Customer Segmentation: Definition, Types & Examples

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One of the most difficult tasks of running a small business is figuring out what your customers want. If you are able to offer your customers exactly what they need, then you have a better chance of convincing them to make a purchase. However, different groups of customers have unique problems and desires, so offering the same kind of product, marketing or messaging to all of your customers may not be effective.

Using customer segmentation can help your small business to more effectively reach and keep your customers.

What Is Customer Segmentation?

Segmentation is the act of grouping various sets of people together who share specific common traits, such as the same gender or the same level of income. When applied to your customers, segmentation is about understanding the different needs that various groups of your customers possess. For example, some of your customers may be price sensitive, while others may care more about saving time than money. As a result, those two segments of your customers will have different needs.

A successful marketing strategy tries to satisfy the needs of customers. However, when the customer base has differing needs, the same marketing strategy cannot be effectively applied to everyone. By segmenting the customer base, however, businesses can better understand the nuances of the different requirements of their customer groups.

When segmenting the customer base, it’s important to keep specific parameters in mind:

  • Measurable and identifiable: A customer segment needs to have specific unique traits that can be measured and identified. Intangible traits may be hard to ascertain and satisfy.

  • Durable: It’s important for customer segments to have lasting traits. If they keep changing their minds, then the business will have a hard time keeping up. Plus, constantly pivoting direction will cost the company money and time.

  • Accessible: A customer segment needs to be reachable by the business. If you identify a segment that lives in a remote area to which your company can’t readily ship, then they are not a viable customer segment.

  • Substantial: Size is a critical element to consider when identifying your customer segments. They need to be large enough to justify the amount of resources required to provide them with custom marketing and products.

  • Unique: The customer segment needs to have traits that are different enough from the other customers. If they respond to the marketing mix in the same way as other customers, then they are not a true separate segment.

The Advantages of Segmenting Your Customers

There are numerous benefits of customer segmentation in small business. With the right segmentation strategy, you can identify your most profitable customers as well as those who are likely to spend the least. As a result of knowing this information, you can then allocate your marketing budget adequately with the hope of increasing sales with your big spenders.

Segmenting can also help a small business to group customers by where they are in the customer journey, and how to improve the customer relationship. Some customers may be more ready to buy than others. While some may takes months of convincing, others may be ready to make a purchase within a few days. As a result, the way a business markets to these segments will differ.

Other benefits of segmentation include:

  • Getting ahead of the competition: Segmenting allows businesses to cater to specific customer needs. If competitors are trying to appeal to everyone with the same message rather than offering tailored messages, they may not be as successful.

  • Building relationships with customers: Catering to market segments enables businesses to show customers that they truly understand them and identify with them. This helps to build connections, loyalty and trust.

  • Avoiding risk: By knowing your least-profitable customers, you can avoid sinking large sums of money into trying to convince people who may never purchase your product again. Segmentation can help businesses to identify where they will not find success.

Breaking It Down by Demographics

One of the most basic ways to segment customers is by demographics. People with differing demographic traits often have varying needs.

For example, a single man in his early 20s will need a different kind of car than a married man in his 30s with four children. A car dealership may tailor its marketing materials to different demographics based on what problem those groups are trying to solve. Trying to sell a two-door convertible to a soccer mom may not be as effective as trying to sell her a minivan or SUV.

Demographic characteristics include:

  • Age group
  • Gender
  • Marital status
  • Family life cycle, such as having young kids or being an empty-nester
  • Education
  • Income
  • Occupation or job title
  • Social class
  • Nationality
  • Ethnicity
  • Religion

Looking at Customer Segments Geographically

Where a customer lives is an important element to consider for many small businesses. Geographic segmentation enables businesses to understand specific requirements, like where their customers are likely to shop, how difficult it is for the customers to reach the business and what needs they have related to their location.

Geographic segmentation traits include:

  • Climate: The weather that customers face on a daily basis affects their needs. People in warm climates may rarely need a parka, for example.

  • Region: The area of the country in which customers reside will affect their tastes and choices.

  • Size of metropolitan area and population density: If customers live in a big city versus the countryside, they will have a different lifestyle. This will affect their needs.

