To be at their most efficient, businesses must center their efforts on a specific subset of customers and not on a broad group of potential customers. The means of doing so is through customer segmentation.
Customer segmentation enables businesses to better communicate the value of its offerings by prioritising key target audiences – and should be first on the agenda when it comes to informing marketing strategy. The best customer segmentation outlines customer requirements and gets as close as possible to their needs.
In this post, I will delve into the six different types of customer segmentation and explain how all of them vary in their implementation in the real world.
*Approx 10 minute read
Who Is This Post For?
- Local business owners small to large.
- Multi-unit brands such as franchise groups, dealer networks and national brands with a local presence.
- Any brand, whether you’re just starting in your digital journey or you’re advanced, this post is for you.
Commonly Asked Questions That I Will Address:
- What is Customer Segmentation
- Why Customer Segmentation matters
- Why Customer Segmentation is important
- How your business will benefit from Customer Segmentation
What is it?
Segmentation involves producing small market segments within a broader market and then choosing the correct target market for particular brands. Segmentation aids in creating and implementing relevant strategies to promote products amongst the chosen target market.
In a nutshell, customer segmentation (also known as market segmentation) is the segregation of likely customers in a particular market into distinct categories. That division is based on customers having similar needs and buying characteristics.
There are 6 different types of market segmentation and all of them vary in their implementation in the real world. These are:
- Behavioural Segmentation – Segregates customers based on their behaviour, usage and decision making system.
- Psychographic Segmentation – Involves using lifestyles, activities, interests as well as opinions to define a market segment.
- Demographic Segmentation – Simplest and most popular types of market segmentation used.
- Geographic Segmentation – Dissects people on the basis of geography. Customers will have different needs based on the location they are in.
- Occasional Segmentation – Focuses on specific events that are completely independent of the customer.
- Cultural Segmentation – Understanding customer behaviour in the context of social traditions, attitudes and behaviours embedded in the community to which they belong.
Why it Matters
It is impossible to be successful if a company’s marketing strategy is structured upon targeting the needs of an entire market. Even a large corporation must break down their total demand into segments and choose those that it is best equipped to handle.
The importance of market segmentation is that it allows companies to specifically reach a customer with distinct wants and needs. This also helps businesses to make better strategic marketing decisions for the future.
Market Segmentation Types
As the name suggests, behavioural segmentation segregates customers based on their behaviour, usage and decision making system. For example – usage segmentation – at Christmas time, consumer buying patterns will be completely different as compared to buying patterns on normal days.
Businesses can also create a segment based on what the customers will benefit from the product.
Let’s take a deodorant brand for example. What are the most important aspects for the customer?
- How much does it cost?
- Does it contain aluminium or is it aluminium free?
- Do they want something that is gentle on the skin?
- Do they look at the fragrance?
- Or perhaps they don’t care, and just want any deodorant.
The targeting for each of these segments will be different for each, as well as the different benefits that these customers seek. The places, online or offline, where our customers may be, also need to be analysed.
Psychographic segmentation involves using lifestyles, activities, interests as well as opinions to define a market segment. This type of segmentation is similar to behavioral segmentation, however with one main difference: psychographic segmentation also takes the psychological aspects of consumer buying behaviour into accounts. Aspects such as:
- How do they spend their free time?
- What influences them?
- What image are they trying to project?
- What are the needs and wants of people in this common lifestyle group?
For example, usually people who buy a luxury car can not only afford it, thus defining their economic status, but it also shows a preference to spend money on more luxury lifestyle products.
So we can extrapolate that they may travel to high-class destinations, wear specific brands, or visit certain establishments.
So, say we’re trying to sell a luxury car if we want to market to people who can afford it, we’re going to consider doing that in other high-end places such as a luxury magazine found in the first class section of an airline, or sponsoring the valet outside of an expensive restaurant.
This is one of the simplest and most popular types of market segmentation used. Demographic segmentation focuses on variables such as age, gender, family size, income, occupation, religion, race and nationality.
