Customer segmentation

What are the different types of customer segmentation, what benefits do they offer, and what models and examples can businesses follow to create their own successful strategies?

When it comes to marketing, there’s no such thing as one size fits all. Even universally known, widely admired brands like Disney and Coca-Cola use customer segmentation to make sure they’re marketing to the right people in the right place at the right time. After all, doing otherwise doesn’t really make sense — why wouldn’t you invest more in your most likely leads or prospects?  

As a foundation for sales and marketing success, then, customer segmentation is an essential ingredient. Let’s take a closer look at what businesses should know about customer segmentation, and what types of models, strategies and techniques they can leverage to achieve their goals. 

What is customer segmentation?

Customer segmentation is the process of breaking down a company’s customer base into smaller groups, to better reach them and communicate with them. By segmenting them according to demographics, product preferences, past behavior and other shared characteristics, businesses can differentiate their customers, and thus more effectively match messaging to a buyer’s unique needs.   

In addition to more effectively finding and speaking with them, segmentation gives businesses the power to better understand customers, and thus better address their needs and pain points over time. Customer segmentation also enables businesses to anticipate meaningful market trends and to lay the foundation for offering a superior customer experience. 

Segmentation also makes it easier simply to get someone’s attention in the first place. Data shows that targeted emails get opened about 14% more than in non-segmented campaigns, and get 74% more click-throughs, too. 

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What’s the difference between customer segmentation and market segmentation?

Like market segmentation, customer segmentation groups people based on certain shared characteristics. But, while market segmentation seeks to define an organization’s place within the larger marketplace, customer segmentation seeks to define, and establish categories among, existing customers (or those likely to be). 

In other words, customer segmentation is like a micro version of market segmentation. The purpose of customer segmentation is to gain greater understanding of a specific part of a larger target market. In doing so, it also serves as a tool to pinpoint an organization’s highest-value customers and provide insights into achieving customer-led growth, among a host of other benefits.   

For example, Nike uses market segmentation to reach a specific niche, such as runners and those participating in certain sports. It then applies customer segmentation to break those groups into smaller groups — such as females, or those who live in a certain country, or who speak a certain language — and to maximize the effectiveness of its messaging to people in those groups. 

Customer segmentation examples

Other examples of customer segmentation can be seen virtually everywhere. For instance, Amazon uses behavioral segmentation to offer specific messaging and promotions to certain customers based on their purchase history, as do most other online retailers. In fact, determining a successful algorithm to best communicate to such customers is an ongoing source of innovation for these companies. 

A key example of customer segmentation is the creation of the first frequent flier program. By singling out customers who travel more often than others, airlines could increase their value even further by offering exclusive promotions. In the years since, tiered rewards and loyalty programs have been a standard way of segmenting and engaging customers in most other industries, too. 

Customer segmentation benefits

What benefits does customer segmentation offer to businesses? By investing in this important marketing tool, business leaders can enable smarter spending by leveraging important information about the people who engage with their brand — who they are, where they live, what they like, where they shop online, and much more. 

Equipped with this information, marketers can speak more impactfully to its customers with personalized campaigns. Stronger relationships lead to more opportunities to upsell and cross-sell in a way that legitimately meets customer pain points, and therefore works to build satisfaction and loyalty, too. Businesses can also more readily identify unhappy customers, and work to win them back. 

Customer segmentation also provides information on what channels any given customer is most likely to engage with, whether it’s an app, a social media push, or a traditional brick-and-mortar sale. This data helps businesses provide support and engagement in the places most likely to win customer approval. 

In addition to better organizing its customer base, segmentation can also define a company’s most valuable customers. This lets marketers know the best prospects to target for particular campaigns, as well as who are deserving of particular attention in general — as well as learning more about what makes them valuable, and how to apply that information to win over new prospects.   

The information gained by customer segmentation can also lead to operational improvements, such as product design and distribution. It can inform decisions about resource allocation, pricing and product development. Done right, it can be the key to achieving a customer-centric reputation, and the benefit of added consumer confidence during a time of widespread concern over spending and inflation.

How customer segmentation helps customer service delivery

Customer segmentation doesn’t just help marketing and sales efforts, but also helps improve customer service, and even the larger overall experience. By better understanding their customer base, and how it changes on a month-to-month basis, businesses can organize their service delivery in a way that best meets the preferences and needs of all customers — and especially the high-value ones

By leveraging segmentation data to make sure all customers and prospects can access the customer service they need quickly and conveniently, businesses can help improve life-cycle value, satisfaction and long-term loyalty. And that, in turn, can readily turn into word-of-mouth praise, further extending the marketing value businesses receive from their investments in customer segmentation. 

