Let’s talk about customer segmentation in the context of a dating game show. Well, why not? Think about it: To market effectively, you need to understand your customers — to have a lasting relationship, you’ve also got to know and understand your partner.
What’s Customer Segmentation?
Customer segmentation is the practice of splitting a customer base into groups that are similar in specific ways relevant to marketing, such as gender, interests, activities, location, and spending habits. It’s important for marketers because it’s unrealistic to target a mass audience and expect good results. People are different, and you have to play to those differences.
The Four Common Customer Segmentation Models
There are four common segmentation models that businesses use: demographic, geographic, behavioral, and psychographic.
But, before we delve a little deeper into each segmentation type, let’s imagine that you’re on a blind dating show. We’ll give you some information about contestants A, B, C, and D, and in the end, you’ll choose who you’d most likely pursue a relationship with.
Ready? Here we go.
Demographic segmentation slices the market into smaller categories based on demographic factors, such as age, gender, and occupation. Here are four common demographic subcategories that you can target:
- Age: Age segmentation slices up your target market by specific age ranges or generations, such as millennials and baby boomers. For instance, baby boomers probably aren’t your target audience for a young adult love story between vampires and werewolves.
- Education: Education segmentation thinks about where people went to school, what they’ve studied, and the highest level of degree earned. For example, those with higher education levels are more likely to understand the benefits of a healthy diet. Consumers with a lower education might need to be more informed. Knowing this information helps health food organizations market to people with different educations in varying ways.
- Occupation: This type of segmentation focuses on a person’s job and seniority, which can significantly influence how someone purchases products and services. To give an example, construction workers would make different clothing choices compared to company executives.
- Income: Income segmentation looks at consumers’ income range to determine pricing tiers. This is used when you carry both expensive and inexpensive products or services.
What you know about Contestant A: They’re 33 years old, with a bachelor’s degree in mathematics, and a job in finance.
This type of segmentation zones in on geographic locations. People have different needs, depending on where they live. Here are three geographic subcategories to target:
- Climate: Climate segmentation involves marketing products based on a particular region’s climate. For instance, swimsuits probably have a lower demand in Alaska than California.
- Population: Population segments consumers according to urban, suburban, and rural areas. For example, lawnmowers might be more of a draw in suburban areas versus big cities.
- Culture: Many companies practice cultural-based geographic marketing. One such company is McDonald’s — their menus differ according to country. Taro pies are a huge thing in China, while the McCurry is a popular item in India.
What you know about contestant B: While they currently live in the same city as you, they were born and raised in China until the age of ten.
Behavioral segmentation divides consumers according to behavior patterns as they interact with a company. This includes their attitude, response, and knowledge of a product or service. Here are a few variables to track:
- Purchase behavior: Measuring purchase behavior is the best way to tell what someone likes. Case in point: Amazon’s algorithm and how it recommends new products based on your past purchases.
- Timing: Everyone makes different buying decisions based on the time of year. Think holidays, birthdays, anniversaries, and so on.
- Engagement: Levels of engagement allow you to determine who you should spend your resources on. If people show low engagement, you don’t have to waste your time converting those low-quality leads.
- Loyalty: Figure out who engages with your brand the most and makes repeat purchases. According to the 80/20 rule, 80% of profits will come from your most loyal customers.
What you know about Contestant C: They love shopping on Amazon and acknowledging special events and holidays with gifts.
Psychographic segmentation splices up target audiences based on consumer psychology. This type of segmentation shines a spotlight on the intrinsic traits of a consumer, which can include values, personalities, and attitudes. There are three common psychographic segmentation factors:
- Social status: The social standing of your potential customers has a direct correlation to their shopping habits. A luxurious car is probably a better fit for someone of high social status as opposed to a person who’s struggling financially.
- Lifestyle: The lifestyle of your target customer is essential for determining whether your products or service will appeal to them. For example, you’d put a more significant focus on marketing hiking gear to someone who prefers outdoor activities.
- Personality: Your personality is made up of your beliefs, motivations, and values. By digging into consumers’ personalities, you can market accordingly and become an emotionally compelling brand.
What you know about Contestant D: Considered wealthy, this person enjoys outdoor activities and is an extravert who revels in being the center of attention.
And the Winner Is…
Based on the information about each contestant, who would you most likely choose to form a relationship with? The answer is probably (ding! ding! ding!), none! There simply isn’t enough information to determine whether you’d be compatible with any of them in the long-run — the factors given are too shallow.