Geographic segmentation dissects people on the basis of geography such as a country, regions, different cities, or postal codes.. Customers will have different needs based on the location they are in. This type of segmentation is the easiest and has a high reach.
This type of segmentation focuses on specific events that are completely independent of the customer. It divides the market into categories based on the various occasions when the customer plans to buy the product, actually buys the product or uses the product.
Occasional segmentation is segmented mainly into three types:
- Universal occasions
- Regular personal occasions
- Rare personal occasions
For example, oats are most commonly deemed as a breakfast product and products targeted for Mother’s Day or Father’s Day gifts or the turkey bought during Christmas etc.
Cultural segmentation is about understanding customer behaviour in the context of social traditions, attitudes and behaviours embedded in the community to which they belong.
This is a very potent method of segmentation as it leads to understanding the audience culture, with a view to targeting them more accurately, engaging them more deeply and building lasting relationships.
Cultures can be large, they can be nationwide or they can be small and reflect a particular region or even the startup culture.
Benefits of Customer Segmentation
A company cannot create a market strategy without market segmentation. Furthermore, for the smart marketer, customer segmentation isn’t just a suggestion – it’s a necessity.
Without a deep understanding of how a company’s best current customers are segmented, a business often lacks the market focus needed to allocate and spend its precious human and capital resources efficiently. Furthermore, a lack of best current customer segment focus can cause diffused go-to-market and product development strategies that hamper a company’s ability to fully engage with its target segments. Together, all of those factors can ultimately impede a company’s growth.
If best current customer segmentation is done right, however, the business benefits are numerous. These include the following:
The more you know about your customer, the better you’ll be able to focus on catering to their needs. And this sentiment applies to various areas of the company-customer relationship, too.
By analysing customer data, companies can gain a much better understanding of what their customers want to get out of using the particular product or service. This, in turn, allows for fine-tuning the product specifically to the customers’ needs, making them feel as if it was created it just for them.
Furthermore, you can use segmentation data to create targeted advertising and marketing campaigns for subsets of customers, as well.
Whole Product Improvement
It is important to have a distinct notion of who wants to buy the product and what they need it for as it will help distinguish the best solution for their individual needs. This, of course, will lead to better satisfaction and improved performance against the competition. The advantages also extend beyond the core product offering, since any insights into the best customers will allow the business to offer better customer support, professional services, and any other offerings that make up their whole product experience.
As soon as a customer segment is established, and it is transparent what they’re looking for, then the marketing efforts can be directed to target them relentlessly. Subsequently, as the product or service that will ease their pain points will be offered, it can be confidently expected that the efforts will result in an increase in sales and revenue.
An increase in sales numbers and revenue, in turn, will result in the business owning a bigger slice of the market share in that particular industry. And, as the company becomes more popular, its brand equity will also increase. In other words, the bigger the company grows, the more likely potential customers will trust with their hard-earned cash.
Better Customer Retention
As mentioned above, when customers trust the company, they’ll be more likely to return when they find themselves in a similar situation in the future. This is mainly because the product targeted and offered has helped them in the past and given them exactly what they needed to triumph over a particular pain point.
When segmentation is done correctly, it allows businesses to stay connected to their customers even after a sale has been processed. This can be done via a customer satisfaction survey, a mailing list or extend extra information or support to help them get the most out of the product they purchased.
By spending less time on less lucrative opportunities and more on your most successful segments, your sales team will be able to increase its win rate, cover more ground, and ultimately increase revenues.
The goal of segmenting your customers and learning as much as you can about them is to provide service that makes them feel right at home when engaging with your brand. When your customers feel as if you exist solely to cater to their needs, it’s almost certain they’ll continue to rely on your services indefinitely.
To discuss more about how to apply customer segmentation to your business model as well as specific solutions I have developed for Franchise groups and multi-unit organisations, contact me today for a confidential discussion.