What is customer segmentation: Guide to targeted marketing strategies

What is customer segmentation?

Customer segmentation is the practice of dividing a company's target audience into groups with similar characteristics to improve customer engagement.

Think of it like organizing a messy closet. Instead of a jumble of clothes, you sort everything into categories: shirts, pants, dresses, etc. This makes it much easier to find what you need. Similarly, customer segmentation – a cornerstone of customer analytics and behavior – helps you "find" the right customers for specific marketing efforts.

Why is customer segmentation important?

The goal of segmentation isn't just about labeling groups. It's about understanding your audience on a deeper level. This allows you to:

• Personalize marketing. Tailor your messages and offers to resonate with specific categories of shoppers, increasing engagement and conversions.

• Improve product development. Identify customer differences, specifically their unique needs and wants, to create products and services that truly meet their demands.

• Optimize resource allocation. Focus your marketing budget and efforts where they'll have the most impact.

• Build stronger customer relationships. By showing that you understand what makes them unique, you can foster loyalty and long-term customer value.

• Boost customer retention: Proactively address the specific pain points and preferences of different segments to reduce churn and keep customers coming back.

Customer segmentation vs market segmentation

While both customer segmentation and market segmentation involve organizing shoppers into smaller segments, they play unique roles in your marketing arsenal.

Customer segmentation spotlights your existing customer base, aiming to understand the different types of customers you already have. This approach is best for businesses with established customer bases who want to deepen relationships and tailor their offerings. For example, a clothing retailer might segment its customers into budget-conscious shoppers, fashionistas, and those who prioritize comfort.

Market segmentation, on the other hand, focuses on the broader potential market. The goal is to use market analysis to identify distinct groups and, subsequently, expand your reach – whether it’s by entering new markets, exploring new product lines, or identifying other untapped opportunities.

Types of customer segmentation models

Understanding your customers is not a one-size-fits-all affair – there are several customer segmentation types to consider when approaching this challenge, including:

• Demographic segmentation

• Geographic segmentation

• Psychographic segmentation

• Behavioral segmentation

• Technographic segmentation

• Firmographic segmentation

• Needs-based segmentation

• Value-based segmentation

Here’s what makes each one unique.

Demographic segmentation

Demographic segmentation involves organizing your target audience based on demographic factors like age, gender, income, and education level.

One of the biggest benefits of demographic segmentation is how it provides the foundation for developing targeted marketing strategies. For example, a cosmetics company may target ads specifically for women aged 18-35.

Because demographic data is relatively inexpensive and simple to gather, businesses can use it to easily predict consumer behavior and allocate marketing resources more efficiently, potentially resulting in increased engagement and conversion rates.

However, given its simplicity, solely focusing on demographic segmentation can lead to over-generalizations and missed opportunities. Whenever possible, try to pair it with other segmentation models.

Geographic segmentation

The geographic segmentation model separates customers based on physical locations such as country, state, or neighborhood, allowing businesses to localize their marketing efforts.

For example, a clothing retailer may use geographic segmentation to offer different styles or promotions depending on the weather patterns of specific regions.

While the advantages of geographic segmentation are numerous for businesses with physical locations, they may be less relevant for online-only retailers seeking a broad, international audience.

Psychographic segmentation

Psychographic segmentation categorizes customers based on their values, lifestyle choices, and opinions. This provides key insights for businesses to connect with shoppers on a deeper, more emotional level.

Here are some examples of psychographic segmentation in action:

• A fitness brand might target individuals who value health and wellness.

• A luxury car manufacturer could focus on consumers who appreciate status and performance.

• A sustainable fashion brand may appeal to environmentally-conscious consumers.

The catch? Data for psychographic segmentation is often harder or more expensive to collect and analyze.

Behavioral segmentation

By leveraging behavioral segmentation variables like spending habits and product usage rates, companies can create personalized campaigns that compel shoppers to take particular actions.

For example, businesses can use this segmentation model to:

• Target users who have engaged with their products but have yet to make a purchase.

• Deliver tailored recommendations to frequent shoppers based on their purchase history.

• Incentivize low-engagement customers to interact more with the brand.

Like psychographic segmentation, behavioral segmentation typically requires extensive data collection and analysis, which may not be feasible for all businesses.

Technographic segmentation

Technographic segmentation categorizes customers based on their relationship with technology. This includes the specific technologies they use, how often they use them, their proficiency level, and even their attitudes towards adopting new technologies.

Technographic segmentation is particularly valuable when:

• Your product or service is tech-related. If your business sells software, hardware, or online services, understanding your customers' tech stack is essential for tailoring your marketing and sales efforts.

• You want to target early adopters. Technographic segmentation can help you identify those who are enthusiastic about new technology and likely to be the first to try your latest innovations.

• You offer products with different levels of complexity. Segmentation based on tech proficiency can guide you in creating targeted messaging and support resources for users with varying skill levels.

