What is Customer Segmentation?

Businesses are bound to have customers whose needs are the same. But, being humans, they are bound to have different preferences and are from a variety of geographic places and various age groups, their expectations in terms of your products and service, would vary.

The key to serving the needs of various groups of customers effectively is to clearly understand their preferences in every part of your business, like the product, communication, service and so on. This helps a business to efficiently meet their customer’s expectations in every way possible and develop a strong relationship with them.

The ideal way of doing this is called Customer Segmentation.

• What is Customer Segmentation?
• Why do you need to segment your customers?
• How to segment your customers?
• Types of Customer Segmentation
• Tools to segment your customers
• Common Customer segmentation mistakes to avoid
• Benefits of customer segmentation

What is Customer Segmentation?

Customer Segmentation is the process of organising your list of customers into various groups, based on their common interests and specific criteria like gender, age, location, etc.,

Customer segmentation offers businesses and marketers an opportunity to tailor their communications based on a specific group of customers and their unique needs or expectations. With segmentation, it becomes easier to exactly pinpoint the needs of every group of customers and eventually it becomes easy to drive them to make a purchase. 

Customer segmentation can be done based on two factors,

1. Expectations: This can be of expectations in terms of your product or service. This group of people will be satisfied if their needs are met with the help of your product.
2. Behaviours: With the evolution of customer behaviours like buying patterns, mode of buying, reaction to marketing communications and so on, it is necessary to identify and address every behaviour of your customer groups, through proper segmenting and targeted marketing communications.

Why do you need to segment your customers?

When you want your marketing campaigns to succeed, the campaign must reach the right person at the right time, so that they are convinced to make a purchase. 

To reach the right person at the right time, a marketer must identify and understand the various groups of audiences and their unique needs. Customer segmentation can help any business to achieve much more than just being proactive to the changing needs of customers. Segmentation helps a business through,

1. With the in-depth knowledge of your diversified customer base, businesses can tailor their product or service to the specific needs of the customer group.
2. Understanding the most valuable group of customers and why they are loyal to your brand.
3. Every group of customers will have a different preference in the medium of communication, with segmentation, you can communicate with their unique preferred medium of communication for every segment. For instance, emails that aren’t targeted produce a 50% lower CTR than a targeted campaign.
4. Meeting the expectations of every group in terms of after-sales service by understanding their needs and feedback from across the various groups of your customers.
5. Improve customer experience and brand loyalty through personalised content and personalised communication.
6. Identify the areas of improvement through customer data and their preferences.
7. Explore and test various products, services and pricing options among various segments.
8. Identify opportunities for a new product or service to meet the needs of any particular segment or a common need of multiple groups of customers.
9. When developing a new product, having the complete knowledge of your customer base can help you incorporate the most liked features and ensure that the product will be appreciated by the community.
10. Create and promote personalised offers based on location, culture or demographics concerning festivals, celebrations or holidays.

When trying to establish yourself among your competitors, doing things effectively matters most. Being able to know exactly what your target customers want, gives you an edge over the competition. Marketing segmentation or Customer segmentation offers exactly that. 

How to segment your customers?

When starting with segmentation you must keep an open mind to changing your strategy because focusing on a small set or group of customers, with a lot of effort, isn’t worth it. Therefore few things must be addressed carefully while starting with a customer segmentation strategy for your business. 

Initially, it is okay to have the segmentation based on the easily available and broad categories of data such as age, gender, location and so on. When there is action in your marketing and communication and data starts to accumulate in your database, you would be able to create precise segmentation with the help of the complex data that is being collected and analysed. 

There isn’t a smooth sail to any good things, likewise, you are bound to hit road bumps at the beginning of your segmentation journey. Since you are just starting, you can choose to iron out the issues with various cross-functional teams in terms of the collection or processing of data. This gives a good beginning to the process. Usually, while any organisation is stepping into segmenting their customers, they need to get the following parts of the organisation aligned,

1. Leadership,
2. Product,
3. Marketing, 
4. Sales, and,
5. Support.

After having established sync between all the cross-functional teams, it is important to have a meaningful and large set of segments to have a real impact. Thus having a defined strategy would be able to define the requirements so that the organisation as a whole can work towards addressing and achieving them. A sample segmentation strategy has to explain,

• How the number of segments to be decided and what criteria are to be considered?
• How to evaluate the past problems and data to evaluate the performance at any stage?
• Where to collect the data that helps in segmentation? And so on.

Oftentimes, many end up creating customer segmentation based on incomplete datasets and end up regretting it. To avoid this, the customer segmentation has to be based on the analytical data of behaviours and traits of your customer base as a whole. 

