How to Implement Customer Segmentation
If you lived in southern California, it wouldn’t make sense to get ads about the newest winter coat that can keep you warm up to -20 degrees. If you are a single teenage boy, you would be confused to receive ads about baby diapers. This is why customer segmentation is essential. Consumers benefit from seeing content relevant to their lifestyle, life stage, interests, and behaviours. It is helpful for brands to ask questions such as, why do some customers value quality over price? Why do some customers prefer to shop in-store instead of online? Why do some customers purchase your products once a month while others only engage with your brand twice a year?
To answer these questions, companies should segment their users by shared similarities to build, nurture, and maintain strong consumer relationships. Brands should start by conducting market research and collecting data to categorize their customers so they can better understand how to position themselves in their industry, personalize their marketing efforts, and meet shopper expectations. What is customer segmentation, and how does it work?
What is customer segmentation?
Customer segmentation is dividing your customers into groups based on shared traits and similarities. Customer segments can be broad, such as separating customers who follow you on social media from those who do not. They can also be specific, like separating customers by their generation. Segmentation helps companies gain a competitive advantage, draw in high-quality leads, and improve products.
Customer segmentation is often referred to as market segmentation, but the terms differ slightly. Market segmentation is when brands separate consumers into needs, behaviors, or values based. Customer segmentation occurs when brands separate consumers into geographic, demographic, or psychographic groups. Both are useful for personalizing content to guide consumers along the path to purchase. For simplicity’s sake, both will be referred to as customer segmentation in this article.
Brands use market research, industry and competitor analysis, and customer data to categorize customers. When capturing user information, companies should focus on zero-party and first-party data, which includes their contact information, purchase history, marketing communication preferences, and survey responses. Second and third-party data can have disadvantages due to varying accuracy, reliability, and quality. Since zero and first-party data come directly from the consumer, it is the most reliable data for customer segmentation purposes.
So, why should your brand consider customer segmentation? First, 71% of consumers expect personalized experiences while shopping. Personalized content makes consumers’ shopping decisions easy, allowing brands to lead more consumers to purchase. Additionally, segmented marketing campaigns have been seen to produce an average of a 760% increase in revenue. Moreover, customer segmentation is found to help brands resonate with their audience. Whether tailoring messages to customers' needs and interests or selecting the most appropriate communication channel, each segment has unique ways of receiving information.
B2B vs. B2C
As expected, B2B and B2C companies may take different approaches to customer segmentation. In B2C marketing, brands are focused on the individual. Segments can include customers’ profiles, attitudes and lifestyles, geographic location, and other demographic information.
In B2B marketing, companies focus on the industry rather than the individual. Segments can include decision-maker job titles, the industry sector, the size and location of the company, whether the company is public or private, or buying patterns. B2B companies often use vertical or horizontal alignments to approach customer segmentation. In vertical segmentation, companies choose industries or job titles that would be interested in their product and then market to segments that are ready to purchase. This tactic helps companies to solve specific problems that industries experience. In horizontal segmentation, companies market to one job title across various industries and organizations. This tactic helps companies to meet the unique needs of specific job titles.
10 Customer Segmentation Models
Technographic segmentation
In technographic segmentation, customers are separated based on the technology they use, such as different types of devices, software, or apps. This can include what device people read email newsletters on, whether they purchase products within an app or on a website, or what internet browser they use. Brands should use technographic segmentation to understand and optimize their consumers’ experience across all platforms and devices. For example, Universal Pictures uses behavioral segmentation in their All-Access Rewards program by tracking which movies consumers buy and if they buy digital or physical copies.
Behavioral segmentation
In behavioral segmentation, customers are separated based on how they interact with your product, service, or overall brand. This includes click-through rates, social media interactions, or time spent on a website. Behavioral segmentation helps companies understand their users’ journeys, reduce friction, and identify up-selling and cross-selling opportunities. For example, brands can see which customers click to purchase a product through a newsletter.
Needs-based segmentation
In needs-based segmentation, customers are separated based on their financial, emotional, and physical needs. For example, Apple prides itself on having products that are easy to use and accessible to everyone. This helps those that have impaired vision, are hard of hearing, or may not be tech-savvy to feel confident that they can use an Apple product. Other brands have tapped into consumers' emotional needs by partnering with charitable organizations and donating a percentage of their profits.
