In today’s highly competitive world, knowledge of customer behavior is invaluable. Simply offering products and sending notifications about their promotions is not enough to be a leader. In order to effectively reach your target audience and offer them valuable products and services, you need to understand the diverse needs, preferences and behaviors of your customers. To this end, more and more companies are using customer segmentation techniques to divide customers into more precise and understandable groups.

Regardless of the size of the company or the industry, the most important thing is the customer. After all, customers are responsible for a company’s revenue. Customer segmentation is important for both B2C and B2B business. By using segmentation, the needs of customers are analyzed first and only then can an offer be built for their needs, not the other way around.

What is customer segmentation?

Customer segmentation is the process by which a group of customers is divided into smaller, more homogeneous segments, allowing companies to better tailor their marketing and sales strategies. The process involves analyzing data to identify groups with similar tastes, expecting similar services, products or overarching benefits. This is a tool that not only aims to make a description of the segments themselves, but at the same time is designed to suggest what actions towards which groups should be taken. This makes it possible to focus marketing efforts on particular customer groups in a personalized way – and in the end, more personalized communication means better conversions. The key to successful sales is not always the lowest possible price offer mass-mailed to everyone. A price offer can easily be outbid by competitors. In contrast, contextual, inspirational communication and an offer tailored to the segment is already much harder to copy.

Why is it important to segment consumers?

Customers are distinguished by different characteristics and have different needs. For some of them, it is important to have a new offer, the highest quality, a specific product category, or sometimes a discount. Trying to meet everyone’s expectations with one offer will usually not meet the expectations of anyone. Segmentation makes the recipient of an ad feel like it was created with them in mind and specifically for them.

In the past, customers relied on the recommendation of a salesperson who knew almost all of their customers. As the number of customers grew and the sales network expanded, offering a personalized approach to everyone began to become difficult and, over time, impossible. In order to further personalize content, it therefore proved indispensable to create similar groups of customers through a segmentation process.

Today, machine learning models accurately create groups with the most similar preferences and expectations. Segmentation can take different forms and focus on different aspects due to the company’s needs and business goals. It is important that each segment is significantly different from the others and, at the same time, that they are sized similarly so that they can be served as efficiently as possible.

Market segmentation criteria

Segmentation allows you to distinguish groups of customers that have similar needs, preferences, behaviors. In principle, the number of criteria against which segmentation can be done is unlimited. There are many different criteria for segmenting customers. The most common is segmentation based on the following criteria:

– Demographic criteria

They include segmenting customers based on variables such as age, gender, education, income, marital status, etc. This type of segmentation is often used to better understand target groups and tailor communications to their needs.

– Psychographic criteria

They focus on studying customers’ lifestyles, values, buying preferences and personalities. This allows them to better understand what customers’ motivations and goals are, and what products or services might interest them.

– Behavioral criteria

They are based on an analysis of customer behavior, such as purchase frequency, order size, brand loyalty, most frequently chosen sales channels, etc.

How to perform customer segmentation?

Proper customer segmentation involves several key steps. The general steps that should be included in the customer segmentation process include defining goals, collecting data and analyzing it, selecting appropriate criteria, and finally creating segments of interest to your company.

Before starting segmentation, it is important to define your goals and expectations. Think about why you want to segment your customer base and what benefits you want to achieve by doing so. Remember that segmentation cannot be done without enough data. Identify and collect the necessary data about your customers. Use various data sources, such as CRM systems, surveys, or market research. Then conduct an analysis of the collected data to find patterns, similarities and relationships among the various variables among the customer data. Use data analysis tools and methods to identify important customer segments and differentiators. Based on your data analysis, select key segmentation criteria that will be most relevant to your organization. Then divide customers into groups with similar characteristics. You can use various segmentation methods, such as value-based segmentation, behavioral segmentation, and geographic segmentation.

It is important to make each group as homogeneous internally as possible, while differentiating it from other groups. Don’t forget to describe each segment in detail, taking into account demographic and psychographic characteristics, behaviors, needs and other relevant information. This will give you a better understanding of how to tailor offers and marketing strategies for each customer group. Testing is an integral part of the process to determine how well the segments have been validated.

Customer segmentation is an ongoing and dynamic process. It is important to constantly analyze and update segments according to changing customer needs and market conditions. Segmentation is an essential tool in customer relationship management. One example of segmentation is RFM analysis, which we wrote about in our blog.

