Why Customer Segmentation Matters (And How To Do It Right)

10 years ago, Target did customer segmentation so well it landed them front-page headlines – and sparked a conversation that hasn’t really stopped since.

The quick-and-dirty version goes like this. Target successfully predicted a teenage girl in Minneapolis was pregnant based on some common demographics and shopping behaviors that many pregnant customers share – and sent through a mailer of coupons for baby clothes and furniture, to her home, under her name. That’s how her father first discovered he would soon be a grandfather.

From Target’s point of view, this approach made a lot of marketing sense. Wanting to capture more of the new-mom market before the deluge of marketing that often follows birth, they decided to court women in their second trimester of pregnancy. They found commonalities that these moms-to-be typically share and sent mailers just to this segment of their customers.

Though we don’t know whether that teenager ever used those coupons or shopped there afterward, we do know that the story tells us a few things about customer segmentation and how it’s used.

Now more than ever, it’s very important for companies to tune into the behaviors, desires and needs of their customers. In fact, 66 percent of customers expect companies to understand their needs and expectations, reads a Salesforce report. Furthermore, 71 percent of customers say they expect and prefer personalized, relevant content that’s geared to their interests and needs. For a business, failing to provide a personalized experience for customers can result in frustrating over three-quarters of them.

And businesses that use personalization come out ahead. Personalization can lift revenue anywhere between 10 to 15 percent according to McKinsey’s research. The better you get at personalization as a business, the better your returns.

So let’s break down what customer segmentation is all about, and how you can use it in your own business to personalize the customer experience.

What is customer segmentation?

Customer segmentation is the practice that B2B and B2C organizations use to divide customers into defined groups based on a set of common characteristics such as age, location, interests, habits and needs.

It’s the difference between sending out a generic blanket email to every customer who has ever purchased a pair of shoes from you vs. sending out a specific message about basketball shoes just to high-earning men between the ages of 25-35 in Denver, CO who play the sport and who’ve shopped with you before.

Which option do you think would get more traction? Sure, the product you are marketing is the same – but when you truly understand who’s on the other end of the conversation, you can position what you’re offering in a specific manner so it resonates with your customers’ needs.

The end result is a better experience for a customer who feels understood as an individual, whether they’re shopping, calling customer support or learning online.

(Quick side note: though customer segmentation is closely related to the process of defining target audiences, they’re not the same! Target audiences are the people who are most likely to buy your product or use your service. Customer segmentation is more about understanding those customers and reaching them more effectively.)

Why should you segment your customers, anyway?

First, the broad strokes. Customer segmentation is an effective way to organize all the data you collect about your customers, along with a deeper understanding of who they are. And your customers, in turn, get more personalized interactions that make them feel understood.

Common motivations for creating customer segments range from happy customers to better bottom-line results:

Improving customer loyalty by providing a customer experience that’s more personalized to their needs
Understanding the full customer journey and where the best opportunities for conversion are
Making better use of the resources available to you by identifying the most valuable customer segments
Reducing the risk of spending time and money in the wrong places

The numbers back these benefits up. When they’re picking a brand, 76 percent of consumers say that personalization is a key factor that impacts their decision. They’re 2.1 times more likely to view a personalized offer as important, and 78 percent report they’d be more likely to become a repeat customer.

But the devil’s in the details. So let’s take a closer look at how it can be leveraged as a tool across individual parts of your company.

In marketing: Marketers use customer segmentation to reach the right people, on the right channel, with the right message, at the right time. The more you understand and tailor your outreach, the less friction in lead generation and conversion… and the more effectively you can spend your budget.

In sales: Sales reps are on the front lines talking to prospective customers and existing customers alike. The more they are able to know about the person on the other end of the call, email or chat, the more they can tailor their pitch, anticipate the customer’s needs, help them overcome objections and drive further sales.

In product development: Getting to know your customers and learning in depth about their behaviors, wants and needs will allow you to create products with personalized features that are unique to the needs of your different customer segments.

In customer service: Just like your sales reps, customer service agents deal with customers directly and constantly. The better they understand the person they’re talking to and what their needs are, the better they can anticipate the specific problems they might be encountering and find a solution that’s most likely to resolve the issue.

In pricing: It’s a bit of a science, knowing how to price a product or service. Customer segmentation makes it easy for your decision-makers to test different price points with targeted groups of customers, or appeal to specific people with new discounts, offers and bundles.

