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 a person went to school, what they’ve studied, and the highest level of degree earned. For example, people 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 you purchase 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 it does in 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, and 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, etc.
- 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, they enjoy 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
When you’ve collected the data you need, use the following methods to segment your customers effectively:
Determine the size and value of each segment: Compare segment size with revenue generated by each segment to differentiate between loyal vs. 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 like 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.
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.