Customer segmentation – what is it and how to use it?

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.