Customer Segmentation

What Is Customer Segmentation?

Customer segmentation is the process of breaking a customer base into smaller groups (or segments) based on demographics, industry, company size, or other shared characteristics.

When businesses segment customers, they can develop sales, marketing, and customer success strategies for each segment, personalizing the overall customer experience.

Although segmentation looks different for every company, the basic idea is the same: separate customers into meaningful groups with similar needs and preferences.

Common ways businesses segment customers include: 

• Demographics
• Industry vertical
• Company size
• Psychographics (purchase behavior or preferences)
• Location
• Spoken language
• Technographics

Companies also get customers to segment themselves by developing products with tiered pricing, industry-specific feature sets, add-ons, and upgrades.

By dividing customers into smaller groups, businesses can better understand their specific customer needs, which helps them design and deliver more targeted products and services that meet those needs.

Synonyms

• Customer segmentation analysis
• Customer segmentation models
• Customer segmentation software
• Customer segmentation strategy

Importance of Customer Segmentation in Marketing and Sales

Customer segmentation identifies which groups of potential customers are most likely to buy from you and what types of products or services they are most likely to be interested in. It serves a critical role in just about every organizational function, from marketing and sales to product development and customer service.

Product Development

Even though several customer personas can use a company’s core product, they don’t have the same needs and preferences.

Customer segmentation helps product developers to identify and create products for specific groups of customers. By knowing the needs, wants, preferences, and purchasing behaviors of each segment, product developers can tailor their offerings to better match customer preferences.

It also informs the development of new features, add-ons, and microservices. For instance, DealHub offers CPQ (its core product) for sales teams, but also has a suite of tools for subscription businesses, including billing and subscription management.

Customer Targeting

By understanding the characteristics and preferences of each customer segment, companies can identify the most common traits of their best customers and refine their ideal customer profile (ICP).

Instead of sending the same message to everyone, businesses can tailor their marketing communications and sales outreach to address the unique needs and preferences of each segment.

Marketing Messaging

Marketing typically build customer relationships through multiple channels, including:

• Email marketing campaigns
• Search engine optimization (SEO)
• Content marketing
• Paid search and social media
• Organic social media
• Direct advertising

Even within these channels, two customers might not respond to the same marketing strategy. With customer segmentation, businesses can tailor their messages to each group of customers, ensuring that their marketing campaigns are more effective and relevant.

It’s common for businesses to diversify their marketing efforts, even when using the same platform. Businesses frequently run two or more ad campaigns on the same platform, for example, with ad copy tailored to each respective audience.

Buyer enablement content is another example of this — businesses create some content for executive leaders and decision-makers, while targeting other content to company members who will actually use the products.

Personalized Selling

80% of B2B buyers now expect the same personalized customer experiences as their B2C counterparts, and segmentation helps sellers, marketers and customer success teams achieve that.

Sellers who understand their prospect’s customer segment can present timely content, deliver sales demos that show exactly what prospects need, and provide tailored post-sales support.

Post-purchase, customer success teams can use segmentation to further differentiate experiences, offering extra support for new customers and find new way to deliver value through upselling and cross-selling.

Customer Retention

Keeping current customers is considerably less expensive than acquiring new ones. And a high customer retention rate signifies product-market fit and a healthy business.

Customer segmentation helps businesses understand why customers decide to stay or leave and provides data-driven insights to identify which customer segments are loyal and profitable.

They can also use their customer segments to offer discounts, loyalty rewards, and other incentives that create loyal customers.

Types of Customer Segmentation

Businesses typically use more than one customer segmentation model. Here are some of the most popular:

Demographic (B2C)

Demographic segmentation is the most popular customer segmentation strategy for B2C businesses. Demographics include age, gender, income level, education level, occupation, marital status and family size.

This segmentation method is one of the best ways to reach a target market because it allows businesses to tailor their messaging and products to customers who share common characteristics.

Demographic segmentation works best for companies with a wide range of customer personas, like e-commerce stores or fashion brands. For example, a fast fashion retailer might choose to target younger customers by offering trendier styles, while a luxury retailer might target older customers with higher incomes.

Firmographic (B2B)

Firmographic segmentation is similar to demographic segmentation, but it’s used to segment businesses rather than individual customers. This type of segmentation is used by B2B companies, as each buyer (company) has its own set of requirements that the company’s products and services meet differently.

Firmographic data includes characteristics like company size, industry, location, and revenue. B2B organizations use this information to understand the customer companies they are selling to and how their products or services can best meet the needs of each target group.