To create a Customer Segmentation Strategy, the team goals are to be determined first. After which, you segment customers and target them with personalised communication messages related to their segment characteristics. For a healthy practice, the outcomes of these efforts must be analysed and fine-tuning the marketing strategy is done for each segment.

While developing a method to group your customers into various segments, start with the following process,

1. Identify Goals: 

Segmenting customers is not a universal, one size for all concept. It is unique for every business. So, ask yourself, why you are into customer segmentation and what outcomes are you expecting out of this.

The strategy can then be developed, to achieve the desired outcome of implementing the segmentation. When using your organisation’s goals and expectations as a building block of your customer segmentation strategy, you have a solid foundation.

2. Segment Customers

After creating your personalised segmentation strategy that reflects the goals of your business, you can then proceed to segment your customers into various groups of your choice. There are no preset rules to judge whether you are right or wrong. As long as you segment your customers based on your strategy, you are free to decide how your customers are segmented.

If you want to target your marketing campaigns towards the young millennials, who are interested in music, you can segment your customers based on their common interests.

3. Reach customer segments

To target your customer segment effectively, all the departments in your organisation must be aware of how the customers are segmented. With that knowledge, every department can effectively communicate with each of the customer segments.

As an illustration, consider our example of a segment consisting of young millennials who are interested in music, 

• Your marketing team can develop effective communication messages to cater to the interests of this particular segment of customers.
• The sales team can then develop a way to convince this segment of customers to make a purchase and increase conversions.
• The service team can make sure that there is a good opinion about the product or service, by providing the necessary support to eliminate the challenges that can arise for the young millennials interested in music. 

4. Analyse your customer segmentation

Once you start to reach out to the customer segments that you have created, you must analyse the outcome in terms of feedback from across your internal teams as well as from customers.

Based on the analysis, you can make changes to existing segmentations, create new segmentation, develop a new brand of products or do anything that you can to address the concerns of your customer segment. 

Customer segmentation is a continuous and evolving process. Once the initial phase of knowing your customer base and categorising them according to various factors is done, you need to keep exploring to find whether their preferences have changed over time and react to it accordingly. Along with this, for any business, there would be a regular inflow of new customers to keep track of. So the process of customer segmentation is a continuously evolving process that leads to healthy growth if it is carefully implemented.

Types of Customer Segmentation

When you have learnt the importance of segmentation and before moving into the next step of implementing it, you have to understand the various types of customer segmentation methods that are commonly used. While there are no limitations on the factors on which you can segment your customers, we have listed some of the widely used segmentation types.

1. Demographic Segmentation

Demographic segmentation is the most common and yet one of the effective ways of segmenting customers. It uses non-personal traits such as,

• Age,
• Gender,
• Income, 
• Education,
• Location,
• Religion,
• Ethnicity,
• Job type and the likes.

With demographic segmentation, it becomes easier to target your customers based on gender, so if you are marketing a gender focussed product, you do not waste the budget by marketing it to the other gender that you may not serve, with that particular product. When you can present yourself to the right person at the right time, you can be almost certain that you will be able to improve your ROI.

2. Geographic Segmentation

Geographic segmentation is grouping your customers in terms of their physical location and is mostly the easiest way of segmentation. Some of the attributes that can be used for geographic segmentation are,

• Country
• Region
• State
• City
• Town and
• Postal / ZIP code

Segmenting customers based on geographical factors can help you in effectively reaching customers based in a certain location. Live events, region-specific offers or products and any business who would want to effectively communicate with their local audiences can choose to segment their customers based on geographical traits.

3. Psychographic Segmentation

Psychographic segmentation involves a  customer’s personality traits such as 

• Personality,
• Hobbies,
• Interests,
• Lifestyle, 
• Attitude,
• Beliefs, and,
• Values.

In contrast to the above types, these traits are harder to identify and require additional effort and good market research. When you manage to accurately figure out the common traits of your customers concerning their psychographics, you can most effectively target them on a personal level.

4. Behavioural Segmentation

Behavioural segmentation is highly useful to online businesses among others. It also needs a wider set of data to effectively accomplish the goals. But unlike other data, behavioural data can be collected with the help of your website or social channels with the help of the commonly available analytical tools. Behavioural segmentation involves customer grouping based on their,

• Interactions with the brand,
• Loyalty,
• Browsing patterns,
• Spending patterns,
• Purchasing patterns, and,
• Other interactions with the brand.

Almost all of these data can be harvested from the website using APSIS One’s segmentation, information like,

• Number of sessions by any user in your site,
• Pages visited,
• Time spent on-site and individual pages,
• Shopping history & Cart value, and
• Every discrete data can be extracted.

For instance, if a user visits your sites frequently and has not yet made a purchase, you can tailor a customised message for that individual customer or a group of similar customer segments.

