• nicholas6708

Customer segmentation

Updated: Jun 8, 2020

First, a few points of clarification. When we're talking customer segmentation we are NOT talking about:

  • Ideal 'buyer' or 'purchaser personas'. That is identifying the fictional ideal target customer and focusing our marketing and communications efforts on attracting and engaging that customer.

  • Marketing segmentation. That is, dividing your existing and potential customer base into groups based on business-focused objectives and metrics such as purchase history or transaction behaviour. Admittedly there is overlap here with Customer segmentation, leading to confusion.

While both have their place, we're focusing here on customer segmentation, what it is, standard methods of segmentation and its practical application.

To learn more about other strategic marketing topics, download our marketing strategy white paper.

What is customer segmentation?

While it would be nice to sit down with every one of your existing and potential customers, get to know them, identify their needs and wants, what drives their behaviour and what they want out of a relationship with your business, it's not possible.

So, we make the best effort to bundle customers into groups or segments with other similar customers. How are they similar? We'll look at that and a number of the standard methods below. But we're mainly interested in defining these segments by customer-focused attributes, not business metrics. Given we need to use objective identifiers to do this, we sometimes end up blurring this distinction.

It's also worth noting at this point, that customer segmentation, while good practice, is just a stepping stone to the elusive one-to-one communications. But this is a topic for another day.

Standard methods of customer segmentation

We're big believers in being customer-focused while business-minded. Everything you do as a business needs to have the customer at its core while meeting a clear business objective. How you segment your customers should reflect your business objectives, or more correctly, your business objectives should reflect your customer, as well as what is feasible from a data, functionality and sophistication perspective.

In practice, it is unlikely you'll use one method of segmentation to the exclusion of all others. But you'll need to strike the right balance between time, resource, capability and sophistication.

The most common methods of segmentation are;

Demographic - Using personal data points to create segments.

  • Customer attributes used – Age, gender, family size and age, occupation, level of education, income.

  • Positives – Information is more readily available. You probably already think of your products along demographic variables. Options under each attribute are generally mutually exclusive and all-inclusive across options.

  • Negatives – There are huge variables within customer preferences, needs, wants and behaviours within each segment.

Geographic - Using location and distance data points to create segments.

  • Customer attributes used – Location, distance from a point (stores, natural features),

  • Positives – Can be useful where a business's product or service accessibility or cost is location dependent.

  • Negatives – Where customers live may not be a great driver on their wants, needs and behaviour.

Psychographic – Using shared personality traits to create segments.

  • Customer attributes used – Values, personalities, interests, motivators, lifestyles.

  • Positives – Allows you to understand and market to customers wants, needs and drivers.

  • Negatives – Can be difficult to attribute to a business objective. Can be difficult to attribute to a specific customer.

Attitudinal and behavioural – Creating segments based on patterns of behaviour and sentiment.

  • Customer attributes used – Usage and interaction with the business, purchase behaviour, occasion and timing, interest, engagement, features and benefits sought.

  • Positives – Allows for highly personalised communications, more predictive of future behaviour than other segmentation methods, easier to create marketing material for, allows for highly personalised communications.

  • Negatives – Can be difficult to attribute to a business objective. Can be difficult to attribute to a specific customer.

Lifecycle – Segmenting based on customer lifecycle stage.

  • Customer attributes used – New versus old client, purchase recency, level of engagement.

  • Positives – Ease of segmentation, ease of automation.

  • Negatives – Doesn't tap into customers wants and needs.

Practical application

How you segment your customer base, and potential customer base, will depend on:

  • The method of segmentation you choose,

  • How you'll use this information to personalise marketing and communications, and

  • Your level of businesses sophistication.

But breaking the problem down into its core components, you'll need to overcome and solve the following issues:

  • What data do you have, can acquire, or can extrapolate to use for segmentation (data handling and manipulation raises its own set of problems)?

  • Which attributes of your customers significantly impact on your business objectives and outcomes?

  • What additional functionality, processes, creative development do you need to facilitate your marketing and communications?

  • How do these segments impact what and how you communicate with your segments? And,

  • How do you continue to report and iterate on your segmentation?

To learn more about other strategic marketing topics, download our marketing strategy white paper.