Customer Segmentation

What is Customer Segmentation?

Customer segmentation, as the name suggests, is the practice of dividing the customer base of a business into various groups based on common characteristics, such as gender, age, or spending habits.

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Customer segmentation helps marketing and sales teams adapt their strategies according to the segment they’re catering to. After all, sales isn’t a “one-size-fits-all” process.

The Different Types of Customer Segmentation (With Examples)

Customer segmentation can be broadly done in 4 ways. We’ll go through each type of segmentation one by one below.

Demographic SegmentationGeographic SegmentationBehavioral SegmentationPsychographic Segmentation

Demographic Segmentation

This is one of the most common types of segmentation where the customers are divided based on factors like age, gender, or income. This kind of segmentation is popular in the eCommerce industry.

For example, an online clothing brand will divide its customers based on their age, body type, and gender. It’ll then display products according to the segment a customer falls in.

A 25-year-old male buyer will probably see ads for hoodies and sneakers. At the same time, a female buyer would see more makeup ads than their male counterparts.

Geographic Segmentation

This involves dividing your customers based on their locationcity, country, climate, or culture, for example. This helps businesses narrow down the area they want to target.

Let’s say you have a gourmet meal box business in New York with the option of home delivery. However, wouldn’t it be inconvenient if someone from Jersey City placed an order?

This is where geographic segmentation comes in handy. Similarly, if you’ve opened a new outlet in San Francisco, you can design a location-specific campaign in that specific location.

Behavioral Segmentation

Here, customers are segmented based on how they interact with a brand, generally with the help of website analytics – i.e. the number of visits, time spent on the website, or the period of inactivity.

Businesses also use lead scoring to understand customer behaviors. Under this, specific points are assigned to each customer based on their actions.

Let’s say for every email a user opens, it’s 2 points. Similarly, if a prospective lead calls and inquires about your product/service, they might earn 5 points.

The higher the score, the more interested they likely are in your business. These leads can be classified as “qualified”. You can then direct your efforts at this customer segment to boost conversions.

Psychographic Segmentation

Here, businesses segment customers based on determinants like their values, opinions, personality, lifestyle, hobbies, and other psychological characteristics.

This process is a tougher process than the others, as this data can’t be quantified, so they’re difficult to gather. Surveys with open-ended questions are the primary source of psychological data collection.

Why Customer Segmentation is Important

For starters, customer segmentation is important to streamline and focus your sales efforts on the right audience. Here’s a quick look at some of the other key benefits of customer segmentation:

  • It helps you know your audience better
  • By identifying the right customer target group, your marketing team can bring quicker results
  • Increases customer retention as segmentation helps identify key clients
  • Allows marketing teams to personalize marketing efforts based on the customers being targeted
  • It helps you stay competitive by offering the right prices and offers as per the segment’s needs

How to Segment Customers

Wondering how to go about dividing your customers into various segments? Here’s a step-by-step guide to help:

  1. Know Your Market

    The first step of the process is to understand your own market. Who are the large players in your industry? How do they segment their customers? What sort of people are their target audience?
  2. Collect Customer Data

    Next, you’d need to examine your own base of customers. A good way of doing this is to gather information on how a customer, or a prospective lead, interacts with your brand.

    This is typically done with CRM software. We suggest using survey and feedback forms to build on this data. Remember, the more you know about your customers, the better you can segment them.

  3. Choose a Segmentation Model

    Now comes the most important part — choosing a segmentation model. As we’ve already outlined, you have 4 options — demographic, geographical, behavioral, and psychographic.

    Look at what your competitors are doing, as it’s always a good indication of which direction you should go.

    Segmentation Model Basis of segregation
    Demographic Age, gender, income level
    Behavioral Personal interests, purchase behavior, occasion, benefits sought
    Geographical Location, city, state
    Psychographic Personal beliefs, political opinions, values
  4. Use CRM Software

    Finally, when you’ve decided on your segmentation method, and have all the customer data you need, use the CRM software to create customer profiles and divide them into various groups. You can even create multiple groups for the same customer.

    For example, an adolescent female buyer can be classified on the basis of both gender and age. Once your profiles are well segregated, you can direct marketing efforts to these groups for a more successful approach.

The Bottom Line

Customer segmentation helps you narrow down your marketing approach and focus on hot leads, which can turn into long-lasting customers. It also helps you personalize your marketing efforts.

All in all, segmentation has proved as a valuable addition for marketers all around the world.

FAQs

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Krishi Chowdhary

Krishi Chowdhary has half a decade of experience writing buying guides and product reviews for numerous leading technology websites. He spent two years writing for Business2Community.com before joining Techopedia.com. He has a degree in Commerce and extensive experience in the technology industry. He's also the key driver behind TechReport.com's news content, delivering expertise insight into the latest tech and cybersecurity news daily.