6 Reasons You Need Customer Segmentation (And How It Drives Increased Profit)

Segmenting your customer base helps you be more relevant and better solve each customer's specific problems. Here's a complete rundown of how to get started.

Customer Segmentation Strategy

No matter how specific your brand’s niche, every single one of your customers is an individual – and they deserve to be treated as such.

However, it can be difficult (if not near-impossible) for even a small- to medium-sized company to cater to every customer on an individual level.

But, through customer segmentation, you can come pretty darn close.

SearchSalesforce defines customer segmentation as “the practice of dividing a customer base into groups of individuals that are similar in specific ways relevant to marketing.”

The most common ways in which businesses segment their customer base are:

  • Demographic information, such as gender, age, familial and marital status, income, education, and occupation.
  • Geographical information, which differs depending on the scope of the company. For localized businesses, this info might pertain to specific towns or counties. For larger companies, it might mean a customer’s city, state, or even country of residence.
  • Psychographics, such as social class, lifestyle, and personality traits.
  • Behavioral data, such as spending and consumption habits, product/service usage, and desired benefits.

Customer Segmentation Example

A basic breakdown of customer segments

By analyzing various aspects of your customer base – as well as how these aspects relate to one another – you can start to get a more complete idea of who your customers are, and what they’re looking to get from engaging with your company.

Why is Customer Segmentation Important?

For the modern marketer, customer segmentation isn’t just a suggestion – it’s a necessity.

In the following section, we’ll detail how segmentation can be beneficial to your customers, and also how it can allow your company to grow.

Improved Focus

The more you know about your customer, the better you’ll be able to focus on catering to their needs.

And this sentiment applies to various areas of the company-customer relationship, too.

By uncovering and analyzing the data we mentioned earlier, you’ll gain a much better understanding of what your customers want to get out of using your product or service. In doing so, you can fine-tune your product specifically to your customers’ needs, making them feel as if you’ve created it just for them.

Furthermore, you can use segmentation data to create targeted advertising and marketing campaigns for subsets of customers, as well. Again, by creating such content with a specific customer persona in mind, you increase the likelihood of it catching the attention of individuals within that subset.

In either of these cases, segmentation increases the chances of targets becoming prospects, and prospects becoming customers. Without customer segmentation data, you’re simply putting your product “out there” and hoping for the best.

Increased Competitiveness

Going along with that last sentiment, using customer segmentation strategies allows you to be active, assertive, and even aggressive when it comes to building your business.

(On the other hand, using the “spray and pray” method when creating advertising and marketing campaigns is rather passive, as you simply sit back and wait for customers to come to you.)

Once you know who your customers are, and you know what they’re looking for, you can pursue them relentlessly. And, since you know exactly how your product or service will ease their pain points, you can be confident that your efforts will result in an increase in sales and revenue.

An increase in sales numbers and revenue, in turn, will result in your company owning a bigger slice of the market share in your industry. And, as your company becomes more popular, its brand equity will also increase. In other words, the bigger your company grows, the more likely potential customers are to trust you with their hard-earned cash.

Ability to Expand

As your company grows, it’ll also be able to expand – in two different ways.

In the literal sense, you may be able to expand the physical area your company caters to. Customer segmentation allows you to do so strategically, since you’ll know to move into areas populated by individuals most similar to your current customer base.

Think of the popular transportation company Uber. At first, it catered to individuals strictly within the San Francisco area. Once the company was financially prepared to expand, it began offering its services in other metropolitan areas across the country (rather than simply expanding outward from San Fran and beyond).

You also might expand your company in terms of the products or services you provide your customers, as well. Once your customers trust you to provide an effective solution to one of their major pain points, they’ll be more likely to trust you when you introduce a solution to another one of their problems.

Perhaps the most ubiquitous example of a company expanding into a new market is Apple. What was once a company predominantly focused on producing computers is now a tech giant responsible for creating smartphones, smartwatches, and televisions. One of the main reasons Apple has been able to expand into various markets so seamlessly is because it knows what its customers want, and relentlessly works toward providing it for them.

By truly understanding your customers on an almost individual level, you’ll have a better idea of how your company can expand its reach – in turn increasing its potential for growth.

Increased Customer Retention

As we’ve alluded to throughout this post, customer segmentation allows you to fine-tune the product or service you offer your customers to better suit their needs – in turn increasing their trust in your brand.