5. Technographic Segmentation

Technographic segmentation involves grouping of customers based on,

1. The type of device they access your website, like desktop, mobile or tablet.
2. The browsers that they use.
3. Whether they use any of your mobile applications or software,

This will enable you to identify the source of most of the traffic to your site as well as personalising the communication or promotional messages on the site to suit the interests of the particular device user. For example, if you are a mobile accessory store and you have a user accessing your online store via an android phone made by an X company, you can show them the products matching that device.

6. Need-based Segmentation

Need-based segmentation groups customers based on their current and important needs. The factors that influence need-based segmentation are,

1. Marital status,
2. Whether they are parents,
3. Home or property owners and so on.

A need-based segmentation will enable a business to target the right audience based on their need of the hour. 

7. Value-based Segmentation

Value-based segmentation puts customers into various groups based on their economical value to the concerned business. It is useful to market the highly valuable product to a customer who has enjoyed your products, as it will generate interest and they are more likely to buy.

8. Firmographic Segmentation

While all of the above segmentation focuses on the consumer side of things, firmographic segmentation is used to arrange business customers into various categories based on various factors like,

1. Industry type, 
2. Industry size,
3. Past performance,
4. The number of employees and more.

Having a segmentation for a B2B market will enable you to precisely target your audience, as the B2B market is quite complex and the sales cycle is a bit longer than B2C.
 

Tools to segment your customers

When it comes to customer segmentation software, you are presented with a whole range of options ranging from free to premium ones. You can choose the right software for your nature of business and needs. Let us explore some of the popular customer segmentation software among marketers and businesses.

1. APSIS One

APSIS One is an all-in-one marketing suite that caters to all of your marketing needs including customer segmentation. APSIS One offers Smart customer segmentation based on user actions, attributes and behaviours.

APSIS One intelligently groups your customers dynamically, based on their recent activity, like for instance, receiving and opening one of your emails to click on a specific content puts a user into a predefined smart segment who then starts to receive content related to that particular product/service category he/she is interested in.

With APSIS One, you have access to a powerful custom segment builder that lets you create a segment that reflects your goals. You can also be confident of your investment in APSIS One with its flexible scalability as per the growth and size of your business.

Learn how to effectively segment your customers with APSIS One here. When you are confident, contact one of the APSIS One experts to book a personalised demo to find out how APSIS One’s segmentation can make a difference for you.

2. Hubspot

Hubspot is the most popular enterprise CRM or CMS software that is feature-rich and offers diverse functionalities while also being simple to use. Hubspot’s segmentation engine offers you static and dynamic segmentation features to cater to all the needs of a modern and dynamic marketing strategy. 

3. Experian

Experian is a purpose-built market segmentation software that lets you build a complete customer profile and custom segments that meets your business goals.

Unlike others, Experian specialises in segmentation and offers a variety of functionalities to effectively create, manage, view and edit the segments that are created. 

4. Qualtrics

Qualtrics is another segmentation focussed software solution that is claimed to make the complex customer segmentation process easier for any business. You can build studies, analyse the segments and organise customer groups to communicate efficiently with them.

Over the years, Qualtrics has incorporated machine learning and artificial intelligence (AI) into it, to help you identify newer ways and opportunities to segment your customers.

5. Mailchimp

Mailchimp’s email and marketing automation software has a segmentation engine that can identify, organise and manage customer segments and generate customised marketing campaigns to communicate with each of the segments effectively. 

Common Customer segmentation mistakes to avoid

With the abundance of knowledge about marketing segmentation, it might seem a pretty easy task at hand. But it is as easy to make mistakes and fall into the consequences later. So it is wise to know the common mistakes that would ruin your implementation of customer segmentation and avoid them carefully.

1. Market size being small

In the beginning, not everyone will aim for mass marketing. So it is inevitable that you are tempted by the nature of precise targeting through customer segmentation and choose a narrow and specialised market segment. Specialised segments are extremely complex and quite challenging. The major consequence of choosing a specialised market segment is that it limits your customer base and does not offer scalability. 

So it is important to have a wider market segment that will allow you to achieve your target with high efficacy. 

2. Return on Investment

While your research is focused on how your target market segment is ideal to start with. You may be ignoring the fact that the ROI of that particular market segment is also to be considered. You are marketing your product or service for revenue and if you choose a market segment that does not yield a good ROI, your efforts may go in vain. 

It is advisable to address the marketing strategy, communications, customer segments, and other factors to ensure that you get your targeted ROI.

3. New markets and customers

Markets are always dynamic and tend to change rapidly with the ever-changing needs of the customers. If you fail to adapt to the dynamics of the market changes through your segmentation strategy, you may be missing out on the potential new markets and new customers too. 

