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Customer Segmentation: Why Segment Customers?

Last Updated on June 3rd, 2021

Published on July 31st, 2019

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In this post, we will show you how to use crucial customer segmentation elements to grow your business.

Businesses that want to grow will have a hard time focusing their efforts on a large pool of potential clients. 

Rather, uncovering the traits that make up a small subset of customers and prospects that are most likely to make purchases and remain loyal is the key to growth. And it’s here that customer segmentation comes in handy. 

We need mechanisms in place to collect and analyze data, the proper attitude to utilize that data, and the ability to compromise to better understand our customers. 

But, first and foremost, what is customer segmentation and why is it important?

What is Customer Segmentation?

What is Customer Segmentation?

Client segmentation is the process of breaking a customer base into groups of people that are similar in areas that matter in marketing, such as age, gender, interests, and purchasing habits. 

Companies that use customer segmentation believe that each customer is unique and that their marketing efforts would be better served if they targeted particular, smaller groups with messaging that would be relevant to those customers and lead to a purchase. Companies also want to obtain a better understanding of their consumers’ tastes and demands, to determine what each category values the most so that marketing materials can be more precisely tailored to that segment.

Customer segmentation is based on the identification of important differentiators that split customers into targetable groups. When developing customer segmentation techniques, factors such as a customer’s demographics (age, race, religion, gender, family size, ethnicity, income, and education level), geography (where they live and work), psychographic (social class, lifestyle, and personality characteristics), and behavioral (spending, consumption, usage, and anticipated benefits) inclinations are considered.

Why Segment Your Customers?

Customer segmentation is beneficial to many different types of firms that want to improve their marketing and sales efforts. These are some of the advantages:

  • Personalization of Marketing Communications: Personalizing marketing communications for customers leads to a stronger customer-business relationship. This has the potential to dramatically boost client loyalty. Acknowledging your customer as more than just another email subscriber might help you build brand equity. 
  • Upselling/Cross-selling Opportunities: Understanding your customers’ purchasing habits or income levels can help you find consumer categories who can benefit from additional products. Alternatively, offering special discounts to customers who have recently purchased from you can boost sales of related products.
  • Higher ROI and CRO: Sending targeted advertising to clients generates a higher ROI because they’ve previously expressed an interest in purchasing from you. Customers are less likely to engage with content when you send out generic campaigns. This is because the information is not relevant to them, or not of interest to them. Taking the time to segment your consumers will boost your CRO significantly.

Types of Customer Segmentation Models with Examples

Customer segmentation models can be basic or sophisticated, and they can be used for a variety of purposes. The following are examples of common segmentations:

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1. Demographic Segmentation

Demographic segmentation separates the market into smaller groups based on criteria like age, gender, and income. Rather than reaching the entire market, a brand employs this strategy to concentrate resources on a certain segment of that market. 

Companies can use their time and resources more efficiently by segmenting the market into smaller parts, each with a common variable. They can gain a deeper understanding of the target market and employ advertising personalization to meet the target depending on the group’s need.

This form of customer segmentation is one of the most popular since it is simple to obtain through census data, analytics software, consumer insights, and other sources. Many firms consider it to be the most cost-effective method of segmenting a target market.

Examples of demographic segmentation:

Demographic Segmentation
  • Age 

Age is the most fundamental of all the variables, but it is also the most essential because customer preferences fluctuate over time. Almost every marketing campaign caters to a specific age group. 

This variable can be considered in terms of distinct age groups or life phases, such as babies, children, adolescents, adults, middle-aged people, and seniors. 

Baby boomers, Generation X, millennials, and other generations are segmented by age. Because members of each of these groups were born around the same period and had comparable upbringings, they have a lot in common in terms of personality traits and mental processes. Because baby boomers and gen X think and act differently, targeting them with the same offer and marketing technique is likely to create unfavorable outcomes. 

Not only do different age groups and generations have different buying habits, but they also have different responses to advertising. They tend to speak in different ways and spend a lot of time on different platforms.

  • Gender is a factor

Men and women have diverse preferences, dislikes, wants, and mental processes in general. Few males, for example, wear cosmetics, and most women do not wear boxers. Women also do the majority of the grocery shopping in the house and are more likely than males to donate to charitable causes. When planning a campaign, these are all important aspects to consider.