Geographic

When businesses consider geographical segmentation, they typically focus on a customer’s country, region or city. This is important for companies that are selling different products in different regions and need to tailor their pricing, product offerings, and marketing campaigns accordingly.

For instance, international fast food chains offer different menu items in each region based on local preferences and tastes.

B2B companies also use geographic segmentation — national companies section off their offices to different regions, while global brands do business their international customers with respect to their local customs.

Behavioral

Behavioral segmentation looks at how customers interact with the product or service — from the moment they become aware of it, to their decision-making process and eventual purchase.

Behaviors businesses typically look at include:

• Purchase behavior: What customers buy, how frequently they buy, and how much they spend.
• Usage behavior: How buyers use the product or service.
• Attitudinal behavior: Their attitudes towards the product, brand, or company.

Behavioral segmentation is one of the most effective ways to understand customer needs and preferences because it looks at how customers interact with the product or service.

Suppose a business is looking to increase customer loyalty. Looking at the purchase history of their most loyal customers, they can identify patterns that lead to repeat purchases and use this information to create campaigns and incentives that encourage more frequent buying.

Psychographic

The psychographic segmentation process is a bit more complex than demographic or behavioral segmentation. Psychographic segmentation takes into account customer’s lifestyle, values, interests, and attitude — all of which can influence their purchasing decisions.

This form of customer segmentation can be seen in everything from lifestyle advertising to luxury brands using it to target certain audiences. Businesses use it to create marketing campaigns specifically crafted for certain personality types. Copy, visuals, and messaging are tailored to appeal to a specific customer’s individual interests and values.

Needs-Based Segmentation

Products that solve a few specific needs have the highest chance of success. Needs-based segmentation helps businesses identify customer needs and match their solutions to those needs accordingly.

Mostly used for product development and customer service, needs-based segmentation looks at how customers use a product or service and why they choose it over other options. By understanding what drives their decision making process, companies are able to develop products and services that meet the specific needs of different customer types.

Technographic Segmentation

Technographic segmentation is used differently in B2B and B2C contexts.

In B2B, sellers look at elements of their prospects’ tech stack (e.g., CRM systems, sales enablement, cloud solutions) and which vendors they use.

The logic is that if a business already uses a particular set of solutions, they are likely to purchase products compatible with their existing tech stack. If Company X uses CRM from Vendor Y, they might be immediately identifiable as a qualified lead.

B2C companies look at how their potential customers use technology in their everyday lives and create customer profiles based on the apps and devices they use. For example, a fitness app might target users who have fitness tracking devices or who have downloaded other fitness apps.

How to Segment Customers

To group customers by shared characteristics and identifiers, the customer segmentation process follows these steps:

Identify Your Customer Segmentation Goals and Variables

The first step in the customer segmentation process is to define your goals. What do you aim to achieve through customer segmentation? It may be improving customer service, increasing sales, identifying new marketing opportunities, or enhancing product development.

The next step is to determine the variables that will inform your segmentation strategy. They should be closely tied to your goals and could range across various factors.

If your goal is to meet your customers’ needs better, you might segment them based on how they’ve previously interacted with your product or website content. For a goal focused on revenue expansion, you may want to adjust your sales and marketing strategies to connect with your new target customers.

Collect and Analyze Customer Data

Next, collect customer data through surveys, focus groups, interviews, past purchase history and other customer behavior analysis. You’ll need to gather information related to the variables you identified in your segmentation goals.

Customer data can also come from CRM, ERP, or other software that stores information related to customer activity.

Social media tools have customer segmentation data built into their ad platforms. Facebook, for example, gives advertisers the ability to filter who sees their ads according to demographics, interests, behaviors, and more.

Once you have all the data you need, analyze it using a customer segmentation tool to identify relationships and patterns among customers as well as similarities and between them.

Create Customer-Focused Segmentation

After you’ve identified the customer segments, craft marketing strategies that resonate with each specific segment. Create content and campaigns tailored to their needs and preferences.

Think about how your product or service can best meet each target customer’s needs — provide discounts or offers specifically for that segment, customize product packaging, or adjust the pricing strategy for each segment.

It helps to have an overarching strategy for segmenting customers that can be used across different departments and processes. Consider how you can use customer segmentation for product development, customer service, marketing, sales, and other areas where it could help improve customer experience.

At this stage, many companies also choose to draw out their strategy by mapping out different customer journeys and visually associating each segment with the most relevant offers and experiences.

