Jimmy Chase
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January 22, 2024
Last updated
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min read
Customer segmentation is the process of dividing customers into groups that share similar characteristics. By focusing on smaller subsets of customers, businesses can personalize their products and services to those that matter most to their brand.
While customer segmentation is primarily a strategy used by marketers to enhance the effectiveness of campaigns, it benefits every area of a company. By identifying key customer segments, the sales team can determine how much customers are willing to pay, the product team can focus on the most important features, and the support team can understand customer needs better.
For retailers and restaurants with brick-and-mortar locations, customer segmentation can also provide valuable insights that inform site selection and expansion strategies.
When discussing the segmentation process, ‘market segmentation’ and ‘customer segmentation’ are sometimes used interchangeably. This is because there is a lot of overlap between them and both are often conducted simultaneously during market research initiatives. Nonetheless, it can be helpful to distinguish the two terms.
Market segmentation is more general and involves dividing an entire market of prospective customers into subgroups.
Customer segmentation is more specific as it only deals with the classification of existing customers.
Depending on your business goals, you may want to pursue one or both forms of segmentation. For instance, a retailer looking to expand to a new geographic market would benefit from understanding where their potential customers are located through market segmentation. That same retailer could also use customer segmentation to discover a new audience and create a targeted marketing campaign for that group.
The next step is to decide which segmentation models to use to provide the most valuable insights. Here are six ways you can segment your customers:
The decision to use one or more of these segmentation models depends on the level of customer data available to you and which information is valuable to your business. If you’re just getting started, begin with demographic segmentation to provide a foundational understanding of your customers. Then consider which additional data points you’d like to collect and use to enrich your customer profiles.
Once you’ve decided on the scope and method of customer segmentation, you’re ready to begin the segmentation process. There are five steps to developing a customer segmentation strategy: prepare, segment, analyze, target, and adapt.
Collect and clean customer data to ensure your segmentation will be accurate. Data is typically collected via surveys conducted either by your company or a third-party market research firm. You can also use 1st-party data your business already has in its CRM platform from previous customer interactions.
Next, decide how to segment your customers. Two common methods include RFM analysis and CLTV analysis.
CLTV (Customer Lifetime Value) analysis identifies the customer segments that will likely yield the highest total revenue throughout the entire business relationship.
RFM (Recency, Frequency, Monetary Value) analysis determines a business’s most profitable customers by focusing on three factors:
If you’re comfortable working with data, you can build either of these models within an excel spreadsheet. Our Customer Segmentation Toolkit shows you step-by-step how to segment your customers using RFM analysis. For larger, more complex projects, you’ll likely want to hire a data scientist to build one of these for you.
Another way to segment your customers is to leverage a segmentation system. These are market segmentations built from aggregated third-party data–typically census and survey data–that classify consumers by broader lifestyle characteristics. Segmentation systems are particularly valuable in market research, offering data and insights that extend beyond the information gathered solely from customer interactions with your business.
After you’ve segmented your customers, it’s time to mine the data for valuable customer insights. The exact output will differ based on the segmentation method used, but there are generally four categories of customers you’ll want to identify and study:
By analyzing the shared characteristics of your most valuable customer segments, you can develop customer personas that bring them to life for your business. These personas can then be shared across the company to inform marketing, sales, and product decisions.
With a robust picture of your customers in hand, you are equipped to target them more effectively and optimize your marketing efforts. At a high-level this involves choosing a customer segment, tailoring the ad messaging and creative, and launching your campaign across specific channels. If you are a real estate strategist and your segmentation includes geographic data, you can map customer segments to find ideal target markets.
Finally, monitor your campaigns and adjust your strategy accordingly. For digital marketing campaigns, you will likely discover certain ad sets that perform better with specific segments. An easy way to capitalize on this is to reallocate ad dollars to the high-performing ads. In the brick-and-mortar space, brands can experiment with new markets by measuring customer engagement with smaller pop-up locations before committing to a full site build.
Use customer segmentation tools and software specific to your use case to streamline the process. Below are a few examples to kickstart your research:
Want to go deeper? Watch the on-demand webinar to learn more about PersonaLive or schedule a free demo.