• Your sales cycle is long and complex. Technographic data can help your sales team prioritize leads and tailor their approach based on a prospect's technology preferences.

An example of technographic segmentation is a software company identifying customers who primarily use Apple devices versus Android devices, allowing them to tailor marketing campaigns and product features to each group's preferences.

Firmographic segmentation

Firmographic segmentation is a strategy used primarily in B2B marketing to categorize companies based on shared attributes such as:

• Industry. The specific sector or field in which a company operates.

• Company size. The number of employees or annual revenue.

• Location. The geographic location of the company's headquarters or target market.

• Performance. Financial metrics like revenue growth or profitability.

• Status. Whether the company is public or private, or its legal structure.

An example of firmographic segmentation could involve a technology company targeting cloud-based service providers with a substantial workforce and significant annual recurring revenue, located within a specific country.

Needs-based segmentation

Needs-based segmentation groups customers based on their specific needs, pain points, and desired outcomes.

Unlike demographic or firmographic segmentation, which focus on attributes like age or company size, needs-based segmentation digs deeper into the underlying motivations and challenges that drive customer behavior. From there, brands can tailor their products, services, and marketing messages to directly address those needs.

Needs-based segmentation is particularly effective when:

• You have a diverse customer base. When your customers have varying needs and expectations, understanding those nuances is crucial for personalized engagement.

• You offer solutions to specific problems. If your products or services solve specific pain points, identifying those pain points within your audience can help you craft targeted marketing campaigns.

• You want to build stronger customer relationships. By demonstrating a deep understanding of their needs, you can foster trust and loyalty.

Given these benefits, this type of segmentation is most applicable to B2B companies with complex solutions, service providers, and ecommerce businesses.

Value-based segmentation

Value-based segmentation groups customers based on their economic value to your business. It's about identifying which customers are the most profitable and prioritizing them in your marketing and customer service efforts.

Unlike other segmentation methods that focus on demographics or behavior, value-based segmentation directly ties into your bottom line, making it a powerful tool for maximizing revenue and profitability.

How it works is simple: you start by analyzing customer data to determine their lifetime value (LTV), which is the total revenue a customer is expected to generate over their relationship with your company. Based on this LTV, you can then group customers into segments, with high-value customers receiving more attention and resources.

Value-based segmentation is especially beneficial for:

• Subscription-based businesses. Identifying high-value subscribers and focusing on their retention can impact recurring revenue.

• Ecommerce companies. Understanding the value different customer segments bring can help tailor promotions and loyalty programs.

• Luxury brands. Targeting high-net-worth individuals with personalized experiences can drive sales and brand loyalty.

• B2B companies with long sales cycles. Focusing on high-value leads can improve conversion rates and shorten sales cycles.

How to segment and target customers efficiently: Data collection and analysis

Data is naturally the bedrock of effective customer segmentation — keep these considerations in mind when developing your data collection and analysis processes.

Customer data collection

Here are some common customer data sources for the different segmentation models:

• Demographic segmentation: Customer surveys, census data, social media analytics, public records.

• Geographic segmentation: Customer surveys, sales data by location, IP addresses, mobile location data.

• Psychographic segmentation: Social media insights, lifestyle surveys, online quizzes, focus groups, third-party data providers.

• Behavioral segmentation: Website analytics, CRM systems, customer feedback, purchase history, email engagement.

• Technographic segmentation: Website analytics, customer surveys, tech forums and communities, product usage data, third-party data providers (e.g., G2 Crowd).

• Firmographic segmentation: Company websites, LinkedIn, industry reports, business directories, public financial records.

• Needs-based segmentation: Customer surveys, interviews, focus groups, customer support interactions, product reviews, social media listening.

• Value-based segmentation: Purchase history, CRM systems, customer lifetime value (LTV) calculations, average order value (AOV).

Customer-based marketing strategies

Once you have your insights for each segment, it’s time to apply them to your customer-based marketing strategies. Use these tips to fine-tune your marketing efforts:

• Craft customized messaging. Create marketing copy that resonates with the needs and interests of each customer segment. Tailored content captures attention and spurs action, thereby increasing engagement.

• Offer relevant deals and promotions. Ensure your promotions align with each customer segment's preferences and purchasing behavior to optimize conversions and boost sales.

• Choose the right channels. Utilize the preferred communication channels of different segments, be it social media, email, or another platform. By engaging customers where they’re most comfortable, you can substantially increase your reach.

Wrapping up: The impact of customer segmentation

Customer segmentation is not just a buzzword. It's an essential strategy that can significantly influence a growing business's success.

By understanding your customers' unique characteristics, behaviors, and preferences, you have the opportunity to tailor your marketing campaigns – ultimately unlocking increased conversions, heightened customer loyalty, and a boost in revenue growth.

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