When your customers trust your company, they’ll be more likely to return to you when they find themselves in a similar situation in the future. On the surface, this is because you’ve helped them out in the past, having given them exactly what they needed to overcome a certain pain point.

But it goes much deeper than that.

Proper customer segmentation allows you to stay connected to your customers even after you’ve made a sale. You might send them a customer satisfaction survey (along with an incentive for filling it out). Or you might choose to provide supplemental information to help them get the most out of the product they purchased. Or you might ask them to sign up for your mailing list, providing them with information regarding future upgrades to your service.

By segmenting your customers into specific subsets, you gain a general idea of what else you can provide them (in addition to your main product) that will show them you’re dedicated to helping alleviate their pain. In doing so, you make it much more likely that they’ll return to you when they’re in need some time down the line.

Capitalize When The Time is Right

Segmenting your customers also allows you to know when a specific persona is most likely to be in need of your services.

Notice, though: we said “a specific persona,” and not “your entire customer base.”

In other words, different types of customers will be in need of your services at different times throughout the year.

For example, if your company sells chocolate and other assorted candies, you can assume demand will increase around holidays like Valentine’s Day and Halloween.

But the people buying these products will not always be from the same customer segment. During Valentine’s Day, you’d likely create advertisements full of sentimental messages, while during Halloween you’d focus on creating spooky commercials aimed at children.

While it doesn’t take much insight to know that Halloween is an optimal time to market candy to kids, the point of this example is:

By having a well-rounded understanding of who your target customers actually are, you’ll have a much better idea of when they’ll be most likely to purchase your product.

Price Optimization

When you know where your customers stand in terms of financial and societal status, you’ll be in a much greater position to offer your product or service at a price they consider reasonable.

By optimizing the price of your product, you not only ensure your customers get the most value for their dollar, but you also ensure your company generates the maximum amount of revenue possible.

We’ll discuss this a little more in-depth later in this article when we talk about estimating the value of each of your customer segments. For now, just know the focus is on revenue generated – not sales numbers.

How to Effectively Segment Customers

Before we discuss what to do with the information gleaned from segmenting your customers, let’s review some of the ways in which your customer base can be divided.

While we’ve already discussed the basic ways in which to segment your customers: demographic, geographic, psychographic, and behavioral data. While the first two categories are rather straightforward, let’s clarify – and provide examples of -what we mean by psychographic and behavioral data.

Psychographic data deals with a variety of personality traits and characteristics. This data generally relates to each of the other categories in some way or another – but provides supplemental information that can prove to be vital to your marketing campaign.

For example, while you may know a large percentage of your customer base is made up of 30-35 year old married men from California, this information doesn’t mean much until you dig deeper and discover most of them enjoy sports, action movies, and craft beer. You might also discover other traits such as political and religious affiliations, as well as their attitudes toward certain cultural or societal phenomena.

Behavioral data focuses specifically on the type of customer a specific person (or type of person) is. This type of data tells you:

  • The time of day they tend to shop and make purchases
  • The time of year they shop and make purchases
  • The routines they go through when shopping
  • Their preferred method of shopping
  • The ways in which they use what they’ve purchased

Behavioral data also takes into consideration a customer’s history with your brand. You can classify customers in terms of their loyalty by analyzing their:

  • Recent purchases
  • Number of transactions within a specific time period
  • Longevity
  • Referrals

Once you’ve collected as much data about your customers as you possibly can, you’re ready to start making sense of it all and figuring out how you can use it to improve your company’s performance.

Determine Segment Sizes

The first thing to do with your customer data is to look at the overall makeup of each category.

For example, when looking at geographic data, you might discover that 65% of your customers live in the suburbs, while 25% live in urban areas and 10% in rural. This data tells you that the product or service you offer has resonated best with individuals in suburban areas.

Of course, the previous example just scratches the surface when it comes to analyzing segmentation data. Once you get a basic overview of your customer base from various angles, you can zoom in on each to further understand the exact type of people your customers are.

While analyzing this data, take note of both trends and anomalies that arise in specific segments.

Trends can tell you what’s going well or as expected with regard to your marketing campaigns, letting you know where you can “stay the course.”

Anomalies, on the other hand, can prove to be even more valuable. On the one hand, you might discover that your product isn’t faring as well as you thought it would within a certain segment. On the other, you might be surprised to find out that people in an unexpected segment are particularly fond of your services. In either case, noticing these anomalies can spur you into action to either shift your plan of attack or capitalize on a newly-discovered market.