Types of customer segmentation models

The type of customer segmentation that’s most appropriate for any given business in any situation will depend on factors unique to that business — what product it sells, its price point, its area of distribution, and so on. For example, shaving or hygiene products are more readily segmented by gender, while health insurance plans would be segmented by age and income. 

In any case, the basic types of customer segmentation usually include: 
  • Demographic customer segmentation groups people by age, gender identification, income, workplace, and other basic identifiers. 
  • Geographic customer segmentation is based on geographic location — usually where people live, but also where they work or go on vacation. 
  • Psychographic customer segmentation is based on more subjective data like values, interests and preferences, such as religions identification. 
  • Technographic customer segmentation groups people based on their tech preferences, like those who prefer apps to online shopping, or those who are more likely to engage via mobile than desktop.  
  • Behavioral customer segmentation groups customers based on actions taken in the past — such as frequent shoppers, or those who buy just one specific product. 
  • Customer status segmentation groups people based on where they’re at in the customer lifecycle, from leads to first-time conversions, and from at-risk members to long-time brand advocates. 
  • Firmographic customer segmentation is based on factors important for B2B marketing and messaging, such as industry, type of corporation and size (i.e., number of employees).  

Customer segmentation strategies and techniques

A wide variety of customer segmentation strategies are available to leverage the different types of segmentation noted above, depending on the needs and goals of each individual business. Many use a customer value matrix to place buyers on a chart dictated by factors such as top spenders, new customers, or those who engage the most frequently with customer service. 

A customer value matrix can be particularly helpful with defining these priorities, especially for smaller retail and service businesses taking the first steps into customer segmentation, as researchers have pointed out. It can also be a useful team exercise, with various stakeholders tasked with defining and justifying their own priorities. 

Another frequently used strategy is segmenting between needs-based and value-based customers. With needs-based segmentation, customers are defined based on meeting a specific need (a.k.a., the pain point), while value-based customer segmentation focuses on specific economic value (the price point). 

Needs-based versus value-based segmentation can provide marketers with useful information for crafting marketing messages. For example, emotional values like trust and reliability can be conveyed to customers most likely to respond to that approach, while purely transactional relationships can be emphasized for buyers who prioritize efficiency and savings.

Customer segmentation analysis

Whatever models or techniques a company chooses to use, ongoing analysis is a key ingredient in any successful customer segmentation strategy. Just like the market itself, customer segments are continuously changing. And it’s important to constantly review and re-measure segments to not only adjust to those changes, but even anticipate them

In recent years, machine learning and automation have come to play important roles in analyzing a vast amount of data in an efficient way, many of which are available via popular tools like Google Analytics. Yet powerful as they are, these tools still require guidance. Authentic expertise is also needed to prioritize a company’s important key process indicators (KPIs), which usually include factors like: 
  • The conversion rate of a given segment, over time 
  • The conversion rate of a given sub-segment — say, people who fit into a more defined criteria than a larger segment — over time 
  • What email messaging or other content received the most engagement or click-throughs, versus which did not 
  • Which customers are most likely to engage with a specific campaign, and which are not 
  • How conversion rates for products or services rise or fall among specific segments, over certain points in time

Tracking these analytics gives organizations the means to achieve continuous improvement in their segmentation efforts, as well as in their marketing messaging and relationship-building goals. And this also helps further maximize the value of all of these efforts over time, and can even be used to help justify maintaining a robust marketing budget.

Customer segmentation tools

Businesses looking to implement a customer segmentation strategy can choose from an almost overwhelming variety of tools. Most leading marketing software and automation tools like HubSpot, Mailchimp and Sprout Social include built-in segmentation options to help businesses easily create and manage segments, as well as extrapolate those findings to inform other efforts like branding or product development. 

However, powerful as these customer segmentation tools are, newer companies without substantial customer data may need to find a more pragmatic starting point. Those seeking not just a tool but a comprehensive solution may prefer to partner with an expert that can provide holistic guidance through the entire process of segmenting, as well as associated tasks like marketing and branding.   

To that end, today’s best customer segmentation tools are also turnkey solutions designed to ensure success in a marketplace that’s more competitive and fragmented than ever. Using a combination of demographic data, behavioral analytics, and market expertise, these companies don’t just help organizations navigate the finer points of segmentation. They also help them put the information they gather to the best possible use, today and in the years to come.

Find your customer segmentation solution with GfK

The days of “send-all” are long over. Every business needs accurate and effective customer segmentation and targeting strategies to reach the right buyer at the right time, with the best possible messaging. And, while the abundance of consumer data available today may help make those strategies more powerful than ever, it also makes for a process that can seem impenetrably complex. 

If your business is seeking help with customer segmentation — or looking to improve current efforts to meet new goals — you can trust the experts at GfK. From market research to in-depth customer surveys, we’re standing by with everything you need to achieve your unique customer segmentation goals, and much more.