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What is customer segmentation?

Have you ever wondered what customer segmentation means? In this blog post, we explore customer segmentation: its meaning, significance, and tips for implementation.

Rose McMillan · May 20, 2024
What is customer segmentation?

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Customer segmentation is the process of categorizing current and prospective customers and, therefore sales, according to common attributes.

By organizing customers into distinct segments, you’ll get a deeper insight into customer requirements, tastes, and purchasing behaviors.

This understanding helps your marketing and sales teams to customize their strategies effectively, ensuring they connect with your customer base in the most appropriate way..

Through well-researched campaigns and initiatives, you can keep existing customers and expect to see an increase in customer loyalty and engagement.

This strategic approach to customer segmentation is crucial in refining a brand's messaging and positioning, guiding decisions on potential new product or service investments, and identifying opportunities to enhance sales strategies.

Due to this, marketing personas must be tailored to these segments for maximum effectiveness.

A ‘target persona’ or ‘marketing persona’ is a particular customer segment. It's a common practice for businesses to craft multiple personas to accurately represent the diverse customer segments they serve.

Developing a comprehensive customer segmentation model requires an understanding of distinct customer segments.

This explores the nuances between customer segmentation and market segmentation, aiming for specificity and accuracy in your efforts.

Customer segmentation vs. market segmentation

Customer segmentation categorizes your specific slice of the market based on shared characteristics. Yet, market segmentation adopts a broader perspective, encompassing the entire marketplace.

For instance, a business specializing in car sales to other businesses might identify distinct segments such as companies inclined to purchase larger vehicles versus those preferring smaller cars. Both have unique needs and preferences.

Conversely, market segmentation might examine preferences across a wider spectrum, such as the choice between affordable family cars and luxury vehicles.

Focusing your efforts on specific customer segments is more fruitful than casting a wide net across the entire market and being generalized.

Customer segmentation

  • Deals with only your part of the market
  • Creates user-based categories
  • Groups customers depending on shared characteristics
  • Precise marketing and sales strategies with precise data taken from customers

Market segmentation

  • Looking at the whole market
  • Focuses on areas of the market
  • Groups customers according to their service and product purchases
  • Creates the foundation for marketing and sales strategies

Why is customer segmentation important?

Customer segmentation is important for businesses aiming to uncover new product and service opportunities and help the sales and marketing existing offerings.

By segmenting customers based on a deeper understanding of customer needs and preferences, you can tailor your approach more effectively. We’ve listed the importance of customer segmentation below:

Boosting brand loyalty and increasing CLV

Implementing effective customer segmentation helps enhance customer lifetime value (CLV). An enhanced CLV will offer strong customer relationships and increased spending.

For instance, rather than customers making biannual large purchases, segmentation could reveal opportunities to encourage more frequent, smaller, transactions.

Frequent purchases and engagement boost customer loyalty but also increase customer value over time.

Here are some other reasons why customer segmentation is so important:

Offering large-scale tailored experiences

Most customers express a willingness to spend more with brands that make them feel valued individually, impacting your revenue.

Effective customer segmentation allows for a better understanding of each customer’s wants, facilitating targeted strategies at both the brand and marketing levels.

By analyzing your customer base through segmentation, you can pinpoint high-value customers' preferences, find commonalities among different groups for improved personalization, and identify new segments ready for engagement.

Customer needs and behaviors are ever-evolving, meaning businesses must adapt their strategies and experiences accordingly.

By developing flexible customer segmentation models that can incorporate new data and adjust to these shifts, businesses can remain relevant.

Recognizing and adapting to the fluid nature of customer segments—such as life changes from graduation, career progression, or family dynamics—enables businesses to stay ahead of changing needs and capture new demand effectively.

Advantages of implementing customer segmentation

There are a few reasons why customer segmentation can greatly help your business, and we’ve listed a few below.

Deepening customer relationships

Segmenting your customers gives you insight into their desires, allowing you to tailor your marketing efforts and select the most effective communication channels.

Understanding a customer’s interests, spending patterns, and budget enables personalized interactions that make customers feel valued, encouraging repeat business and fostering loyalty.

Improving customer experiences and boosting sales

Customer segmentation gives you knowledge about what customers want when they want it and the purpose behind their needs. This helps you provide more accurate and effective service delivery.

Tailoring your marketing messages means promotions reach those most interested, boosting purchase rates. Adapting to customers’ evolving needs across seasons helps you to provide superior customer service support and offerings.