Benefits of customer segmentation

The benefits to companies of proper customer segmentation are numerous. Depending on a company’s needs, they can include personalization of offerings, more efficient use of resources, better understanding of the market, more effective communication and marketing, or increased customer loyalty.

Segments help you better understand and know your customers. This allows you to tailor your offerings to their needs. Segmentation makes it possible to create more effective marketing strategies that focus on specific market segments, instead of treating all customers the same. This increases customer engagement and brand loyalty.

Establishing benchmark customer profiles enables personalization of offers and communications. With a better understanding of customers’ needs, you will be able to deliver personalized advertising messages, product recommendations, offers to specific customer groups. This, in turn, leads to better sales results and more effective marketing efforts.

Customer segmentation is also useful for assessing the likelihood of leaving a brand. Thanks to this, the retailer knows to whom to target campaigns aimed at countering churn.

The collected data is changing the process of planning and implementing marketing strategies due to its ability to effectively acquire new audiences. Nowadays, advanced machine learning methods allow not only segmentation of consumers already acquired by the company, but also enable reaching potential customers. Using hundreds of variables related to website behavior, mailings, transactions or demographics, we build scoring models and combine them with DMP systems. In DMPs, we look for new audiences – “look a like” potential customers who are most similar to our club members with certain characteristics, which enables us to scale the reach of campaigns.

Summary

Properly conducted customer segmentation helps companies better identify new opportunities for marketing and sales activities. Analyzing different segments can reveal market niches that are undervalued or under-served by competitors. Companies can focus their resources and efforts on these areas to gain a competitive advantage and increase their market position.

Consumer loyalty has been repeatedly conjugated by all cases, and a lot has been said about the rightness of developing it. SmallBizGenius proves that the best companies in the world generate as much as 65% of their revenue based on repeat business from loyal customers.  Customers who remain loyal to a brand not only buy more often, but it is also much cheaper to retain them than efforts to attract new customers. A high rate of brand loyalty provides stability and acts as a dynamic growth gas pedal, enabling companies to grow up to 2.5 times faster than their competitors. No one needs to be convinced that having a loyalty program simply pays off.

A loyalty program is an investment with multiple business benefits, which is why companies are allocating increasing budgets to loyalty activities. According to the “Loyalty Big Picture” report, more than 71% of retailers invest at least 2% of their total revenues in loyalty and CRM. In this article, we will present the positive effects, sometimes not obvious and not always directly related to the consumer, by which business with the help of a loyalty program grows.  Learn about the areas where the loyalty program brings the biggest growth opportunities!

Targeting communications

Loyal customers are one of a brand’s most valuable assets, and the ability to contact them is a natural source of revenue for a company. If a company pays great attention to the proper building of the base from the very beginning, both quantitatively and qualitatively, it can count on a high response of its communication activities. The loyalty program is conducted in order to get to know customers, identify and understand their needs, and then tailor product recommendations on this basis. Communication prepared in such a way will simply be valuable, will fit into the natural needs of the consumer and will not be perceived as spam. Experience shows that recipients communicated with personalized messages have up to three times higher purchase response compared to non-communicators. In addition, by targeting selected offers to selected club members, the company does not unnecessarily burn through budgets, and targeted communications yield up to 60% higher results than an offer sent to the entire base. It is worth noting that out of the available palette of marketer’s tools, the budget spent on communication in the loyalty program gives the highest return on investment in a short period of time – investment in communication in the loyalty program generates up to four times higher ROI compared to other communication and media activities carried out in offline and online channels. The best market banchmarks show that with a sufficiently large share of the loyal customer base, it is possible to generate up to 15% of additional company turnover with the help of the program. Communication is the basis, but the role of the loyalty program does not end there, as it also affects other aspects of doing business.

Making better decisions

The classic approach to developing a retail business usually focuses on bringing new traffic to the store. However, there are times when stationary stores without special promotional activities are crowded and thus intensifying the number of customer visits, instead of closing sales, only intensifies dissatisfaction in them.

We were faced with an analogous challenge by one client who wanted to grow, but customer satisfaction surveys showed that stationary stores were too crowded to provide a high and satisfying level of service. Bringing in traffic would actually generate even more lost product sales opportunities for the retailer. So how do we grow when we can’t serve more customers?

