Your marketing success hinges on your ability to identify and segment your customer base effectively. This means understanding that your business caters to a diverse group of individuals, each with their own unique needs, preferences, and purchasing habits. By developing a comprehensive customer segmentation strategy, you can tailor your marketing efforts to specific age groups, locations, budgets, and other relevant factors. This enables you to connect with potential customers on a more personal level, promoting the products and services that are most likely to resonate with them.
Your customers have different attitudes about you, including which products they’d buy, when, where, what other services they’d buy, and how often. And in today’s digital age – they want more than posters, flyers, and discounts; they want you to understand exactly what they need – without intruding on their privacy.
That’s why businesses should create offers with equal value and well-thought-out ideas to catch their attention. Without this, it will be easy for customers to find other brands online.
This article provides a step-by-step guide to help you design your customer segmentation strategy. Let’s begin.
What Is Customer Segmentation?
Customer segmentation groups customers with similar needs or behaviors into smaller segments.
Segmentation helps improve marketing strategies and customer satisfaction by considering how different groups behave. This lets businesses market to specific customer groups and ensure they meet their needs.
Different businesses and marketers use various factors and methods in grouping their customers. Knowing your business’s nature is crucial in determining the best customer segmentation strategy.
Why Segment Your Customers?
Marketing is a necessary expenditure, but failure to track it may do more harm than good. With this, you should be efficient with your strategy. You have to pay due attention but avoid overspending at the same time.
How can you do it? You should woo your customers in a way that best suits them. And what better way to do this than to cater to their unique demands?
Customer segmentation can help when planning your marketing strategy. Here are five benefits of setting a customer segmentation strategy:
- Targeted Campaign. A survey by Mailchimp found that segmented campaigns yielded 14.31 percent higher open rates than non-segmented ones.
- More Customers. Why limit your market to one group when you can have many of them? Customer segmentation helps you create differentiated plans that work for different people.
- Improved Services. Different customers have different needs. Knowing their shared characteristics lets you respond to them in a way that pleases them.
- Better Preparation. Different needs mean different problems. Having a clear picture of your customers’ archetype helps you create a more detailed plan to get around potential issues.
- Easier Modification. You may need to change your strategy from time to time. Customer segmentation spares you the need to troubleshoot the entire plan amidst problems. You can pinpoint the part that needs fixing.
- Better Focus. Similar businesses don’t always compete. You may be weak in other segments, but you can focus on strengthening relationships with groups that could give you an edge over your competition.
Advanced Customer Segmentation Methods
There are many customer segmentation strategies you can use. The most popular ones are demographic (based on age, gender, education, income, etc.) and geographic (location-based).
These basic segmentation methods have been around for a while. Although still effective, things have been evolving fast. Consumers have more complex needs than ever, and so do businesses. You need more innovative and timely strategies. Below are some advanced customer segmentation methods to help you up your game:
Factor Segmentation
Factor segmentation is a great ROI-driven customer segmentation strategy. It involves grouping your customers based on what they want in a product or service.
You can do this by surveying the things that most affect your market’s buying behavior. After that, you need to identify the common themes that surfaced in the survey.
For example, answers like “low price” and “inexpensiveness” will fall under pricing. Meanwhile, you can group responses like “long-lasting” and “sturdy” under quality.
Also, you can rank these purchasing factors based on their importance. It can help you realign your marketing strategy with your target customer.
RFM Modeling
RFM stands for recency, frequency, and monetary. It assesses your current customers based on those factors.
Recency is the last time a customer purchases a product, while frequency tells how often they buy. The monetary factor determines how much they spend on your business.
Essentially, your customer gets a score based on those three. From there, you can decide what scores are high or low-value customers. It will help you set priorities and divide your marketing funds well.
Propensity Modeling
Propensity modeling is an advanced marketing segment strategy that predicts future actions. It uses statistical methods to determine how likely a customer will do something.
This approach uses both independent and confounding variables to predict customers’ behaviors. You can compute a customer’s propensity score with existing data about your buyers. The propensity score will be the basis of your segmentation. This strategy is beneficial for e-commerce. You can predict whether a website visitor will become your customer and you can also use this tool to determine how likely your current customers will use an emailed promo.