The same applies to the marketing world: You can’t successfully market unless you have a deep understanding of what your customers want. To do this, you shouldn’t just focus on one type of segmentation, like demographics. Use a mix of or all of the components of customer segmentation to expand and mold your products or services specifically to consumers’ needs.
When customer segmentation is successful, you can also create a better customer experience using personalized ad campaigns for subsets of consumers. This type of laser-targeting doesn’t just increase customer retention — it also allows your company to remain competitive with others.
How to Effectively Use Customer Segmentation
It’s not enough to simply segment out your customers. Those segments must serve a purpose to justify the cost and time spent identifying them. The good news is that a plethora of new tools make it easier than ever to identify, sort, and market to these individual segments. This section will help you figure out what to do with them once you have them.
Business Objectives for Customer Segmentation
There are many great reasons to segment marketing groups, but the biggest two are to decrease marketing costs and increase sales. These two pillars represent the traditional gold standard for segmentation business objectives, but they aren’t the only ones. Some of the reasons you may want to run a segmentation campaign include:
- Decrease Marketing Costs: When you know the relative value of each segment, you can do some simple math to figure out where your marketing dollars will have the most impact. This may not always be the biggest segment or the highest source of revenue. Instead, it’s the segment with the highest return on investment (ROI) — they may have exceptionally high customer lifetime value (CLTV), or they may just be very cheap to reach.
- Increase Revenue: Sometimes, the goal is to increase revenue, whether it’s the most efficient way or not. Segmenting customers allows you to identify your most valuable customer groups and saturate them with marketing to increase top-line sales by focusing on those groups.
- Taking Market Share From A Competitor: By understanding your customer segments, you may be able to figure out which ones your competitor is targeting, and then steal their market share.
- Identifying New Marketing Opportunities: Segmenting allows brands to figure out what their customers look like now, which allows them to identify similar customer groups they aren’t yet engaging with. This approach of similar segments allows brands to expand their market by going broad rather than deep — finding new markets instead of pushing further into existing ones.
- Increasing Marketing Efficiency: Different segments may respond differently to the same marketing message and approach. Segmentation allows savvy brand managers to create varied messaging that is custom-tailored to each segment’s needs. It can also allow for using different strategies and tactics to bypass each specific segment’s defenses.
Processes and Techniques
Turning your customer information into useful segments requires a few extra steps beyond collecting the data. You can use some of the following methods to segment your customers into more helpful groupings:
- Determine the size and value of each segment: Compare segment size with revenue generated by each segment to differentiate between loyal versus non-loyal customers. Loyal customers are those who you should focus your marketing initiatives on. Determine the average revenue and profitability by each segment by using attitudinal variables, such as the Net Promoter Score.
- Cross-tabbing: Don’t be afraid to experiment with “crossing” more than one variable. For example, maybe you think there’s a relationship between gender and intent to buy. You can create a cross-tab report that filters the people interested in your product and cross-tab by gender to test your theory.
Once you’ve got that, you can design a segmentation targeting program to start using the segments in your marketing. Remember that the key to any successful marketing campaign is a solidly data-driven approach, so always test your implementations and iterate until they are running at peak efficiency.
Segmentation has been a hot topic over the last few years, and a number of tools have been developed to support marketers in their efforts. These tools fall into three broad categories:
- Identifying and Segmenting Customers: These tools are usually, but not always, built into CRMs and allow you to split up your audiences into logical segments based on a variety of criteria. The best ones leverage AI to make these decisions even smarter.
- Exploring Similar Segments: These tools will help you find segments and audiences that are similar to the ones you’re already engaging. Often built into ad and social platforms, they can help marketers find new opportunities.
- Creating and Implementing Campaigns: These tools take in segmentation data and allow you to launch full campaigns across different segment groups without having to manually separate customer lists or deal with groups individually.
For marketers diving into segmentation, it’s critical to understand how each set of tools work, even if you don’t need to be familiar with every tool on the market. Luckily, there are plenty of resources available to help you learn how to use segmentation tools.
After you’ve segmented your customers, the next step is to get creative and personalize! The ability to create attention-grabbing content is one of the great benefits of segmenting your customers. Think of personalized ads, CTA buttons, blog posts, social media campaigns, emails, and customer service. Be sure to continually fine-tune and test to see what works best, and don’t forget — a customer who feels comfortable engaging with your brand is a customer for keeps.
Wait — the journey to understanding your customers isn’t over. Learn how to use psychometrics to understand consumer attitudes and buying behavior.
Originally published on November 18th, 2019, last updated on June 16th, 2022.