Humans have always loved categorizing things: people, animals, just about anything you can think of. And customers are no exception.

Customer segmentation is a useful tactic to better align tools and strategies with your target customers.

In this article we’ll talk about:

What is customer segmentation?

Customer segmentation is a practice that divides up your customers based on certain characteristics or demographics like geography, age, interests, and spending habits.

Because each customer’s unique in the way they experience the customer journey with your product, not one single approach is going to work for all. Customer segmentation aims to better categorize your customers so that their needs can be fulfilled during this journey.

Why use customer segmentation?

Customer segmentation’s a popular practice because it helps to market and sell your products or services more efficiently. Once you understand customer needs and desires, you can better prioritize how best to market to them.

Segmenting customers can also improve customer loyalty and retention rates because they respond to content focused toward them. The priority of segmentation is to have your customer returning more frequently to your site, and buying more often.

Even if they spend a small amount each time, their consistent return is more valuable than a big one-off spender. This type of customer behavior increases your customer lifetime value.

Customer Lifetime Value (CLV) is the total income a business can expect if a customer sticks with your business over a complete relationship. As retaining existing customers is far cheaper than obtaining new ones, increasing your CLV is a great way to drive growth.

Customer vs market segmentation

The difference between customer and market segmentation is just in the scale of what they cover. Market segmentation covers the whole market industry your organization’s in whereas, customer segmentation only looks at the part of the market relevant to customers.

Market segmentation might classify customers based on specific products or broad areas of industry they’re interested in, but customer segmentation goes into the details, focussing on smaller groups of customers and prioritizing their experience with your product only.

Most marketers aren’t looking to advertise or cover the needs of the whole market, so it’s more effective to look at who you’re actually selling to and prioritize them as your targets.

Types of customer segmentation

The four basic types of customer segmentation are: demographic, psychographic, geographic, and behavioral.

Demographic

This segments customers through non-character traits such as age, sex, ethnicity, income bracket, education level, and profession.

Psychographic

Opposite to demographic, this type of segmentation focuses on customers' specific interests and personalities. This’ll include things such as hobbies, life goals, values, and lifestyles.

Geographic

Geographic segmentation is one of the easiest and simplest to identify. It uses physical location taking into consideration, postal code, city, region, and country.

Behavioral

This is perhaps one of the most useful for e-commerce marketers as it segments customers based on their online activity. This includes purchasing habits, spending habits, browsing habits, brand interactions, and brand loyalty.

How to segment your customers

Starting with a bulk load of customers can be overwhelming, so where do you start segmenting to make the overall customer ecosystem make more sense to you? There’re three simple steps to follow which we’ll go through here:

Graph showing the 3 steps to customer segmentation: identify your best customers, understand your segments, and execute relevant experiences

(Alt: Graph showing the 3 steps to customer segmentation: identify your best customers, understand your segments, and execute relevant experiences)

Step 1: Identify your Best Customers.

It’s important to note that ‘best’ customers doesn’t mean your favorite customers. Be objective and identify who your best customers are by volume, performance, and win rate. Let’s start with volume.

If you look at your customer demographics and identify which of these make up the majority, then you’ve identified your largest volume demographic.

But don't just stop there. Biggest volume doesn't mean ‘best’; just because they make up the largest number in your customer pool doesn't mean that they’re who you should prioritize.

This is where ‘performance’ then comes in. You need to assess how that demographic is performing. It’s no good if your largest demographic has a really low purchase rate, or really high churn rates. So make sure you layer your volume data with your performance data. Useful things to look at here’re churn rate, average revenue per customer, acquisition rate, and product usage.

The last layer is to assess your potential to ‘win’ that area. This action assesses how much ‘effort’ you’ve made to get and keep these customers. This information will let you know if a certain segment is worth keeping or not. Look at things like customer acquisition costs, the scalability of this segment, and other competitors for this segment.

Step 2: Understand your segments.

Once you’ve identified the best segments for your organization to focus on, the next step’s to understand them. You can’t do anything with just a random collection of data, you have to make it into something else, something that can give you a concrete overview of all you need to know.

This is where personas come in. Personas are nifty little tools that help your customer-focused departments understand their audience at a glance.

For segments, what you use is a quantified buyer persona. This is a persona created from business metrics rather than personal attributes. Things like jobs, pain points, and gains are categorized based on functional, personal, and social value.

Once you understand your customer segments, you can now evaluate your current workflow, and what it’s doing to work on these segments. This might be nothing at all, or you may already be working well for these segments.

Begin by setting goals for your organization. What do you want to do with this segment? Map out what you need to achieve these goals and begin adjusting your practices to align with them.

Step 3: Execute relevant experiences.

This is where you evaluate what experiences currently exist for this customer segment. Good or bad, you should understand where you need to go from its current standing.

Apply what you learn about your segment to the whole funnel. Some easy ways to do this are by reevaluating your onboarding process, considering how you compare to competitors and getting feedback on your customer support systems.

Customer segmentation in complex B2B markets

What do you need to do when traditional customer segmentation just won't cut it? Discover why a flexible ‘customer lens’ framework can help your organization reduce complexity and present the right products and messages to the right customers.

Our sister community, Product Marketing Alliance has a great talk on how to overcome segmentation challenges in complex markets and how you can implement this dynamic framework throughout your company.

Watch this session to discover:

🤯  How to profile your target customers when buyer decision committees could involve 15+ people across different functions and regions.

🧠  How to identify customer needs when your products serve multiple industries.

💻  How to market your products to an early adopter versus a tech laggard.

⁉️  Which customer classification is most important.