Market to Your Customer Segments

After the groundwork is laid, buyer engagement can begin. There are several ways to do this:

• Personalized emails and drip campaigns
• Targeted advertising
• Relevant content and messaging
• Social media campaigns
• Loyalty programs and rewards
• Showcase specific offers to targeted segments
• Personalized onboarding for new customers 
• Cold calling and targeted outreach

Chances are, each of these strategies require a different approach for each customer segment. B2B buyers generally respond better to marketing that moves them through the sales pipeline, while B2C customers are driven by emotions and are likelier to elicit a direct response.

Personalize Selling and CPQ

Once customer segments are thoroughly defined and the sales process is updated with new methodologies and tools, the next step is to offer personalized selling.

Personalized selling improves sales efficiency, makes it easier to complete a purchase, and helps sellers relate to their customers.

CPQ (configure, price, quote) software allows businesses to tailor their quotes and proposals for each customer, which helps them quickly and accurately generate offers for products and services they’ll benefit from most.

Customer Segmentation Examples

Customer segmentation is used differently in different industries — B2B and B2C companies, for instance, have distinct approaches when it comes to customer segmentation. Here are some examples of different types of customer segmentation used in various industries:

Ecommerce

Online retailers often segment their customers based on purchasing behavior, demographics, and personal interests.

An ecommerce store selling fitness equipment might segment its customer base into categories like ‘Health Enthusiasts’, ‘Beginners’, and ‘Professional Athletes’, allowing them to tailor their marketing messages, product recommendations, and special offers to each group, resulting in more personalized and effective marketing strategies.

Software-as-a-Service (SaaS)

In the SaaS industry, customer segmentation often revolves around business size, industry, and usage behavior.

For example, a project management software company could differentiate its customers into ‘small businesses’, ‘enterprises’, and ‘nonprofit organizations’. They might categorize users based on the frequency of their usage and the features they use most.

This detailed understanding helps in customizing product offerings and enhancing user engagement strategies.

Telecommunications

Telecommunication companies usually employ a combination of demographic and usage-based segmentation.

They group their customers into segments like ‘family plan users’, ‘heavy data users’, and ‘international callers’. By doing so, they can optimize their service plans to cater to the specific needs of each group, thereby enhancing customer satisfaction and loyalty.

Telecom providers also use customer segmentation to target customers with relevant offers. For instance, they might send special deals or discounts for international calls to customers who often make those types of calls.

Fashion

Fashion companies need to keep up with the latest trends and have to be creative when it comes to segmenting their customers.

They may create segments based on age, lifestyle, or location as well as fashion preferences. A clothing retailer might group its customers into ‘trendy’, ‘casual’, and ‘sporty’ categories in order to offer more relevant product recommendations and personalized discounts.

The best example of this is Nordstrom. The department store caters to just about everyone and sells products at multiple price points, so they need to use their audience targeting data to deliver the right ads and marketing messaging to the right customers.

Technology Used in Customer Segmentation 

There is no one “customer segmentation software,” but there are many software that gather data and aid in customer segmentation analysis.

CRM

CRM software is the central hub for customer segmentation. It’s where all the customer data is stored and managed, enabling marketers to segment customers based on their preferences and behaviors.

Every time a company sales or customer success rep engages a prospect or existing customer, their interaction is noted in CRM. In the case of sales, leads are also moved through a visual sales pipeline as they move through each stage of the sales process.

Marketing Automation

Marketing automation includes email marketing software, A/B testing tools, and multi-channel marketing platforms. These tools enable marketers to create and send personalized emails, targeted ads, and drip campaigns to their various customer groups.

More importantly, they gather data from successes and failures, which helps marketers refine their customer segmentation strategy.

CPQ

CPQ software includes custom rules for discounts, product bundles, add-ons, taxes, and more. It helps sales reps quickly configure quotes for customers in the most efficient way possible.

When implementing CPQ, businesses will input their own contingencies based on their customers’ preferences and segmentation groups. This way, sellers have an easier time personalizing their offers, leading to higher customer satisfaction and retention rates.

Revenue Intelligence

Revenue intelligence analyzes customer data to predict future trends and behaviors. It helps businesses understand their customers more deeply by uncovering insights from customer interactions, buying patterns, and other sources.

Revenue intelligence comes from all customer interactions, including email, website visits, customer service inquiries, and more. It helps marketers and sales professionals decide where to invest their resources and which customers to continue targeting.

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