Value-based segmentation
In value-based segmentation, customers are separated based on the financial value they bring to your business. Creating value-based segments can help brands focus on customers with high lifetime value, or the estimated monetary amount they will bring to your business. This type of segmentation can help businesses see how consumers respond to the prices of products or services and shed light on why people spend the way they do.
Customer status segmentation
In customer status segmentation, customers are separated based on their place in the customer lifecycle. This refers to new customers, loyal customers, at-risk customers, churned customers, or new leads. By knowing what stage consumers are in, marketers can use effective tactics to nurture them toward purchase, loyalty, and advocacy.
Firmographic segmentation
Often used by B2B companies, firmographic segmentation separates companies in a market. While B2C companies often segment individuals by demographics, B2B companies look at the characteristics of businesses. Characteristics used for firmographic segmentation include location, number of employees, industry, or revenue.
Generational segmentation
In generational segmentation, customers are separated based on their generation. These categories include Generation Alpha, Gen Z, Millennials, Generation X, Baby Boomers, and the Silent Generation. Each generation has its own beliefs, preferences, and behaviours that play a prominent role in who they are as consumers. Generational marketing shouldn’t be a company’s only consideration when segmenting its customers. However, generational marketing can offer a strong foundation for designing and analyzing personalized marketing campaigns that help create fully-developed future strategies.
Geographic segmentation
In geographic segmentation, customers are separated based on their location, such as their country, region, state, or city. Other factors considered are time zones, language, climate, or culture. For example, a brand that sells down-filled winter coats may choose to have fewer storefronts in Arizona compared to Washington due to the warm climate. Alternatively, brands may advertise using shoppable videos in Asia rather than North America because that form of marketing is commonplace in Asia but still growing in North America.
Demographic segmentation
In demographic segmentation, customers are separated by population characteristics such as age, gender, ethnicity, and religion. This can also include family and career attributes, such as occupation, income, and household and marital status. For example, Lululemon released an athletic hijab for Muslim women. Before this product was released, there were few athletic hijabs available on the market. Through market research and data collection, Luluemon anticipated that Muslim women would value a hijab that they can use while exercising.
Psychographic segmentation
In psychographic segmentation, customers are categorized by their social status, lifestyle, attitudes, values, and opinions. Companies should focus on gathering first-party data through surveys, quizzes, and polls to segment their customers accordingly. For example, skincare brands can send out a poll asking consumers which new products they would like to see, or a music streaming app can send out a survey to tailor the algorithm to users’ preferences. When combined with other segmentation models, psychographic segmentation can help businesses create detailed buyer personas and design personalized marketing campaigns.
How to Implement Customer Segmentation
1. Analyze your product
Take time to define its function, audience, unique selling points, and competitive advantage.
2. Create a buyer persona
Ensure you create a well-rounded buyer persona with specific characteristics to help your segmentation process. Break apart and rebuild the purpose and messaging of your product to match your customer segments. When building your buyer persona, ask: Who benefits from your product? What social media channels do they use? Where do they engage with your product?
3. Collect market data
Leverage public records, general research, and purchasing data that you already have to collect demographic and geographic data. Utilize surveys and interviews to help collect behavioral and psychographic data. Remember to choose what data is relevant to your product or service.
4. Organize segments
Order segments according to their buyer characteristics. You want to focus on the groups that contribute to the highest sales. For example, if you notice that males between the ages of 25-30 buy more chocolate-flavored ice cream than other flavors, you can reflect those segments into your marketing plan for chocolate ice cream.
Mistakes to Avoid
There are a few things brands need to be aware of when implementing customer segmentation. The first is making segments too narrow. You want to ensure that each segment will serve a purpose for your marketing plan. Next, refrain from segmenting groups that have a low chance of purchasing. It’s essential to analyze your data and leverage segments with a high customer lifetime value. Lastly, don’t be rigid with your segments. Always allow for flexibility in your models so that you can change plans as necessary after testing segments for effectiveness.
Collect First-Party Data and Leverage Customer Segmentation
Brands can segment customers in various ways to help drive sales, identify opportunities, reduce risks, and grow their business. Companies' strategies, decision-making processes, and customer support become stronger when they capture and leverage market research and first-party data. Segmentation also supports personalization, creating a more engaged customer base.
3 tier logic’s PLATFORM³ helps brands connect with customers and collect valuable first-party data through gift with purchase promotions, contests and sweepstakes, loyalty programs, and more. The Data Capture & Analytics dashboard provides consumer insights into how to improve awareness, increase engagement, and nurture customer loyalty. To learn more, book a demo with our team today.