Psychographic Segmentation
This customer segmentation strategy uses the consumers’ opinions, beliefs, and other psychological factors. It means that you will group like-minded customers.
Personality types, religious beliefs, political views, and many other factors are examples of data.
Psychographic segmentation is a powerful tool to strengthen your marketing strategy. Knowing how certain groups respond helps you identify your brand’s most vital asset. With this, you can readjust your brand’s positioning and promotions.
This strategy also works better when combined with propensity modeling. The psychographic data can help predict who will buy when granted promotional deals.
E-commerce Purchase Intent
E-commerce intent groups customers based on their intention to buy. It’s simple, so it’s a good market segmentation strategy for B2B (business-to-business).
It uses the customer’s journey or history with your business’s products and services. Essentially, you will separate sure buyers from those who are not (e.g., window shoppers). You will treat their purchasing behavior as a journey in which each customer is in a different phase.
These phases will guide your marketing strategy. For instance, a welcome message and promo code are great for newcomers. Ultimately, this strategy ensures you use your campaign materials at the right time.
Needs-Based Segmentation
As the name suggests, needs-based segmentation focuses on customers’ needs. This market segmentation is advisable for business-to-business marketing. It helps you tailor your messages and offers to each customer.
If you want to use this, you need to determine your target market’s problems first. Targeting a specific problem is critical in needs-based segmentation. It serves as the foundation for your next moves.
Needs-based segmentation lets you offer the right products at the right time. It also saves you a lot of resources and time since you already know what each segment needs. All you have to do is offer them or adjust according to the result.
Order Gap Analysis
As the name suggests, order gap analysis focuses on the frequency of purchases. It is a great complementary strategy for other methods in this list.
It is another B2B marketing segmentation that can quickly identify a customer’s departure. With this, you can plan strategies to keep them. It also helps with restocking, as you can predict your customer’s next order.
Monitoring your customer’s order frequency can alert you to unusual inactivity. With this, you’ll know when an approach isn’t working on a segment anymore.
Unlocking Profitable Customer Segmentation: A Strategic Approach
Choosing the best customer segmentation strategy is only the beginning. Here are some tips to ensure your customer segmentation strategy is done right.
Step 1: Lay down your framework.
Setting up a plan is like building a house. You need to work on your framework first. And what does your structure contain?
- Objective. A concrete and measurable goal is necessary. What do you aim to get by the end of the month? Quarter? Year? Your goal serves as your direction.
- Scope. You can’t have everything on your plate at once. Trying so may only lead to not achieving anything at all. Knowing the segments to target helps you focus.
- Key figures. This is crucial in gathering results. What will you use to measure success? It can be the conversion rate, purchases, and many others.
Step 2: Gather data.
The key figures in the first step are critical in this step. Collect relevant information as you launch your customer segmentation strategy.
There are many ways to gather this information. The most popular method is a survey. But you can also use marketing automation tools to collect conversion rates, web traffic, and other helpful information.
Also, don’t forget to note the data collection cost. It is necessary for measuring your ROI later.
Step 3: Analyze the results.
Here, you’ll know the product of your efforts. The goals you set in step 1 will be the basis of success or failure.
You don’t need to do this manually. Many advanced marketing automation tools have data-collection features. All you have to do is track them.
Don’t forget to include your customers’ feedback and concerns. You may spot new similarities from their first-hand experiences. It may be a sign of a need for regrouping.
Step 4: Improve your segments and strategy.
Some aspects of your strategy may result in favorable results. Others may need modification. The results serve as your guide in making necessary changes to get better results next time.
Also, some segments may respond well, while others will not. It only suggests that they need a different approach.
The point of using a customer segmentation strategy is to improve ROI through personalized marketing. Every step you take costs you time, money, or both. Know when a segment is worth the effort or not anymore.
Step 5: Repeat the process.
Marketing is a cycle, and so is customer segmentation. The changes you’ve made in step 4 will also need tracking and analysis.
There are seasons when a segment needs more focus than the others. You may also need to recategorize your customers into new segments.
As the market evolves, you may need to adjust your goals. Be sure to keep yourself updated to ensure your business’s longevity. Remember, a small change may be crucial in the business’s future.
Tips On Applying Your Customer Segmentation Strategy
Now that you know advanced customer segmentation methods, you have to use them. But it only works if you do it right.
