What Is Customer Segmentation

Who’s your customer?

This is one of the first questions we ask when talking to a prospective client. After all, how can you begin to develop a plan to reach them, let alone sell to them, if you don’t know who they are and what they need. This is where customer segmentation comes in to play.

In today’s saturated marketplaces, trying to be everything to every prospective customer you could acquire just won’t work. Specialization and targeted marketing is the difference between your message resonating and your message falling flat. By taking time to segment your customer base, you’ll learn exactly how to adapt everything from your marketing to your product development to improve your chances of acquiring new customers.

Customer segmentation is the practice of dividing a customer base into smaller distinct groups, usually based one how they vary across two different metric types: demographics and psychographics.

1) Demographic Metrics: This group of metrics aligns with the types of things you’d see on something like the census:

Age
Race / ethnicity
Household income
Education level
Geography

2) Psychographic Metrics: This group of metrics is far more diverse and reflects the attitudes and opinions of your prospective customer. These can include categories such as:

Spending habits
General interests
Attitudes towards product or service categories
Political perspectives
Opinions about the environment

When combined, demographic and psychographic metrics help pull together the typical profile of a customer type. You can begin to visualize what they look like, what they sound like, what they like to do….and then you can start thinking about how to actually attract them to your business.

Why Customer Segmentation Matters

Going through the effort of segmenting your customers, or prospective customers, takes a lot of time and effort. Why do it? Lot’s of reasons, including…

Market Share: There are a lot of ways to determine what type of customer you want to go after, but market share is a compelling way to pick. Knowing that one or two customer segments makes up a large portion of a category can help sway a business’s likelihood to focus heavily on that segment.
Product-Market Fit: People will only buy your product if it meets a need or want they have. By understanding the different customer segments that exist in a market, and how they shape up demographically and psychographically, you’ll be able to determine if the product you’re developing will align with any segment’s particular needs.
Targeted Marketing: You can’t be everything to everyone. By understanding what sets different segments apart, you’ll be able to develop customized, targeted marketing that caters to them, a key task if you want to optimize customer conversions.

How To Perform Customer Segmentation

You’ll generally find two approaches to customer segmentation which require either quantitative or qualitative research. Neither is better nor worse. Rather, business circumstances often dictate which approach you take. You’ll often see B2C businesses performing quantitative approaches since this approach requires very large sample sizes. In contrast, B2B businesses will often skew towards qualitative methods due to it being harder to find the right profile of respondents to take part in research.

Customer Segmentation From Quantitative Methods

How It Works: This approach requires fielding a large, often 60+ question survey to a very large pool of respondents. Once responses have been collected from all respondents, the data undergoes a statistical method called factor analysis which groups respondents into distinct clusters. These clusters help you visualize unique segments that exist within the broader respondent pool, and how they are similar or different based on demographic or psychographic variables.

What Must Be Known Upfront: With quantitative methods, you generally just need to know what you’re looking for in a typical respondent. For instance, maybe it’s an existing purchaser of a product. Or, perhaps it’s someone open to purchasing but hasn’t yet purchased. Once you know this very basic criteria, you can launch your survey knowing that you’re allowing only the right people into your survey.

An Example Of What You’ll Find: For instance, let’s say we’re interested in understanding the distinct segments within the ice cream consumer population. We would collect survey responses from a minimum of (usually) 1,000 respondents and then have that data go through factor analysis. After the analysis is complete, we’ll find ice cream customers take on a variety of different profiles. For instance, you might find that one segment is comprised of younger customers that enjoy unique flavors and don’t care about calories or fat content while another segment is comprised of senior citizens that value traditional flavors and all-natural ingredients.

Customer Segmentation From Qualitative Methods

How It Works: This approach requires having 1:1 conversations with individuals that meet a particular criteria. You’ll need to develop a (usually) 30-minute or so interview guide that lets you ask the same questions of all respondents. After performing the same interview time and time again, you’ll start to see trends in how some individuals respond to certain questions versus others.

What Must Be Known Upfront: With qualitative methods, you generally need to know the distinct segments you want to explore in greater depths. For instance, you might know that people at different seniority levels behave differently with your product or service. Or, perhaps people from different industries buy or evaluate your service differently. Once you know these high-level segments you can target who you need to talk to.

An Example Of What You’ll Find: For instance, let’s say you sell a software product for internal communication that’s purchased by Directors for their teams and HR professionals for their entire organizations. We would develop a 30-minute guide and interview at least five individuals within each segment. Once the interviews are complete, we look for patterns in how one group responds versus the other. For instance, we might find that Directors purchase the product because they manage remote teams and need to maintain regular communication. In contrast, we might find that HR professionals purchase the product to better connect different functional areas within the organization.

What To Do With Customer Segmentation Results

Once you’ve gone to the effort of performing customer segmentation, you’ll want to use those findings to its fullest. These results can be used in a variety of ways including:

Brand Strategy & Positioning: Standing out in a competitive market means having a distinct way of talking about yourself and how you’re different from competitors. Essentially, you need a core brand framework that’s going to help set you apart. By knowing which market segment(s) you want to go after, you can develop your brand positioning and value propositions around those segments’ needs and desires.
Product Marketing: When you talk about your product, its features, and its benefits, you want to make sure it aligns with what your core customer wants. Having a strong grasp of the customer segments you’re marketing your product to will ensure that any discussion of features will be framed in those terms.
Marketing Channel Strategy: You want to spend your marketing bucks where they’re going to reach the right audience. Once you know which customer segments you want to target and where they go to spend free time or research information for professional purposes, you’ll know where to direct your marketing efforts.
Sales Outreach: Sales teams are most successful when they have a thorough grasp of a prospect and their needs so that they can directly address those needs during the sales process. Armed with customer segmentation information, sales can tailor the sales experience through messaging and collateral that shows prospects the company understands them and can solve their challenges.
Product Development: Customer segmentation can help inform what features or services get developed, and which ones don’t make the cut. By knowing what core segments want, you can optimize your organization’s resources and develop a roadmap that directly addresses core customer needs to help drive retention. Or, you can build out features and capabilities that aren’t in your product today but that could help attract a segment you don’t cater to today.

In sum, the results of customer segmentation work span well beyond marketing into sales and product development. When each functional area within an organization has a firm grasp of who its core customer is, all activities can be optimized with them in mind, helping drive customer acquisition and long-term retention.