This targeted approach not only improves customer satisfaction but also optimizes how your business spends time and resources, making your business more efficient and better serve your customers’ needs.

Exploring types of customer segmentation

Considering various segmentation variables and understanding that there's no simple solution that fits every business scenario gives you the flexibility you need when compiling customer segmentation data. Customer segmentation can be broadly categorized into two areas:

Segmenting who the customer is

This approach focuses on understanding customers through psychographics, demographics, and for B2B contexts, firmographics. This may include:

  • Age
  • Geography
  • Urbanization (city dwellers vs. rural residents)
  • Income
  • Relationship status
  • Family composition
  • Job type

Tailoring your customer segmentation efforts according to these factors gives you a more personalized and effective marketing strategy. This will help form deeper connections with your target audience.

Segmenting what the customer does

Customers can also be segmented based on their actions, such as their spending habits, purchase frequency, and the types of products they buy.

Diving deeper, variations in customer behavior suggest the need for nuanced data analysis in areas such as:

  • Basket size
  • Share of wallet
  • Tenure (the duration of their relationship with your business)
  • Long-term loyalty (a blend of share of wallet and tenure)

It's important to note that the optimal strategy for customer segmentation varies greatly across industries and business sizes.

The strategy for targeting specific customer segments should be tailored to fit the unique needs and behaviors of those segments.

This could include special offers designed to entice customers into physical stores so that they’ll make additional purchases once there.

Customer segmentation frameworks

Developing a customer segmentation framework involves dividing your audience into manageable groups with similar characteristics, a process crucial for refining marketing approaches, enhancing customer service, and driving revenue growth.

Here are some foundational strategies to consider when designing your segmentation model.

Demographic segmentation

This sorts customers by categories such as age, gender, and socioeconomic status.

This demographic is frequently used in sectors like retail and fashion, where understanding demographic nuances directly impacts marketing efficacy and customer outreach.

Geographic segmentation

Geographic segmentation organizes customers based on their physical locations, from broad categories like country or state to smaller areas like a city or a neighborhood. This method is crucial for localized marketing strategies.

Psychographic segmentation

Psychographic segmentation categorizes customers by psychological attributes, including personality, values, and lifestyle.

This segmentation helps companies with many offerings, allowing them to align products or services with individual customer motivations and preferences.

Technographic segmentation

This focuses on customers' technological preferences and usage, crucial for digital marketing strategies and companies in tech.

Behavioral segmentation

Behavioral segmentation examines customers' interactions with a brand, purchase history, product usage, and engagement levels. This is useful for upsell campaigns and cross-sell campaigns and much more.

Needs-based segmentation

This identifies specific needs or problems that customers want to resolve. The guiding product development and marketing messages address these directly.

Value-based Segmentation

Value-based segmentation concentrates on the economic importance of different segments and customer groups to prioritize and tailor marketing and sales efforts accordingly.

Customer segmentation strategies examples:

Creating effective customer segmentation programs begins with identifying key characteristics that divide your customer base into distinct groups. We’ve listed some examples below.

Demographic segmentation

Gender segmentation

Starting with gender can offer a base view of your customers. Ensure inclusivity by recognizing a broad spectrum of gender identities to create a comfortable space for all customers.

Age segmentation

Utilizing age as a segmentation criterion offers insights into the preferences and needs of different life stages, recognizing that customers at different ages may have differing priorities and interests.

Job role segmentation

Knowing a customer's occupation can reflect their interests, availability, and financial capacity, providing valuable context for personalized marketing strategies.

Income level segmentation

Segmenting by household income helps gauge a customer's potential spending with your business.

This must be considered with other factors such as location and lifestyle.

Relationship status segmentation

Marital or relationship status can influence purchasing decisions, making it a useful segmentation insight for businesses tailoring their messaging.

Geographic segmentation insights

Location-based segmentation

Tailoring your marketing to geographic locations improves personalization and relevance, adapting your strategy based on regional preferences and behaviors.

Language preferences

Knowing the preferred language of your customers ensures clear communication and customer engagement.

Transportation habits

For businesses leveraging out-of-home advertising, understanding how customers commute can open up targeted advertising opportunities.

Working environment insights

Understanding where and how customers work can inform targeted marketing strategies and product offerings.

