What is Customer Segmentation?
Customer segmentation is the process of dividing customers into groups based on common characteristics so companies can market to each group effectively and appropriately.
In business-to-business marketing, a company might segment customers according to a wide range of factors, including:
- Number of employees
- Products previously purchased from the company
In business-to-consumer marketing, companies often segment customers according to demographics that include:
- Marital status
- Location (urban, suburban, rural)
- Life stage (single, married, divorced, empty-nester, retired, etc.)
Why Segment Customers?
Segmentation allows marketers to better tailor their marketing efforts to various audience subsets. Those efforts can relate to both communications and product development. Specifically, segmentation helps a company:
- Create and communicate targeted marketing messages that will resonate with specific groups of customers, but not with others (who will receive messages tailored to their needs and interests, instead).
- Select the best communication channel for the segment, which might be email, social media posts, radio advertising, or another approach, depending on the segment.
- Identify ways to improve products or new product or service opportunities.
- Establish better customer relationships.
- Test pricing options.
- Focus on the most profitable customers.
- Improve customer service.
- Upsell and cross-sell other products and services.
How to Segment Customers
Customer segmentation requires a company to gather specific information – data – about customers and analyze it to identify patterns that can be used to create segments.
Some of that can be gathered from purchasing information – job title, geography, products purchased, for example. Some of it might be gleaned from how the customer entered your system. An online marketer working from an opt-in email list might segment marketing messages according to the opt-in offer that attracted the customer, for example. Other information, however, including consumer demographics such as age and marital status, will need to be acquired in other ways.
Typical information-gathering methods include:
- Face-to-face or telephone interviews
- General research using published information about market categories
- Focus groups
Using Customer Segments
Common characteristics in customer segments can guide how a company markets to individual segments and what products or services it promotes to them. A small business selling hand-made guitars, for example, might decide to promote lower-priced products to younger guitarists and higher-priced premium guitars to older musicians based on segment knowledge that tells them that younger musicians have less disposable income than their older counterparts. Similarly, a meals-by-mail service might emphasize convenience to millennial customers and “tastes-like-mother-used-to-make” benefits to baby boomers.
Customer segmentation can be practiced by all businesses regardless of size or industry and whether they sell online or in person. It begins with gathering and analyzing data and ends with acting on the information gathered in a way that is appropriate and effective.