Customer segmentation is a marketing method that divides the customers in sub-groups, that share similar characteristics. Thus, product, marketing and engineering teams can center the strategy from go-to-market to product development and communication around each sub-group. Customer segments can be broken down is several ways, such as demographics, geography, psychographics and more.
Aspect Explanation Concept Overview Customer Segmentation is a marketing strategy that involves dividing a company’s customer base into distinct groups or segments based on shared characteristics such as demographics, behaviors, needs, and preferences. This strategy recognizes that customers are not homogenous and allows businesses to tailor their marketing efforts to different groups, increasing the effectiveness of their marketing campaigns and improving customer satisfaction. Key Objectives – The primary objectives of Customer Segmentation are:
1. Targeted Marketing: To deliver personalized marketing messages and offers to specific customer segments.
2. Improved Customer Experience: By addressing the unique needs and preferences of each segment.
3. Increased Sales and Retention: By tailoring products, services, and incentives to match customer expectations.
4. Efficient Resource Allocation: By directing marketing resources where they are most effective.
Types of Segmentation – Customer segmentation can be based on various factors:
1. Demographic: Including age, gender, income, education, and family size.
2. Geographic: Such as location, region, or climate.
3. Psychographic: Considering lifestyle, values, and attitudes.
4. Behavioral: Examining purchase history, usage patterns, loyalty, and engagement.
5. Firmographic: For B2B markets, including industry, company size, and revenue.
Segmentation Process – The segmentation process typically involves several steps:
1. Data Collection: Gathering customer data through surveys, purchase history, or social media.
2. Data Analysis: Identifying patterns and similarities among customers.
3. Segment Definition: Creating distinct segments based on common traits.
4. Targeting: Designing marketing strategies for each segment.
5. Implementation: Delivering tailored messages and measuring results.
6. Evaluation: Continuously assessing and adjusting the segmentation strategy.
Benefits – Customer Segmentation offers numerous benefits:
1. Personalization: Allows businesses to offer personalized products and services.
2. Improved Customer Engagement: Increases the relevance of marketing messages.
3. Efficient Resource Allocation: Reduces marketing waste by targeting the right audience.
4. Enhanced Customer Loyalty: Building stronger relationships with customers.
5. Competitive Advantage: Differentiating from competitors.
Challenges – Challenges in customer segmentation include:
1. Data Quality: Ensuring accurate and reliable customer data.
2. Over-Segmentation: Creating too many segments, which can be impractical.
3. Changing Preferences: Keeping up with evolving customer preferences.
4. Privacy Concerns: Addressing customer privacy and data protection regulations.
5. Integration: Integrating segmentation into broader marketing and business strategies.
Applications Customer segmentation is applied across various industries, including retail, e-commerce, financial services, healthcare, hospitality, and telecommunications. It helps companies target the right customers with the right products or services and tailor their marketing efforts to specific segments. Data Analytics and Technology Advances in data analytics and customer relationship management (CRM) technologies have significantly enhanced the effectiveness of customer segmentation. Businesses now use AI and machine learning algorithms to analyze vast datasets and gain deeper insights into customer behavior and preferences. Dynamic Segmentation Customer segmentation is not static; it should evolve with changing market conditions and customer preferences. Dynamic segmentation involves continuously updating and adapting segments based on real-time data and market trends. It allows businesses to stay agile and responsive. Ethical Considerations Businesses must handle customer data with care and adhere to ethical standards and privacy regulations. Respecting customer privacy and obtaining consent for data collection and use is essential in segmentation practices. Building trust with customers is vital for long-term success. Customer Lifetime Value (CLV) Customer segmentation can help identify high-value customer segments with the potential for long-term relationships. Calculating and optimizing Customer Lifetime Value (CLV) is a critical metric that considers both acquisition and retention strategies for different segments. Global Marketing In global markets, customer segmentation strategies may need to account for cultural differences, regulatory variations, and market-specific nuances. Effective segmentation in a global context requires a deep understanding of local markets and consumers.
Why customer segmentation matters
No matter how niche your brand may be, it is important to keep in mind that every customer is, in fact, an individual. What’s more, they deserve to be treated as such.