Behavioral segmentation

Customer journey stage

Identifying the stage of the customer journey helps tailor marketing strategies to meet customers where they are, enhancing engagement and conversion opportunities.

Online engagement

Monitoring website interactions provides insights into customer interests and engagement levels, allowing for more targeted content and offers.

Recent interactions

Analyzing the latest customer engagement with your business can inform tailored follow-up actions to strengthen relationships or address concerns.

Online shopping behavior

Observing actions within your online store, like cart abandonment or purchase patterns, enables targeted strategies to encourage conversion and loyalty.

Psychographic segmentation

Core values

Understanding what customers value requires deep engagement, such as surveys or interviews, to align your offerings and messaging with their goals and challenges.

Hobbies and interests

Aligning marketing efforts with customer interests, even those not directly related to your business, can enhance engagement and open up partnership opportunities with group customers.

Personality traits

Segmenting customers by personality traits helps devise customized marketing approaches that work better with different audience segments.

Technographic segmentation for digital engagement

Preferred devices

Recognizing customers' preferred devices informs the design and development priorities for your website or mobile app.

Browser usage

Understanding the browsers your customers use ensures your digital content is optimized for how they view your site.

Discovery channels

Knowing how customers have found your business online helps optimize those pathways, making it easier for others to discover your organization.

Value and needs-based segmentation

Customer satisfaction

Using NPS scores to segment customers identifies areas for improvement and opportunities to reward loyalty.

Purchase frequency and value

Tracking how often and how much customers spend informs strategies for increasing the lifetime value of your customer base.

Product feature requirements

Understanding specific product features customers need ensures your offerings meet those demands, boosting inclusivity and satisfaction.

Service expectations

Tailoring customer service based on individual needs ensures every customer receives the support they require, improving their overall customer experience with your brand.

Delivery preferences

Ensuring your products are delivered in a manner that meets customer expectations is crucial for satisfaction and retention.

How to undertake customer segmentation

Formulating a plan that addresses the core aspects of customer segmentation one at a time, will position your business for increased conversions and sales.

Here are the key steps for a successful customer segmentation process.

Establishing your goals and objectives

Begin by pinpointing your goals for customer segmentation. Understanding the specific business needs is crucial.

Also, when forming a segment with your goals, consider your competitors. Ask yourself, do they have any new products or are they aiming to expand the market? If so, match and exceed what your competitors are doing.

If you're introducing a new product or aiming to expand your market, consider segmentation types like psychographic, needs-based, and technographic.

Then, consider each segmentation type to identify critical factors. While this step might seem minor it significantly influences the messaging you send to your segmented customers, impacting your marketing strategies' effectiveness.

Initiating your customer segmentation projects

Tackle the projects established by your goals and objectives by starting with the most significant segment, and setting objectives for each.

Make sure to use the SMART framework for clarity and direction. Engage key stakeholders, such as employees from relevant departments and external parties like customers and vendors, to ensure comprehensive involvement.

Clearly outline the expected outcomes, such as segment profiles and workflow diagrams, to ensure everyone is aligned on the project deliverables.

Gathering and structuring customer data

Data collection is essential. This data may include easily accessible information like job titles and past purchases to more personal details like age and marital status.

Utilize direct methods such as customer surveys to gather customer feedback and indirect methods like analytics tools and social listening for broader insights.

Segmentation and marketing to your customers

With the necessary data in hand, segment your customers into groups. Ensure segments that organize customer data are accessible and relevant to your marketing and sales teams, and ensure you engage your loyal customer base.

Execution and analysis

Execute personalized communication, from emails to landing pages, to make your customers feel understood and valued.

Lastly, regularly analyze your customer segmentation to ensure the ongoing relevance and effectiveness of your strategy.

Assess each segment's alignment with your business goals, gather feedback from both internal teams and customers, and adjust your approach based on these insights.

Overall, this iterative process helps maintain the accuracy of your segmentation and the success of your targeted marketing efforts.

Wrapping up customer segmentation

Customer segmentation requires categorizing both potential and loyal customers to gain deeper insight into a customer’s preferences. Therefore, customer segmentation is crucial to any personalized marketing strategy.

It allows businesses to create individualized marketing campaigns. This helps because you’ll be able to increase customer satisfaction whilst also driving business growth and sales.

Implementing customer segmentation into your marketing strategies along with the help of Capsule’s CRM software is a recipe for success.

Sign up for our 14-day free trial and see the results.