The phrase Customer segmentation gets “banded around” a lot. But do companies actually carry it out in reality, and if so, what are the benefits of adopting the practice? This article will cover the basics of customer segmentation for SME businesses, including:
- What is customer segmentation?
- Why should a business use it?
- Types of customer segmentation
- Some action orientated tips of how to use it with an example
What is Customer Segmentation?
Put simply, it is the process of dividing a market of potential customers into smaller sub-groups or segments based on similar characteristics or needs who will respond similarly to marketing strategies.
Examples of characteristics could be age, gender, location, interests, attitude etc. More on this later in the article.
Why use Customer Segmentation?
The reason customer segmentation is so important is that is allows businesses to tailor their approach and message to the audience. The phrase “you can’t be everything to all people” really resonates with segmentation, especially if a company’s product or service has multiple uses for different types of customers. One message will not apply to everyone and that is where, in my opinion, many businesses go wrong with their marketing.
Having separate smaller groups to market to should make marketing easier, that in turn provide insights which can then turn into actions. For example, a tennis ball as a product would appeal to tennis players (for tennis!), but also dog owners (for their dogs!) Therefore, this company would have 2 distinct customer segments and the messaging would be totally different for each group.
How does a business segment its customer base?
Customer segmentation can be split into 4 different types – geographic, demographic, psychographic and behavioural. However it is important to note that, in reality, most businesses use a combination of these in their customer segmentation process.
The 4 main types of customer segmentation are as follows:
- Geographic – location, town, rural, distance, region e.g. 50-mile radius from Leeds
- Demographic – age, gender, income, occupation e.g. female university students
- Psychographic – personality, life stage, attitudes e.g. customers who want to buy vegan food
- Behavioural – loyalty, usage, benefits, method of purchase e.g. customers who buy via mobile phone
Other segments to consider are:
- Existing vs new vs lapsed customers
- Product/services a customer has bought
- Product/services a customer has shown interest in
- Marketing activity they respond to e.g. did they click on an email you have sent?
- Advertising and media/publications they consume
- Customers’ Interests/hobbies
- Time and frequency a customer buys products/services
- What device a customer uses e.g. tablet, mobile, desktop
- How the customer found a business e.g. from social media, google search
- Engagement level with the promotion of products/services
A business may not have all the information on their customers they need in order to segment them, so how would it find this information?
- Focus groups
- Market information and data
- Google Analytics
- Social media insights
A word of warning – common customer segmentation mistakes to avoid:
Creating groups which are too small – there needs to be an element of critical mass so would recommend keeping the sample size to a minimum of 10% of your total customer/prospect audience.
Keeping segments the same – customer behaviours change over time so make sure they are still relevant e.g. Girls aged 6-9 like glittery pencil cases, but this audience will grow up and move onto marble designed pencil cases, so this business would be concentrating its efforts on girls up to 9 years and as they move on, the business would move these girls out of the segment as new younger girls replace them.
Becoming obsessed with data – a company may have access to lots of data and therefore can create multiple customer segments, but it is important to test each segment and work out which ones perform best and then prioritise these. Just because a business has data for a segment it doesn’t need to be used if it doesn’t deliver tangible results. Some segments will be more profitable than others.
So, once the customers have been segmented, what methods of marketing activity can be used for customer segmentation? Below I list a few examples:
- Advertising on social media platforms
- Print advertising
- Via Email
- At events
- Promotional codes
- Direct marketing
- Specific campaigns
- Direct selling
Having read all this, I thought an example may bring it all to life:
There is a wine company called Buymywine.com who is looking to increase sales and have segmented their customers in the following way:
- New customers – enticing them to try their wine products by offering a free mini bottle via a direct mail campaign.
- Loyal customers – rewarding loyalty and encouraging trial by giving them a money off voucher for other wines within the range via email.
- Lapsed customers – these are customers who have bought wine in the past but have not purchased in the last 6 months. They would receive money off voucher via QR code at an event.
With this example each group has a tailored offer to suit their needs and purchasing history while still addressing the company’s objective of increased sales.
I would urge any business to start using customer segmentation techniques. Start looking at what data is available and how the business could introduce simple segments, then keep testing, measuring and tweaking.