Customer segmentation models: an overview

There are many ways to segment customers – and the ones you pick will depend on the nature of your business and the people you serve. Common models include:

Demographic segmentation

Demographic information paints a picture of individual customers based on their personal characteristics and lifestyle. Common characteristics used to segment customers based on demographics are:

Age
Gender identity
Education level
Occupation
Income

Firmographic segmentation (specific to B2B)

Think of firmographics like demographics for businesses. Segmenting your customer according to firmographics gives you basic yet valuable information about who the company is, what they do and what their goals are so you are able to personalize the B2B experience. Some firmographic characteristics to segment your customers are:

Industry
Revenue
Number of employees
Organizational structure
Growth

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Geographic segmentation

People located in different regions have different needs, so it’s important to consider the “where” in the segmentation equation, particularly if geography matters to your organization.To segment your customers according to geography, you can group customers together by:

Country
City
Landscape (Rural vs. urban)
Population density
Climate

Psychographic segmentation

Psychographic profiles dig into the subjective area of personality – making it harder to apply than other segmentation data but extremely valuable nonetheless.To segment your customers according to psychographics, you must become knowledgeable about your customers’:

Attitudes
Interests
Opinions
Beliefs
Values

Behavioral segmentation

Customers often say more through their actions than their words. Behavioral segmentation taps into those unspoken cues and habits. The following characteristics about your customers will help you understand their behaviors and segment them accordingly:

History of interactions
Frequency of interactions
Time spent in interactions
Preferred time of day
Product or feature use

Technographic segmentation

There’s more than one way to educate your customers. Knowing what technology they use is key to reaching them in their preferred way. You may use the following criteria to segment your customers according to Technographics:

Device preferences
Browser data
Connection speed
Mobile usage
Software and hardware

Needs-based segmentation

Your customers have shared emotional or practical needs – and by using this model of segmentation, your business is able to capture those experiences and provide personalized attention to them. To segment your customers according to their needs, pay attention to your customers’:

Life stages or goals
Desired product features
Changes in needs over time
Decision-making priorities
Expectations

Value segmentation

Some customers provide more financial value to your business than others based on their purchasing and engagement behavior. Looking at that financial value can help you decide where to best invest your dollars. Factors to pay attention to are:

Average purchase value
Purchase frequency
Lifetime value
Price sensitivity
Available budget

Combining multiple facets can give you useful insights. In fact, many organizations look at a customer’s recency, frequency and monetary value to help them pinpoint the highest-value opportunities with customers such as when they made their last conversion, how often they engage and how much they spend.

Ultimately, the customer segmentation models you use in your business depend on what goals you’re trying to achieve.

If you’re doing something strategic and you’re trying to figure out if you have the right brands, the right value proposition, the right product line, then I would say you should start with needs or attitude. But if you think you’ve got that pretty much under control, and you need to understand how to go to market or target your digital and TV spending, then I would start with [behavioral segmentation]. – John Forsyth

5 steps to effective customer segmentation

Speaking of implementation, what steps are involved in launching a customer segmentation strategy, anyway? It comes down to understanding the overall goals you want to achieve for your business, collecting data, finding patterns among your customers, targeting them with your marketing and messaging, reviewing your results, and continuing to iterate as you move forward.

Let’s break it down.

1. Define your business objectives

To reap all the benefits of customer segmentation, your business will need to invest time and resources to determine what your customer segments are, as well as the specific targeting and positioning you will be applying to each segment. Before you set out on your path, it’s important to define why, exactly, you’re putting in the work.

This goal or your “why”, will depend on your business. Perhaps you want to identify your most valuable customers so you can better allocate your marketing budget to reach them. Or, maybe you’re interested in that revenue boost that comes from offering personalized content and products. Perhaps you want to emphasize cross-sell opportunities with your sales team.

Take a moment to reflect about your businesses’ priorities and your current largest goal.This goal will help guide you through the steps that follow, define the scope of work that is ahead, and dictate which teams across your organization need to be involved. So it’s important to make sure your main goal is well-defined upfront.

2. Gather data about your customers

Now it’s time to learn more about the customers who are already interacting with your business. Chances are, you have some of that data available to you already – it’s just spread out across a few places where it might help to take a look:

Your website: Analytics data you can pull from your website can range from information about the person (like their location) to their behavior (what they click).
Learning management systems, marketing platforms and CRMs: These are treasure troves of demographic data, contact information, past interactions and customer history.
Your people: Your customer service agents and sales reps interact with your customers every day and have a wealth of knowledge inside their heads that simply hasn’t been formally captured yet.
Social media: Your social analytics can tell you a great deal about the people who follow and interact with you. Social listening is another way you can glean data from the conversations happening around – and about – your business.

If you want to collect more information than what you already have, consider sending out a survey to your customers – it’s a great way to capture difficult-to-measure preferences, feelings and goals. Focus groups and interviews are more time-intensive alternatives, but they can yield more depth into a customer’s mindset and journey than a simple survey can.

Published research from external organizations can also help you understand buying trends and market categories as well – though you may have to pay a price to access it.

