Marketing Strategy
What is Customer Segmentation and How to Use It to Grow Your Business

What is Customer Segmentation and How to Use It to Grow Your Business

September 9, 2020
7 min read

Businesses looking to expand will have little to no luck focusing their efforts on the broad universe of potential customers.

Instead, the key to growth comes from unlocking the characteristics that make up a specific subset of customers and prospects that are most likely to make purchases and remain loyal. And this is where customer segmentation comes into play.

We all want to get to know our customers better. If we could wave magic wands and have customers walking directly into customized products and services tailored with them specifically in mind, we would. Unfortunately, business – and life – does not work that way.

To understand our customers better, we need systems in place to acquire and analyze data, we need the right approach to using that data, and we need to be able to compromise.

With marketing automation, we already have those systems implemented throughout our company. Marketing automation systems provide us with the insight we need, as well as the means of storing and reporting on large amounts of customer data. We also have the right approach; we want to use this data to better understand our customers and provide a genuinely useful service.

It is the final element – compromise – that can cause difficulty. In essence, customer segmentation is one big compromise; we want to understand our customers on an individual level, but this is impossible. So, instead, we divide our customers into convenient groups and aim to meet their needs in as direct a manner as we can.

But how much should we compromise? How can we get the right balance and provide our customers with seamless services and support?

In this article, we’ll outline how to key factors to customer segmentation you can use to grow your business. But first, what is customer segmentation, and why does it matter?

Customer Segmentation: What and Why?

Customer segmentation – also known as market segmentation – is the division or categorization of prospects and customers into distinct groups. The division can be based on a whole variety of features and variables, most commonly:

  • Customer needs. What does the customer want? Which whole product can satisfy them?
  • Buying characteristics. What are their habits? How do they respond to messaging? Which marketing channels are most engaging to them?
  • How old are they? What stage of life are they in? How do their experiences impact their purchasing decisions?

There are three main types of segmentation:

  1. Classifying customers based on publicly available characteristics, such as demographics, industry, and so on
  2. Needs-based segmentation that is based on findings from market research
  3. Value-based segmentation that can be used by expansion-stage businesses to define and focus on prospects

At the growth stage, a business should focus on value-based segmentation. Why? Because executing a marketing strategy aimed at expansion without an understanding of your best-value customer is like firing an arrow at a target 150 feet away – blindfolded. Chances are, you’re not going to hit a bullseye. You’ll likely end up missing the target altogether.

A thorough understanding of how your best customers are segmented gives you the razor focus you need to allocate human and capital resources in a way that yields the highest marketing ROI.

The Basics of Customer Segmentation

Step 1: Foundations

Preparation is critical to your customer segmentation undertaking. Without it, your project will lack direction. Here are some things to consider as you set up your customer segmentation project:

  • What business goals will the project meet or contribute to? How do they align with your overall strategy?
  • Scope can be defined by either inputs or outputs. Inputs include things like the number of customer accounts to be analyzed. Outputs include things like the maximum number of segments to be created.
  • Key players. Who will be working on this project? Who, specifically, has a vested interest in the project’s success?
  • Does your team have the marketing software it needs to carry out a successful, sophisticated segmentation project?

Once you have defined the above, you can create a work plan. This should be a shared, detailed document that breaks down the project into specific tasks. Each task includes who will be responsible for its completion and a deadline.

Step 2: Analysis

This step is all about developing effective research criteria to successfully undertake the data collection process – criteria that stem from the big question: What makes a customer attractive to your business?

Typically, customer value is defined by cold, hard economic benefit or net profits (or losses) over the customer’s lifetime. But it could be something else. Ask company staff, experts, and stakeholders, and perform a bit of competitor research, if applicable.

Depending on the nature of your business and product or service, you’ll determine a set criteria list or formula for calculating customer value across your market segment.

Step 3: Data Collection

Now, it’s time to put your formula into practice. Create a comprehensive list of ways you can use the criteria you defined in step two to distinctly categorize your existing and potential customer base. Be as thorough as possible, thinking beyond standard factors.

Then, to collect the data, develop a detailed research plan that outlines where each criterion or variable can be found and the resource and method that will be used to collect it. Once you’ve nailed down the details, you can take action.

“Data has officially become the most important marketing tool… Just by knowing who your customers are on a personal level, you will gain insight into their activities, find out more about your product from the people using it, and learn more about how they’re browsing online.” – Forbes

Just a quick note on data collection – be aware of data without integrity. Look out for the following:

  • Incomplete data
  • Outdated data
  • Data that isn’t always standardized, (e.g., profits might be listed as gross profits or operating profits)
  • Data that necessitates qualitative judgment

Step 4: Synthesis

Let’s quickly recap. You’ve set your objective. You’ve determined a criterion that defines attractive customers. And you’ve collected data about potential customers. Now it’s time to synthesize all the information you have – to marry what you already knew with what you’ve discovered through research.