  • Earnings and occupation 

It’s pointless to target folks who can’t afford your goods or service. After all, you wouldn’t recommend a Mercedes or Ferrari to someone who couldn’t afford a used car with more than 100,000 miles on the clock. 

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Income targeting allows you to assess your audience’s purchasing power. When you know the income range of your customers, you can typically obtain data to back up how they spend their money on both ends of the spectrum. Many businesses utilize this information to market different tiers of the same product depending on the customer’s income.

With an account-based advertising campaign, job titles are very important. Because it inverts the process, account-based marketing is often referred to as a flipped funnel strategy when compared to traditional demand generation. Rather than focusing on individual leads, it focuses on accounts. Knowing occupation is critical to approach highly relevant accounts with the most revenue potential.

  • Religion and ethnicity 

With the rise of international trade and advertising, there has been an increase in segmentation based on ethnicity, race, nationality, and religion. Individual cultures exist inside these communities, each with its own set of competing interests, preferences, attitudes, and beliefs. This could have an impact on their marketing responses as well as their purchasing patterns.

  • Structure of the family 

Because a family’s dynamic evolves, so do its needs and desires, family makeup can be useful in segmentation. This has a significant impact on their purchasing patterns as well as your sales process.

2. RFM Segmentation

RFM segmentation enables marketers to target specific groups of customers with communications that are far more relevant to their unique behaviors, resulting in significantly higher response rates, as well as greater loyalty and customer lifetime value. RFM segmentation, like other segmentation approaches, is an effective tool to identify groups of customers who should be treated differently. RFM stands for recency, frequency, and monetary — we’ll get into each of these in a bit more detail later.

Marketers often have a wealth of information about their existing consumers, including purchase history, browsing history, prior campaign response patterns, and demographics, which may be used to identify specific groups of customers who may be targeted with offers that are highly relevant to them.

The RFM segmentation methodology is based on the premise that by studying three quantitative criteria, marketers may acquire a comprehensive understanding of their customers. These are the following: 

RFM Segmentation
  • Recency: How long has it been since a consumer engaged in an activity or made a purchase with the company? The most common activity is a purchase, while other examples include the most recent visit to a website or the use of a mobile app. The more recently a customer has interacted or transacted with a brand, the more likely that customer will be responsive to brand messages.
  • Frequency: During a given period, how many times has a customer transacted or interacted with the brand? Customers who participate in activities regularly are more involved and loyal than those who do so infrequently. One-time-only clients are in another league altogether. 
  • Monetary: This component, often known as “monetary value,” represents how much a customer has spent with the business over some time. Customers who spend a lot of money should be handled differently than customers who spend a little. The average purchase amount is calculated by dividing monetary by frequency, which is a crucial secondary statistic to consider when segmenting customers.

3. Psychographic Segmentation

Psychographic segmentation is a market segmentation strategy in which consumers are divided into groups based on psychological characteristics that influence consumption habits based on their lifestyle and preferences. It is primarily based on “how” individuals think and “what” they want their lives to be like. 

Any company that wants to understand its customers’ cognitive processes can use this segmentation strategy to divide its target market. Other than demographic, regional, and behavioral segmentation, psychographic market segmentation is one of the most efficient segmentation approaches.

Because these items are generated for the consumption of customers, a product/service-based business must keep them in mind. In the design and development of a product, customer requests and expectations are critical. These demands and expectations change over time, and customer knowledge changes when family income, age, or other demographic factors change. An organization’s performance will improve if it understands its customers’ psychology and can supply market-driven products.

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Psychographic segmentation examples:

Personality, Lifestyle, Social Status, AIO (Activities, Interests, Opinions), and Attitudes are the five psychographic segmentation variables on which homogeneous segments can be constructed for good research.

  • Personality: Market researchers can use personality segmentation to create people with similar personality attributes. New products/services can be produced to cater to various personalities, and new features for the examined personalities can also be developed. Creative, emotional, kind, opinionated, introverted, extroverted, and other personality traits are only a few examples. Assist businesses in systematically filtering their clients. 