3. Look for customer patterns

“Companies rarely create a segment — more often they uncover one.” – Gretchen Gavett, Harvard Business Review

Customer segmentation isn’t an exercise in defining a category and then slotting customers into the one that fits best. It’s about understanding the people who want what your business offers, what they’re looking for, how they interact with your business, and why they care.

As you look through the data you’ve gathered about your customers, identify common traits and patterns, and relate them back to your original objective. Then, create your categories from there. Remember, it’s extremely important to relate your categories back to your original business objective. If you try to force the process, you might find yourself creating something similar to Bic for Her.

Once you’ve identified those patterns among your customers, you may want to bring them to life by exploring what someone in each segment may be thinking, doing and feeling. If you’re already doing something like this in your broader marketing efforts, customer segmentation can help you iterate on the personas you’ve already created.

4. Target your customer segments and test your messaging

It’s time to put your strategy to the test! This is the point in your business journey where your marketing team creates more personalized messaging for each of your customer segments. For instance, your sales team can reach out to each customer segment with a different pitch specifically tailored to them to see what works best and resonates with each group the most. Your customer service agents might also reach for different support resources specifically built to address each segment’s most commonly asked questions and needs.

It’s not enough to adopt segmentation. You need to measure its success, too. That’s why it’s important to check in with the different teams and stakeholders involved in your customer segmentation strategy to evaluate whether you’re getting the results you expected.

5. Revisit your customer segmentation strategy

Let’s be honest: your strategy will likely need some tweaking before you get things right. And that’s perfectly okay! As long as you continue to revisit your efforts, review your results, make informed changes to your approach and try again, you’re on the right track.

The customer segmentation strategy review process includes:

Realigning with your original objective
Monitoring competitors to see how they’re approaching customers
Running ongoing surveys to capture data about new customers (and keep old data up-to-date)

Aim to review your businesses’ customer segmentation strategy at least once a year, though more frequent check-ins may make sense if you have seasonal swings. (And in times of rapid change, like a global pandemic.)

The dos and don’ts of customer segmentation

Of course, not all customer segmentation is good customer segmentation. We’ve shared some of the benefits of doing it well… but what does “doing it well” mean?

The dos:

No matter how you slice and dice the data, each group should pass this seven-part test:

Is it identifiable? A strong customer segment can be described or defined by specific characteristics, behaviors and needs.
Is it substantial? The segment should be sizable or valuable enough to make it worth pursuing with personalized messaging or targeted offers.
Is it accessible? In other words, is it possible to gather the data you need and reach the customers within the segment?
Is it stable? While customer segments inevitably shift over time, an effective one will remain stable long enough for your business to benefit.
Is it differentiable? People with similar needs are grouped together, but they’re clearly separate from those with different needs.
Is it actionable? Can you make practical use of this segment and the information you gather to drive a business result forward?
Is it measurable? Once you define a segment, can you track whether it results in your desired outcomes?

In terms of your broader segmentation strategy, you might consider additional factors like the feasibility of implementation within your organization and the projectability of the information you have to make predictions about the entire marketplace.

The don’ts:

And as for segmentation snafus? We can share a few of those too.

Going too broad: When segments are too general, you won’t get enough detail to effectively target and address your customers’ specific needs. Age, gender and nationality alone can’t distinguish between LeBron James and Mark Zuckerberg, for example – and you likely wouldn’t market to them in the same way!
Going too narrow: Similarly, if you define your segments too granularly, you risk spending a lot of time and resources on reaching small groups. And that limits your businesses’ potential profit.
Missing the mark: Setting a clear objective is one. Let this be a reminder to keep your objective front and center when planning what to segment and how to reach out to customers. And never segment for the sake of segmenting – with no goal at all.
Using ‘bad’ data: If you’re using outdated data from five years ago, it might not reflect where your customers are today. This is a big problem if you’re segmenting customers by life stage, for example, as they can quickly move from one to another.
Focusing on the wrong segments: Your most obvious customer segment may not be your most profitable one – so don’t forget to consider the buying power and profit potential alongside the rest.
Setting them in stone: Yes, stability matters. But recognize that progress happens, too. Technology changes. Habits form and evolve. Your customer segments need to be flexible enough to keep up with the world around them.

Ready to launch your customer segmentation strategy?

Let’s face it – we live in a world of customer segmentation and personalization. When we log into our favorite streaming service, we expect to see the shows and movies we love. When we shop at our favorite ecommerce website, we expect product recommendations that fit our needs.

And this kind of experience is normal. Expected. Demanded. Customers want to feel understood as individuals, not faceless parts of a larger crowd.

By implementing a customer segmentation strategy in your organization, you get closer to that ideal. Because no matter your business objective – loyalty, revenue, customer education, lead generation or more – achieving it comes down to understanding your customers in depth and getting to know their needs.

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