Simple Guide to Customer Segmentation

Customer segmentation helps you in targeting a specific set of customers. Not all customers are made the same. Their needs, their cultural backgrounds and their value to the company differ significantly. Thus, it is important to categorize your customers into different segments and adjust your product positioning & marketing messaging accordingly. In this post, I will provide a simple guide for understanding customer segmentation.

Why is customer segmentation necessary?

      1. Tracking and measuring the value of each customer segment to fine tune the customer acquisition strategy.
      2. Better emotional connect with the customers. The product teams and marketing team can now develop their output customized for each segment.

    1. Improving the quality of customer service by identifying the primary trouble points for each segment and customizing the response appropriately.
    2. Improving operational efficiency by realigning the focus on the high value customer segments.
Customer segmentation

Customer segmentation helps you in identifying more profitable segments

What are the ways of customer segmentation?

There are 4 primary ways to bucket your customers.

  1. Using the value generated for the company. Some customers are highly valuable to the company (in terms of margins and revenues generated) while in other segments the company might not gain any value. You can segment the customers into 4 buckets using this strategy.
    • High value customers – Use a commonly agreed metric such as up-sells, total purchases, etc or a custom metric that is relevant to your organizational goals.
    • High potential customers – These are customers who don’t bring sufficient value to the company now, but there is a lot of potential to grow this account.
    • Low value customers – These are customers who have neither a lot of growth potential nor have lower margins/sales.
    • Zero-value customers – These are customers who bring no value to the company and it costs more to retain them than what they add. Look to cut this category of customers.
  2. Demographic segmentation – In this method you use the demographics of the customer to understand their needs. The segments could be based on age, gender, location, language, culture etc.
  3. Behavioral segmentation – In this method you focus on certain customer behaviors and use that to group the customers. The segments could be impulse buyers, geeks, office workers, busy executives, angry customers, etc. based on your needs.
  4. Strategic segmentation – In this method you bucket your customers into certain strategic categories. It could be based on delivery (iPad application users/Web users), purchase model (subscription/one-time payer) or specific activities (sportsmen, gardener etc).

Customer segmentation is very crucial for customizing your products that fits in your customer’s needs. Your operational efficiency and sales number can be boosted through customer segmentation.