Of course, most businesses will not have the resources to cater to every customer on an individual basis.
They can, however, more broadly assess the needs of their customers according to certain metrics.
Customer segmentation in a nutshell
Customer segmentation is the process of separating your customers into groups according to certain traits (e.g. personality or interests) and factors (age or income level).
So why should customers be segmented? There are several important reasons:
- It allows businesses to tailor marketing strategies and ad campaigns according to particular groups of people.
- It enables businesses to learn about their consumers on a deeper level. And with this increased understanding, to create better products that resonate with consumer needs.
- Enhanced customer support – since businesses with customer segments are better able to predict problems ahead of time.
- Conversely, segmentation may also identify groups of consumers previously unknown to the business – allowing marketing resources to be directed toward these untapped groups.
Now that we have a basic understanding of customer segmentation and why it should be implemented, let’s look at some common customer segment types.
Demographic data is relatively straightforward and includes information on age, gender, marital status, income, and education level.
It is perhaps the most well-known and well utilized of all customer segments because demographic data is easy to obtain through market research.
A simple example of demographic customer segmentation might involve the marketing of a high-end sports car.
The manufacturer may want to target consumers that are unmarried or divorced, have a high income, and be at or approaching retirement age.
In this case, businesses may target the industry, job function, or company size as part of their marketing efforts.
Geographical segments detail such parameters as climate, zip code, land use (urban or rural), and the radius around a particular point of interest. But it also concerns the scope and extent of potential marketing efforts.
Smaller organizations, for example, may target consumers living in specific towns or cities. Larger organizations may target consumers according to their country or continent of residence.
If we return to the sports car example, let’s assume that the car is marketed primarily as a convertible.
As a result, the manufacturer may choose to target specific countries (or geographic areas) with sunny climates that are conducive to driving with the top down, so to speak.
Public transport operators could also use geographic segments to target commuters living within 15 minutes of a train station.
They could use this information to develop a marketing campaign to convince commuters to leave the car at home and take the train instead.
Psychographic segments include such things as socioeconomic class, lifestyle, and personality traits.
They also include factors that are big drivers of buying decisions, such as values, motivations, attitudes, and conscious or subconscious beliefs.
However, psychographic data is more difficult to collect than demographic data. Why? Because it is more subjective and requires deeper research to unearth.
Psychographic segments and the information that comprises them are also more fluid because motivations, beliefs and values can change over time.
The luxury sports car manufacturer may target consumers whose values and motivations relate to status, freedom, and fine craftsmanship.
But if, for example, the consumer who bought a 2-seater convertible suddenly welcomed grandchildren into his life, he may then prioritize safety and reliability over status and freedom.
Of course, marketing departments cannot plan for every contingency. But they must be aware that psychographic customer segmentation is fluid and has the potential to shift over time.
Behavioral segments include a consumer’s direct interactions with a business.
In other words, behavior dictates how they act according to their demographic and psychographic attributes.
The behavioral segment encompasses spending habits, product/service usage, and the perceived or actual benefits of such usage.
Behavioral segments are derived from internal data that is collected by the business itself.
It may include data on how consumers use a product and the frequency with which they do so.
Furthermore, information may also include the specific benefits that the consumer is after, such as a time or money saving or loyalty status.
Perhaps most importantly, behavioral segments clarify a consumer’s willingness to purchase.
If a typical sports-car driver likes to upgrade to the new model every three years, then it is the marketing team’s priority to understand this cycle and market to this segment accordingly.
Similar predictive behavioral learning is also utilized by Netflix, who segment their users according to their content preferences and then recommend content in similar genres.
Technographic segmentation is segmentation according to a consumer’s preferred choice of technology.
Think smartphones, software, operating systems, desktops, and apps.
As technology becomes increasingly prevalent in the lives of consumers, technographic segmentation has never been more important to marketing departments.
Business-to-consumer marketing can also use technographic segmentation to target consumers according to their social media use.
In their Harvard Business School published book Groundswell, authors Li and Bernoff suggest that marketing teams further divide their technographic segments according to social media use.