Here’s an example to illustrate. Let’s say you’re looking to increase the number of subscribers to your music streaming platform. Your most attractive existing customers are defined by how long they’ve been subscribed – i.e., you want more customers that will subscribe for two or more years. These are your target customers.

You’ve analyzed your existing target customers and found that the vast majority are 25-35 years old and live in metropolitan areas. You dig a little deeper and uncover than many share an interest in other streaming apps – such as a podcast streaming app.

You use this information to define a look-alike audience, uncovering what your target customers like, what their habits are, which platforms they prefer, and so on. You use all of this data to create a market segment, which then informs your growth marketing campaigns.

Customer segmentation is a key component of the modern marketing process. It helps you to deliver on your demand generation goals by allowing you to focus your resources on those customer pain points that matter most.

Segmentation Aims

To begin with, we need to devise our aims for segmentation. Writing for OpenView, Tien Anh Nguyen defined the three types of customer segmentation. These classifications are a priori, needs-based, and value-based.

A priori refers to simple segmentation along a range of general characteristics. These might include gender, age, income level, or engagement medium. This is the most basic form of segmentation and uses information that is freely available to numerous other parties. This limits the usefulness of a priori segmentation.

Needs-based uses information gathered through thorough market research and interaction to divide customers based on their needs. This is a far more sophisticated form of segmentation than “a priori”, and goes some way to forming a profound understanding between customer and business.

Value-based segmentation divides customers along boundaries of overall value. This requires the harvesting of data from customer and client interaction over an extended period.

While Mr Nguyen is writing with specific regard to the B2B market, this model still applies to B2C businesses. In order to create manageable and useful segments of customers, we must first define our aims, and then decide which of the methods mentioned above is the most suitable.

Tried and Tested Segments

Once formed, customer segments must be subjected to intense scrutiny and examination on a long term basis. It is only by trying and testing and then trying and testing again, over and over, ad infinitum, that we can be sure that our segments are truly working and are as effective as they can be.

One problem which many of us encounter when attempting to build such customer segments is that we get a little ahead of ourselves. We think we know our customers – and we are sure that we know our business – and so we make assumptions. Making guesses and building segments based on such intangibles will only lead you down a blind alley, leaving you with customer segments and buyer profiles that are not fit for purpose.

The data is there; it is up to you to use it. Only form customer segments based upon solid truths, facts, and figures. Leave the guesswork out of it all together, re-appraising the efficacy of each segment with each new data set you lay your hands on.

Don’t forget that the segments must be flexible; if you receive data which conflicts what you already have and you decide that a reorganization is necessary, then reorganization is what needs to take place.

The Omnichannel Approach

Remember that modern consumers are fluid and therefore your customer segmentation strategies need to reflect this. Make sure that your customer segments are optimized for use across all of the relevant access points of your organization.

Increasing numbers of customers use mobile devices to shop for products and services, alongside more traditional means. The physical store is still an important part of retail, but customers are starting to browse products online beforehand or reserve products for collection.

Getting this right requires research and behavioral analysis. Which access points do customers within a certain segment tend to use? At which points are we losing customers from each segment? Which products would benefit this particular segment?

Develop each segment by answering these questions and use the answers to map out typical customer journeys for each segment. There is likely to be more than one typical journey for each, but by understanding them, you are coming one step closer to achieving a totally omnichannel structure within your organization.

Creating Detailed Profiles

Initially, we compromise because of time, cost, and a scarcity of resources. We must start small, working with the data we have in an effort to better understand our customers and to market to them in a more effective manner. This is the nature of the compromise in the early stages; the odds are stacked against us but we are making the best of what we have.

However, the situation doesn’t remain this way forever. Interactions develop and flourish, our marketing automation platforms feed more and more data into our organizations, and our situation hand becomes stronger. With this influx of data, we can make the segments even more accurate.

As we learn more about each segment, we can add more detail to their profile. We might find that, as the wealth of resources at our disposal has grown, we are now in a position to implement more specific profiles and segments and in increasing numbers within our business.

This is the nature of the compromise we are aiming for. It is almost not a compromise at all; instead, we have developed astonishingly accurate, inherently useful customer profiles which we can then utilize in our personalized marketing and support initiatives.

With this level of business intelligence, client understanding and marketing savvy, the sky is the limit for what your business can achieve.

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Michael Brenner

Michael Brenner is an international keynote speaker, author of "Mean People Suck" and "The Content Formula", and Founder of Marketing Insider Group. Recognized as a Top Content Marketing expert and Digital Marketing Leader, Michael leverages his experience from roles in sales and marketing for global brands like SAP and Nielsen, as well as his leadership in leading teams and driving growth for thriving startups. Today, Michael delivers empowering keynotes on marketing and leadership, and facilitates actionable workshops on content marketing strategy. Connect with Michael today.

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