Estimate the Value of Segments

Although you’ve determined the general makeup of each segment, you’ll get much more value out of determining the value of each of these segments.

To get started, estimate the percentage of revenue generated and purchases made by each subsection within a specific segment. This data may or may not correlate to the size of the subsection being analyzed.

For example, even if individuals in an urban setting only make up 25% of your customer base, they may generate 40% of your overall revenue. This tells you that individual customers in urban areas either buy more in a single instance or frequent your business more often than those in suburban areas. In this case, even though most of your customers reside in the suburbs, your best customers live in urban areas.

By comparing segment size with revenue generated by each segment, you can discover which type of customer is most likely to remain loyal to your brand – and which type of customer you should focus your marketing initiatives toward in the future.

Experiment with Cross-tabbing

Now it’s time to get creative.

Instead of looking at each type of segment in a vacuum, start crossing them over into one another. You can do so in fairly straightforward ways, or you could begin thinking outside the box. Given a rather diverse customer base, the possible combinations when cross-tabbing your customer segments are almost innumerable.

As a simple example, you might choose to look at how many of your customers are 25-29 years of age. To get a more specific picture of this segment of your customer base, you can then look at how many of these individuals have a college degree, or how many of them are currently married.

The more details you can discover about your most common customers, the more prepared you’ll be to create content that’s targeted specifically toward these specific individuals.

Content Personalization

One of the major benefits of segmenting your customers into specific personas is you’ll then be able to provide them with personalized content that will almost certainly catch their attention.

In today’s marketing world, content personalization is almost essential. According to Hubspot, a personalized call-to-action can result in 42% more instances of engagement than a generic CTA will.

Customer Segmentation Statistics

Senior marketers are using personalized content across many fronts

Before we dive into the three most effective ways to create and utilize personalized content, let’s make one thing clear:

“Personalized” does not mean “creepy”. It’s one thing to have a general idea of your customer’s needs, pain points, and even their hobbies. It’s another thing to know they were late to work last Thursday because they ran out of gas. The point being, even while aiming to create content that strikes a chord with a certain segment of your audience, you don’t need to truly know everything about your customers.

Start Broad, then Fine-Tune Content

When just setting out to personalize your content, use the broadest categorization possible. As time goes on, the trends that you uncover will help you home in on specific areas to make this personalization more…well…personal.

Begin by creating content with a large segment of your customer base in mind. For example, if your company produces athletic wear, and one of your largest customer segments is college students, you might send these individuals an email discussing “7 ways to stay active while studying for finals.” You might send your 30-35 year-old segment a similar article with tips on staying fit while working 60 hours a week.

Within these emails, you can provide multiple avenues for your customers to go down by placing links throughout the content (we’ll dig more into this in a moment). You can then use marketing automation software to determine who clicked on what, and use this information to narrow down your personalization over time.

Create and Curate Relevant Content

Ideally, you’ve already created a large amount of content covering a variety of topics relating to your industry.

Or – whether you do or do not have such created content under your belt – you always have the option of sharing other interesting content from around your industry, as well.

For each of your major customer segments, create a list of content that these customers are most likely to find interesting. You can then send out an email summarizing a sample of these pieces and pointing the reader to each.

Again, by using marketing automation software, you can then narrow down your focus even further, providing more and more pertinent content to your customers with each subsequent email or newsletter.

Though it’s unlikely that you’ll reach 100% of your audience 100% of the time, by continuing to fine-tune your personalized content, you’ll optimize the chance of a specific email resonating with a specific customer.

Create Personalized CTAs

As alluded to earlier, your personalized content also needs a personalized call-to-action to get the most value for your efforts.

When creating personalized calls-to-action, consider the following pieces of information:

  • Your customer’s goals when engaging with your brand
  • The services your customer will get the most value from
  • The action they are most likely to take after reading your content (and how they’ll take this action)

Chances are, if a customer takes the time to read an email and engage with its contents, they are most likely looking to take an even further step toward engaging with your brand. But if you don’t provide them with a clear call-to-action, they won’t know how to take the next step – and will go elsewhere to fulfill their needs.

Conclusion

The goal of segmenting your customers and learning as much as you can about them is to provide service that makes them feel right at home when engaging with your brand. When your customers feel as if you exist solely to cater to their needs, it’s almost certain they’ll continue to rely on your services indefinitely.

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Matt is one of the brilliantly gifted content contributors at Fieldboom. He helps us whip up useful and interesting blog posts, guides and more.