Initially, the segments you chose may have performed well for you, but their preferences may evolve and you need to adapt to them proactively to stay relevant and positive.

4. Data collection

When planning segmentation, it is important to have a clear idea of what metrics to be tracked and have them up and working in case if the chosen goal or metric needs to be set up. There is no room for guesswork in customer segmentation if you need to have an accurate report of your customer segmentation strategy.

Benefits of customer segmentation

The ultimate goal of any marketing campaign is to reach the right person at the right time with a relevant message. Customer segmentation serves you to achieve this by identifying and understanding every customer persona in an in-depth manner. Thereby enabling you to break a larger group of customers into multiple smaller and focused groups of customers - based on various factors like their needs or expectations.

The benefits of customer segmentation are as follows,

1. Price Optimisation

The more you tend to know of your customers and their needs or expectations, the more opportunities you have to optimise your product or service in terms of pricing and other factors. More efficient pricing for a product or service alone can strike a chord with your customers.

When you get the pricing that is right for both you and your customers, you will be in a position to achieve your goals while also spending the resources effectively and achieving a better economy of scale.

2. Brand Awareness

When you happen to know the smaller details about your various customer segments, you can offer more personalisation in your communications through smarter marketing campaigns. 

If you send the right message to your audience, they will love them and interact with you and eventually happen to remember your brand. In future, they are more likely to buy from you as they are aware of your brand and experienced personally that you care for them.

3. Better competitiveness

Getting to know your customer persona in detail, will help you increase your customer retention through effective communications. The more customer retention, the more revenue will be. This will give you an edge over your competition and will present an opportunity for you to move your business a segment above. 

For a proactive business, it will be easy to spot a newer product opportunity and establish themselves with a first mover’s advantage.

4. Customer retention and acquisition

With customer segmentation, you can establish a personal connection with your customers. Doing so will help your customer loyalty. Most of your customers are likely to stay with your brand for their needs, thus giving you a high customer retention rate. 

With customer segmentation comes the benefit of attracting new customers into your brand, as you already know them quite well and your communications would attract them towards your brand and product. 

5. Efficient spends

When you target customers with your marketing communications, it becomes highly focused and if you get it right, you will end up becoming efficient in reaching your audience and therefore saving a lot of marketing costs. 

In comparison, if you do not segment your customers, the broader communication strategy would not be as communicative and personalised as your targeted communications. 

6. Improved ROI

When you deliver exactly what a user needs in their inbox, they are most likely to make a purchase. With customer segmentation, you can have the possibility of personalised subject lines for each recipient in any segment. 

Campaigns that are sent to the targeted audience have higher conversions than the campaigns that are broader. Eventually, this makes your marketing highly efficient and drives for a higher ROI and better revenues. 

7. Quality leads

When you become good at segmenting your customers based on their criteria, your marketing communications, sales pitches, product documents are also aligned to meet the expectation of the target group of customers you are dealing with. Through this, you will notice that with targeted communications you are being noticed by new audiences across varied customer profiles, leading to a constant flow of highly qualified leads.

8. Identify new niches

With the amount of research and analysis that has gone into segmenting your customer base into various categories that would benefit both you and your customers, you will have some important takeaways in the form of new market opportunities, and even an opportunity for an entirely new product in your area of business, to solve the need of your customers. Of course, before diving in, it is important to study and understand the opportunity more clearly, to ensure success.

9. Positive customer experience

Customer segmentation is important in creating a more personalised experience, with any brand or business. With the help of your segmentation, if you happen to know about the important events in your customer’s everyday life, you can connect with them and create a memorable experience for them, with your brand. 

This makes them delighted and a delighted customer is much likely to stay along and recommend your brand to others along the way. 

Modern businesses are more focused on providing a memorable experience for their customers, as a good customer experience goes a long way in establishing the business or the brand among people. Likewise, Businesses are striving to improve the standards of their customer experience and customer segmentation plays a pivotal role in deciding the experience of customers with any brand.

Today, every business is trying to employ a segmentation strategy to effectively reach out to their target audience and to figure out new opportunities to do business. It is a fact that you cannot force segmentation on your business if the key participants are not convinced, and the output of that half-hearted attempt would be meaningless. If you are in a discovery phase of what customer segmentation can accomplish for your business and looking for advice and opinions, do not hesitate to contact one of our marketing experts.

Customer segmentation helps businesses in improving their performance through cross-functional team efforts spanning from product development to after-sales service. Whether it is marketing a diaper to a new mother, selling health insurance to a millennial, or sharing special offers, customer segmentation offers multiple possibilities to ensure that you deliver exactly what they want, how they want and when they want.

If you are excited to explore the opportunities that market segmentation can offer, book a demo of APSIS One to experience it with expert guidance and a free 14-day trial.