packages to encourage older people to visit the center outside of peak times.
Finally, the fitness center considers how to tailor its offering to its evening crowd. Generally, these include busy professionals, who want to attend outside of working hours.
The fitness center could showcase cutting-edge machines that might interest these customers, or it could make more personal trainers available in the evenings to customize workouts.
Marketing and promotions could then be sent to customers on targeted channels, such as text, social media, or the web. These activities would significantly boost the fitness center's profits, since the number of people using the clubs tends to increase in the evening.
Types of Market Segmentation
Typically, markets are segmented in four main ways:
Geographical
This involves tailoring products or marketing activity by customer location. For example by your customers' country, language, region, state, city, or zipcode.
Demographic
This is often the most common form of segmentation as it focuses on basic customer demographics, such as age, gender, occupation, income, or ethnicity.
Psychographic
This type of data is often harder to collect, as it deals with customer emotions and feelings. However, it can add valuable insight into your customers' motives and preferences.
Psychographic segmentation focuses on things like lifestyle, values, hobbies, or interests.
Behavioral
This form of market segmentation includes buying behaviour, spending habits, social media interactions, or previous customer feedback.
Behaviorial segmentation is often the easiest to explore, as organizations can build up a picture of customers' behavior relatively easily using web analytic tools, which collect data such as page clicks, past orders, usage, and social media interactions.
For example, online retail giant Amazon® advertises products to customers based on items that they have purchased in the past. While film streaming service Netflix™ recommends movies to users based on the ones that they have already expressed interest in. Both of these organizations track consumer purchases and activity, and segment their market based on actual behavior.
Other Types of Market Segmentation
Although the four categories described above are typically used in market segmentation, you can segment your customers any way you want.
Here are some other forms of segmentation you may want to consider:
- Generational/Life Stage – this expands on the demographic approach, but segments customers into generational groups, such as Baby Boomers, Gen X, Gen Y (millennials), and Gen Z (also known as "zoomers"). You can also split customers up by life stage. For example, whether they're going to college, getting married, having children, or are retired.
- Technographic – this type of segmentation looks at customers based on their use of technology. For example, whether they are early adopters of a certain piece of tech, majority users, or late adopters. Tech giant Apple®, for instance, often offers a “luxury,” cutting-edge model of its newly-launched products to early adopters for a premium. These particular customers are a highly diverse group, but they are all willing to spend more to have the newest Apple products first. At the same time, Apple continues to sell its previous generation items, which are less expensive and so more appealing to cost-conscious users.
- Value – some organizations segment their customers according to the value that they can provide. In other words, how much they're likely to spend on products based on their previous purchase history.
- Firmographic – this type of segmentation is most often used by organizations that target the business-to-business (B2B) market. It works by splitting up business customers into groups depending on shared characteristics, such as by industry, revenue, size, or location.
How to Use Market Segmentation
Whatever way you decide to segment your market, it's important to first clarify the common characteristics of each group, as well as the differences between them.
Also consider the following questions:
- Accessible: are you able to reach the subgroup you've identified through cost-effective and practical marketing and distribution channels?
- Measurable: can you estimate each subgroup's size easily, so that you can allocate marketing spend accordingly?
- Substantial: is the segment large, established and stable enough to justify its own marketing activity?
- Viable: can people within the subgroup afford your product, and will they see clear and desirable advantages of using it, compared with other products and services?
Segments that represent small sections of an overall market are known as "niche markets." Organizations may focus on these when their product's price is high, or when the market is especially large. A segment representing only two percent of the total market may be big enough to sustain a good-sized business.
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