- Creators – who maintain a blog or website or upload music or videos.
- Critics – who post reviews of products or services or who like to contribute to forums or blog posts.
- Joiners – who maintain active social media accounts.
- Spectators – who read blogs, listen to podcasts, or watch video content without contributing or participating.
Business to business (B2B) also stands to benefit by technographic segmentation. Specific parameters in the B2B sphere include network and storage capabilities, cloud utilization, and big data technologies.
Target market examples
To recap, a target market is a segment of customers most likely to purchase a company’s products or services.
While the two terms have some overlap, it’s important to first make the distinction between a target market and a target audience.
The target market is the end consumer who will use the product.
The target audience, on the other hand, is the focus of the brand’s promotional efforts.
To illustrate this difference, consider the McDonald’s Happy Meal. The product itself is obviously consumed by children, but it is the parents who control the finances and what the child eats.
As a result, McDonald’s may promote the Happy Meal’s nutritional value or low cost – factors that appeal to the parents but which the child cares very little about.
To solidify the concept of a target market further, read through the following examples.
As part of its rebranding effort, the company analyzed the benefits of owning its apparel, shoes, equipment, and accessories.
From this, Nike defined a target market of mostly younger consumers who were interested in fitness and possessed the disposal income to invest in equipment and achieve their goals.
Today, most of Nike’s promotional efforts focus on aspiring athletes and runners in a way that is motivational and inclusive.
Vans is an American shoe manufacturer founded in 1966 that made the bold decision to champion alternative subcultures such as skateboarding and bicycle motocross (BMX).
The brand appealed to so-called “misfits and rebels” who saw these sports as not only a hobby or passion but a lifestyle choice.
Vans is now taking advantage of the athleisure trend target market and has a much broader appeal, but the company’s stores continue their retro, skateboarding vibe.
In a Manhattan store, for example, vintage posters of skateboarders adorn the walls with industry slogans and skateboards from popular brands.
Next to skateboard accessories such as wheels and trucks is apparel more reminiscent of earlier decades with muted colors and oversized logos.
Dior is a French luxury fashion house founded by Christian Dior in 1946.
The company primarily targets the so-called “Chardonnay Girls” target market which consists of confident, optimistic, fashion-conscious women in the 18-32 age bracket.
Perhaps unsurprisingly, this target market tends to live in world cities such as Moscow, New York, and Milan with above-average salaries and career prospects.
They have also a propensity to shop offline, but having said that, Chardonnay Girls are consumers that are more likely to become advocates for a brand and share their experiences with friends.
Thus, reducing marketing costs through efficient, customer-focused communication.
Customer segmentation examples
In this section, we’ll delve into some additional customer segmentation examples.
Region and culture
With more than 36,000 restaurants in over 119 countries, McDonald’s uses a subset of geographic customer segmentation to promote menu items to users from various cultures.
In India, for example, ads show McSpicy Paneer alongside Green Chili Naan-Aloo.
Another region and culture-specific advertisement promotes the Maharaja Mac – better known as the Big Mac – which is “made with handpicked ingredients from across India” and features the #TrulyIndianBurger hashtag.
Customer segmentation based on the forecast weather conditions enables the company to predict the moods, needs, and purchase behavior of its customers.
This is usually achieved via the integration of real-time weather data into an existing personalization platform.
Segmentation based on the weather is especially important for retail brands whose products are highly seasonal.
A clothing brand based in the United States, for example, can segment its users based on location and direct those living in the colder northern states to a page promoting scarves, jackets, and gloves.
An undisclosed football club – but one of the largest in England – used weather targeting to recommend merchandise to fans based on their location which is positioned on a Google Maps image in the background.
Some airlines are also using the approach to promote destinations with warmer or sunnier weather than the customer’s home conditions.
Home Chef is a food delivery company that segments its customers based on their profession.
In one email campaign aimed at the healthcare and education industries, the company referenced the upcoming National Teachers and Nurses Day and took the opportunity to thank these individuals for their service.
For those that could verify their teaching or nursing credentials, Home Chef offered 50% off the cost of their first box of food.