We decided, with the help of knowledge from the loyalty program, to identify customers realizing large expenditures and analyze what percentage of loyal customers is responsible for what percentage of sales. Very often, to the surprise of many managers, according to the Pareto principle, it turns out that 80% of the company’s turnover is realized by only the top 20% of customers. This was no different in this case.

The data from the loyalty program made it possible to understand the need to focus on activities aimed at the best customers, who account for the lion’s share of sales. This meant that the company should change its approach and start generating sales growth with the quality of customers rather than their quantity. This approach made it possible to meet sales targets by closing sales with the best customers from a business perspective.

Working with assortment

Managing a store’s assortment is quite a challenge for retailers. Optimizing assortment selection is not an easy process and requires the owner to understand shopper behavior. In order to operate effectively, it turns out to be crucial to understand the mechanisms behind customers’ purchasing decisions.

At first glance, it seems that to work with the assortment it is enough to analyze receipts, which of course is possible without a loyalty program. However, on this basis, the company is only able to assess which products are selling and which are not. More accurate analysis is possible by using data from the loyalty program, which takes working with the assortment to the next level. When planning a store’s assortment, it is necessary to know which customers visit our store, when and what products they buy and also in what configurations they do so. Thanks to the fact that customers register their purchases on loyalty cards, we know exactly who buys what, which products customers return for, and which items are repeated in the baskets of a key group of consumers.

This approach sheds new light on assortment control. This is because it may turn out that medium- or even low-turnover products are in the baskets of loyal customers, for whom they regularly return. A company without a loyalty program based on transactional data alone would probably eliminate such assortments, thus risking the loss of regular customers. Analyzing loyalty data can help you understand what products are most popular with loyal customers. This allows you to adjust the assortment at each location based on the preferences of the most profitable business customers.

Distribution network development

Depending on the nature of the business, the store format and the products offered, a company with the help of a loyalty program can optimize the development of its distribution network. We are not only talking about planning the location of new stores, but also providing preferential pick-up points to ensure the best experience for consumers. Loyalty program data is an invaluable source of information that can accurately identify areas with high potential for company expansion. Proper analysis can reveal the presence of customers outside of current store locations or order pickup points. In such cases, it is worth considering expanding the service area to make shopping easier and more convenient for customers.

One Loyalty Point customer, with a relatively small number of outlets in the country, offers products of non-standard weight and size. Although courier delivery is theoretically possible, for an individual consumer this service is disproportionately expensive. In addition, the size of the products in most cases exceeds the possibility of delivery to well-known and popular post office boxes. Based on an analysis of club members’ residential addresses, we were able to launch additional order pickup points in the most challenging locations, making it easier for customers to access products. This gives club members a preferred way to receive their orders near their home address. From the customer’s perspective, this approach is convenient and inexpensive.

Increasing the effectiveness of media campaigns

Loyalty programs are a treasure trove of consumer insights, and, it’s worth noting, their role isn’t just about activities aimed at club members only. Loyalty program data transforms the process of planning and executing advertising campaigns and enables us to look for similar consumers outside our own base.

Using hundreds of variables related to club members, their behavior on the website, mailings, transactions or demographics, we build scoring models that we combine with DMP systems. In DMPs, we look for new audiences – “look a like “, potential customers most similar to our club members with certain characteristics, which enables us to scale the reach of a campaign significantly, up to 10 times.

Because we identify club members’ needs and our knowledge of them is very detailed, we can tailor many of the elements used in a media campaign, such as product and benefit language. In this way, we reach new audiences with a tailored offer with a high potential for conversion to purchase. This translates into up to a 150% increase compared to other activities without using CRM data.

Loyalty program and company financial performance – summary

Once a loyalty program is in place, it is important to continuously monitor how it affects the company’s financial performance. This is because it is not a one-time expense, but a long-term investment. The company must prepare a clear financial plan for the project to know at what point, under what conditions, the loyalty program will earn more than it costs. At the stage of preparing the strategy, a business case needs to be developed, which calculates the costs incurred and the potential benefits under various scenarios. In the course of running the program, new data will emerge, based on which you can estimate further assumptions and develop loyalty activities even more strongly. Work with a loyalty program can never be considered finished – the more we work with loyalty, the more opportunities for development appear on the horizon.