Here are some pointers to help you implement your customer segmentation strategy:
Use Your CRM Data
Most marketing automation software use some built-in customer relationship management (CRM) tools. It means that you have access at all time at least to some basic information about your customers in your database.
Some advanced tools can also automatically do customer segmentation. So it’s best to use one if you have the budget.
Customers’ ages, birthdays, cities, vocations, and other demographics are in your CRM. Simply categorize them strategically using this data.
Use Marketing Automation Tools
Marketing automation tools work better when you use them with customer segmentation strategies.
Many automation platforms include customer segmentation and CRM features. Investing in these tools will save you resources in the long run. These apps are your marketing partners.
Establish Stable Segments
You now know and categorize your customers. The next step is to identify your group’s strengths and weaknesses.
To make your segment last, you must strengthen your customer relationship. Knowing your customers’ strengths and weaknesses can help you provide them with the best experience.
Psychographic data tends to be unstable, so don’t rely on it too much. While this is powerful information to use, psychographic data can quickly change.
Develop Buyer Personas
The buyer persona is the model of your “perfect” customer. Your ideal customer isn’t someone you make up in your mind. Their characteristics don’t come from you.
You will develop the persona based on the available information about your segments. They are the melting pot of all potential buyers.
Developing buyer personas help you focus on your target customers. It lets you set priorities instead of tending to many audiences all at once.
Be Creative With Your Content
The purpose of categorizing your customers is to personalize your content. Information about your audience allows you to be creative and match their needs.
Once you know your customers, you should identify what works for them. For example, a promotional voucher in summer may work on one segment but not on the other.
Remember, don’t waste your resources. Tend to what the segment only needs.
Use a Combination of Segmentation Models
Customer segmentation is limitless. Many marketers use a combination of two or more of these strategies. Know the unique needs of your business to come up with the strategy that best works for you.
For instance, as mentioned before, propensity modeling works great with psychographic segmentation.
Needs-based and order gap analysis are also great combinations. They may help you assess if you still meet your customer’s needs. If not, you should take an immediate action plan.
Test and Track Results
How will you know if a customer segmentation strategy works? Of course, you need to gather measurable results.
Progress tracking is essential to improving your method. It also lets you cut things that aren’t relevant anymore.
Measuring the ROI of customer segmentation is crucial. After all, you invest in these segments. Expect something in return!
If a tactic isn’t working, abandon or adjust it. However, low-profit segments may require a different customer segmentation strategy.
Potential Weaknesses of Customer Segmentation
Customer segmentation can help your business in many ways. However, it is important to understand the potential drawbacks before going all in on implementing it.
Here are four potential weaknesses of market segmentation to consider:
1. High Initial Costs. Customer segmentation can save money in the long run, but it may take some time to get visible results. Initially, it might cost more in technology, labor, and other areas.
What you should do: Set a clear budget to know how much you’re willing to spend. You can always increase your budget as your strategy succeeds.
2. Complex Product Lines. Segmentation aims to provide customized services to customers. You need a wide range of products to cater to each segment’s demands.
What you should do: Set clear and realistic targets. Keep in mind that you don’t need to cater to everyone. A solid pool of buyers is still better than temporary customers.
3. Misrepresentation. It happens when you use the wrong customer segmentation strategy. It leads to undesirable responses from the segments you thought had the same needs.
What you should do: Customer segmentation is trial-and-error at first. A trial run with a sample of potential customers before setting off can lessen the errors.
4. Constant Changes. Your segments may be fitting right now. But the next thing you know, things are different, and you need to set new segments. Sometimes, the change could involve rebranding.
What you should do: Be consistent in tracking your progress. Any noticeable shift can help you predict and plan for marketing changes.
The Bottom Line
Customer segmentation is a powerful strategy to increase your profits. As digital demands are becoming more and more complex, customer segmentation can help you fulfill your customer’s needs.
Just remember those things when optimizing your segmentation strategy for success:
- Knowing Your Market: Understanding your potential customers is essential to categorize them.
- Setting Limits: You know your strengths and weaknesses. Know the difference between missed opportunities and bad investments.
- Creativity and Confidence: The customer segmentation strategies listed here are just some examples. You know your business best, so don’t hesitate to launch innovative ideas.
If you need help implementing your customer segmentation strategy, contact us today!