Almost 70% of desktop users and 86% of those on mobile abandon their cart before finalizing the purchase.
This represents a major source of lost income that can at least be partly recovered with laser-focused customer segmentation.
To encourage users to complete their purchases, companies can create a series of drip campaigns or emails based on metrics such as product type or customer activity level.
Google’s approach for abandoned items in its Google Store is to send users an email with personalization, excellent copywriting, and a clear call to action.
This is normally accompanied by a message that creates urgency such as “Our popular items sell fast” and “Going, going, (almost) gone”.
Politics is a divisive issue that can easily result in negative publicity for a brand. But rather than shy away from the topic, some brave companies use it as a tool for advanced and highly targeted customer segmentation.
Ben & Jerry’s is one brand that uses political segmentation to sell different flavors of ice cream across the United States.
In the democratic state of Vermont, for example, it released an “Empower Mint” ice cream with a slogan that read “Democracy is in your hands”.
Customer segmentation is a crucial part of any marketing strategy, but some businesses may be daunted by the initial investment of time and money.
However, customer segmentation concerns serving customers and serving them well. Those who do not invest in segmentation run the risk of losing their customers to a competitor.
Accurate and detailed segmentation allows businesses to understand their customers on a deeper level and increases the probability of retaining them.
For the business, this increases conversion rates and drives down costs.
- In essence, a target market is a segment of customers most likely to purchase a company’s products or services. A target market should not be confused with a target audience, which is the focus of the brand’s promotional efforts.
- Nike’s target market consists of younger consumers who are interested in fitness and possess the disposable income to invest in equipment and achieve their goals.
- Vans once appealed to smaller alternative subcultures such as skateboarding and BMX. Today, the company’s target market has broadened to include athleisure wearers.
- Customer Segmentation Overview: Customer segmentation is a marketing technique that divides customers into sub-groups based on similar characteristics. This allows businesses to tailor their strategies to specific groups and understand customer needs better.
- Importance of Customer Segmentation: Market segmentation helps businesses understand customer preferences, locations, and communication preferences. Treating each customer as an individual is essential, even if catering to every customer individually isn’t feasible.
- Segmentation Types:
- Demographics: Segmenting by age, gender, income, education, etc., allows businesses to target specific customer groups effectively.
- Geography: Targeting customers based on location, climate, and proximity to certain points of interest.
- Psychographics: Segmenting based on lifestyle, values, motivations, attitudes, and beliefs.
- Behavioral: Segmenting by customer behavior, including spending habits, product usage, and benefits sought.
- Technographic: Segmenting based on preferred technology, such as devices, software, and social media usage.
- Target Market vs. Target Audience: A target market is the end consumer of a product, while the target audience is the focus of promotional efforts. For example, McDonald’s targets parents as the target audience for Happy Meals, even though children consume the product.
- Examples of Target Markets:
- Nike: Initially targeting professional athletes, expanded to include everyday athletes with a focus on fitness enthusiasts.
- Vans: Initially targeted skateboarding and BMX subcultures, now appealing to athleisure wearers.
- Dior: Targets confident, fashion-conscious women aged 18-32 with above-average salaries.
- Examples of Customer Segmentation:
- Region and Culture: McDonald’s tailors ads and menu items based on cultural preferences in different countries.
- Weather: Brands use real-time weather data to personalize offers based on weather conditions.
- Profession: Home Chef offers discounts to customers in specific professions, like teachers and nurses.
- Cart Abandonment: Brands send targeted emails to customers who abandon their shopping carts.
- Politics: Ben & Jerry’s uses political segmentation to offer ice cream flavors tied to political messages.
- Key Benefits: Customer segmentation leads to better understanding, tailored marketing, improved product development, enhanced customer support, cost efficiency, and increased conversion rates.
- Risk of Not Segmenting: Businesses that don’t invest in customer segmentation risk losing customers to competitors and missing out on opportunities to connect on a deeper level.
- Bottom Line: Accurate customer segmentation leads to higher retention rates, improved conversion rates, reduced costs, and overall business success. It’s a crucial part of any effective marketing strategy.
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