Taking a Psychographic Approach

This is a type of customer segmentation that has many variables. Overall, the psychographic approach looks at a customer's lifestyle. However, unlike age or income, one’s lifestyle is not black and white. There are many variations and combinations of those traits, so segmenting using only this approach can be complicated for small businesses.

Psychographic segmentation includes:

  • Activities: In what social or recreational activities are your customers interested? For example, if a business sells shoes, its customers who are runners will have different needs than customers who play basketball.

  • Values: About what do your customers care? Do they value environmental sustainability, or do they care about money and success? A vegan customer will want different products than a meat-eater, for example.

  • Opinions: What are your customers' thoughts on politics and social and economic issues? Their views can affect what is important to them and what kind of products they want to purchase.

  • Interests: The movies they watch, the books they read or the music to which they listen can also play a part in defining a unique need for a customer-segment group.

Understanding Customer-Segment Behavioral Qualities

Looking at customer segmentation from a behavioral perspective involves understanding how they feel about specific products and brands. This also includes where people are in their customer journey and how ready they are to make a purchase. For example, a prospect may be in the very early stages of becoming aware of a product as compared to one who is evaluating what he wants to buy. Marketing to those different kinds of customers requires different messaging and tactics.

Unlike psychographic traits, behavioral segmentation is a good starting point for small businesses. If you track your customer history, like when they last purchased a product or how often they make a purchase, you are one step closer to behavioral segmentation.

Behavioral segmentation includes:

  • Readiness to make a purchase: How close is the customer to buying from your business?

  • Benefits required: For what specific elements is the customer looking? Does she care that the burger is freshly made in house or that it can be ready in 60 seconds?

  • Buyer status: Is she a first-time buyer or a regular customer?

  • Usage rate: How often does the customer purchase from your business? Is there a pattern or a schedule that is related to something like holidays, birthdays or annual quarters?

  • Brand loyalty: Does the customer buy the same product from another brand, or does she only purchase from you?

Different Ways to Gather Information to Segment Your Customers

There are many different channels businesses can use to gather information about their customers in order to segment them effectively. First, it’s important to start with the customer data you already have. Look through your sales records.

Are there reoccurring customers who have purchased from your store once or more than once? Can they be considered loyal to your brand? What about customers you’ve sold to once, but they haven’t returned in some time? Can they be revived?

Other ways to learn more about your customers include:

  • Surveys: Businesses can gather demographic, geographic and psychographic data using surveys with their customers. Often sent with an email marketing campaign and offering a small reward like being entered in a raffle to win a gift card, businesses can ask their customers specific questions to learn more about them.

  • Referral source: When new customers come in, make it a part of your process to learn how they heard of you. Were you recommended by their friend, or did they Google a question and find your website? This will tell you what influences your customers and what motivates them, which are psychographic qualities.

  • Website activity: Pay close attention to how your customers navigate your site. Which pages are the most visited? How long do customers stay on there? Which page do customers visit directly before making an online purchase? This can help you to create more effective online marketing messages.

Offering Your Customer Segments Customized Content

Once you have an understanding of your different customer segments and their specific needs, it’s important to offer them personalized marketing campaigns that speak directly to their interests.

For example, if your business has a customer segment of repeat customers, consider developing loyalty programs with different tiers of benefits to incentivize them to continue shopping at your business. This shows those repeat customers that you see them and appreciate them, and this encourages them to keep making purchases.

Email marketing and direct marketing are also a good way to offer personalized content to varying customer segments. A bakery can send promotions for gluten-free cupcakes to those customers who have indicated that they value that product benefit. A mechanic can share tips for maintaining a vehicle to customers who are interested but not ready to make a purchase.

Finding New Customers Through Customer Segmentation

With better and more personalized marketing, businesses can gain new customers in their target segments. With tailored messaging and customized products, customers have an easier way to solve their problems. If they identify with the messaging your business shares, they may be more inclined to make a purchase than if they saw generic messaging trying to appeal to many different customer types.

Customer segmentation also enables businesses to showcase their expertise in a specific area. When potential customers see that your business understands the specific problems they are facing, they will be more likely to trust your business as a credible source in the industry.