This psychographic segmentation variable can be used by a company to produce products that are tailored to the personalities of the majority of its customers, resulting in increased sales.

  • Lifestyle: If multiple products are to be created for numerous markets, a variety of resources must be invested. Product resources can be saved, and product development can be made more credible if segmentation is done based on lifestyle.
  • Social status: It determines the things they consume and their preferences in the majority of circumstances (in general). Each social class has its selection of clothing, shoes, food, automobiles, electronics, and other items.
  • Activities, interests, and opinions: This psychographic segmentation is based on which activities customers prefer, which topics they are passionate about, and what their opinions are on specific issues. These are referred to as AIO parameters (Activities, Interests, and Opinions).

4. Geographic Segmentation

Geographic segmentation may be the most straightforward sort of customer segmentation to grasp, yet there are still lots of applications that organizations overlook.

Depending on your company’s needs, the size of the area you target should alter. In general, the larger the company, the broader the territories you’ll be targeting. After all, addressing each postcode individually won’t be cost-effective with such a large potential audience. 

Six factors can be utilized to establish client segments and are related to geographic segmentation:

  • Location 
  • Timezone
  • Climate and season
  • Cultural preferences
  • Language
  • Population type and density 
Geographic Segmentation

How to Segment Customers

Begin by considering the following technique when deciding how to segment your customers.

How to Segment Customers

1. Establish your customer segmentation objectives

Consider why you’re developing a consumer segmentation plan. Consider why you’re investing time in segmentation and what you intend to gain from it. 

To do so, look over the list of common reasons organizations segment customers we discussed before. Determine which outcomes you want to attain so that you can tailor the remainder of your strategy to support you in achieving them. 

It’s important to remember that your customer segmentation goals will be unique to your company – segmenting customers isn’t a one-size-fits-all procedure.

2. Divide your consumers into groups according to your preferences

Decide how you’ll segment your customers once you’ve decided what you want to obtain out of the customer segmentation process. Return to the types of consumer segmentation models to figure out how you’ll accomplish this. There is no right or wrong answer here; it all depends on your company, clients, and the objectives you set in the previous phase. 

You can geographically segment your customers, for example, if you want to distribute targeted adverts with your audience members and customers on the West Coast in the hopes of increasing conversions in that region.

3. Segment your customer base and reach out to them

After you’ve categorized your clients, you’ll need to figure out how you’ll target them across your company. Members of all departments (e.g. marketing, sales, and service) will be able to efficiently target your customers through their job if they understand how your consumers are segmented. 

4. Analyze your customer segments and make any necessary improvements

Analyzing your segmentation efforts can give you insight into how you’ve arranged your clients, allowing you to make any necessary tweaks and improvements. 

Check-in with your marketing, sales, and service teams (as often as you like) to receive their feedback on any segmentation adjustments that may be required. You can also try out other ways of grouping your consumers to see what works best. 

You can also solicit input from your clients to better classify them into relevant categories.

Finally, if you update your product or service, rebrand, or alter your buyer personas, check how your consumers are segmented; these changes may necessitate rearranging some or all of your client categories.

Grow Your Business with Customer Segmentation Today

Customer segmentation may help you stay relevant and valuable to your audience while also keeping you ahead of the competition. Customers segmented in the ways indicated above can help you target, attract, and sell more successfully. 

Some marketers are attempting to move away from segmentation to create a one-to-one client experience that is tailored to each individual.

Segmentation isn’t something you do once and then forget about. As new technologies are released and the competitive landscape changes, customer attributes change. Regularly evaluating your segmentation might help your company respond to these changes. 

You should plan to do this at least once a year, if not quarterly, depending on how quickly your sector transforms. 

You’ll position your company for optimum success if you understand consumer segmentation. So, get started on your client segmentation strategy and follow our step-by-step instructions to help you along the way. 

It’s a Wrap!

As you can see, friend, there are a variety of customer segmentation models to select from when it comes to identifying and defining your target client and efficiently marketing your product or service. 

Customer segmentation enables you to identify the specific demands of your target group to market your product and service directly to them, avoiding the waste of messages and your effort. 

More importantly, consumer segmentation provides you with dozens of options for ensuring that your clients perceive you as exactly what they want and need

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