In the modern world of marketing, you need every edge you can get. There’s more competition than ever and making sure your message gets to the right audience is key to success. Customer segmentation helps you create targeted messaging to increase conversion and cut down on wasted effort.
What Is Customer Segmentation?
Customer segmentation is the practice of taking your customer base and putting them into groups based on a shared characteristic. Segments might be based on age, location, buying history, Web site activity or anything else you can think of. Segments can also be subdivided and cross-referenced, so you can have a segment of men from the Northeast who buy Hawaiian shirts. Creating this sort of granular segmentation allows you to tailor your advertising and marketing campaigns to maximize the potential return.
You’ve probably done a little customer segmentation and didn’t even know it. If you’ve sent out a marketing blast to one group of customers and not other, you segmented them. Maybe it was based on a previous purchase or referral affiliation. Whatever criteria you used, that’s the basis of customer segmentation.
Why Is It Important?
Marketing isn’t successful if it takes a “throw it against the wall and see what sticks” approach. Successful marketing is about creating specific targets and tailoring your message to them. College students in the West don’t have the same needs or desires as grandmothers in the Northeast. Sending your customers relevant and engaging marketing communications increases the potential for conversion.
Before You Start
Before you start gathering data and segmenting your customers, it's important to know what you want to achieve by doing so. You need to set clear goals in order to create a successful marketing plan. Ask yourself these questions:
- What are my marketing goals?
- Do I have a large and varied product line?
- Which products have the best profit margin?
- Which parts of my business do I want to grow?
- Who are my competitors?
- How do I differentiate my business from them?
- What do I offer that they don’t?
- How are they meeting customer needs in ways I don't?
If you don’t already have one, create a basic business plan. For any marketing effort to succeed, you need to define your niche. Establish your business goals and create marketing efforts to help achieve them. The scope and focus of your plan will dictate what segmentation information is in line with your goals and what isn’t.
Who Are Your Customers?
Once you really start looking, you'll be surprised at what you already know about your customers. If you use a CRM system, you probably have a fair amount of information captured. If you don't use a CRM, don't panic. You still have lots of good data to start with like location and buying history. But, to get serious about segmentation, you'll need to take it a step further and learn a little more about your customers.
Additional information can be gathered through online surveys, during the registration and checkout processes, and even via newsletter subscriptions. Make gathering info part of your daily business. Always have a “tell us more about yourself” section in your registration forms. This self-segmentation can give you valuable insight into your customers and reveal an untapped potential.
You can also use third-party tools and services to gather market data, but that can be expensive. Whether you decide to use a service or harvest for yourself, narrow the focus of what data you want before you set out to get it. It’s easy to get caught up in the idea that more data is better. But you’ll just end up spending time and money on data that doesn’t serve your purpose.
Based on your self-evaluation and sparkly new business plan, you should have a good idea of what variables are relevant to your marketing goals. For example, for clothing, things like gender, age and size are critical. Determine the criteria that best suits your business model and your desire for growth and then take steps to collect that specific data.
There are various methodologies for segmentation. Traditional segmentation breaks customers into groups based on “traditional” variables.
- Geographic — Location, region and climate can help you target customers properly. This can help you avoid marketing wool scarves to people in Miami.
- Demographic — Income, age, gender, occupation, and education are examples of demographic information that can help you segment your customers to provide targeted messages.
- Behavioral — Perceived benefits, purchasing patterns and loyalty are more difficult to measure, but customer service calls can help you build client profiles to maximize this data.
Another popular segmentation method is called value-based. Like most businesses, you probably make 80 percent of your profit from 20 percent of your customers. The Pareto principle or 80/20 rule might have become something of a cliché in business circles, but it’s still a truism. Understanding who are your most profitable customers can help you focus your attention on your profit centers and stop wasting time and energy on the rest.
The RFM model is a down and dirty value-based segmentation model. It considers three factors: recency, frequency and monetary value.
Recency – How recent was their last purchase?
Frequency – How often do they buy?
Monetary Value – What was the average price or value of what they ordered?
You’ll create a scoring system for your customers and based on their total scores put them in various buckets or segments.
As an example, let’s pretend you own an online clothing store with items that range from $10 to $100.
1 point – Purchased within the last year
2 points – Purchased within the last 3 months
3 points – Purchased within the last month
Create a simple spreadsheet of your customer list. Assign points based on their most recent purchase.
1 point – Purchased 1 item in the last year
2 points – Purchased 2-5 items in the last year
3 points – Purchased 6-10+ items in the last year
Monetary Value score:
1 point – Average purchase $10
2 points – Average purchase $10.01 - $50
3 points – Average purchase $50.01 - $100
Note: Using this same basic formula, you can apply a variety of metrics like email click-throughs, open rates, and lead value. And, of course, your point system can be as detailed as you’d like. You can create five point systems and apply the same valuation formula.
Using the above 3 point scenario, you’ve created three segments of customers.
- Customers who score 7-9 points are your top 20%. These are the cream of your crop. This is your most valuable segment. To make sure these great customers stay happy, consider offering them exclusive perks like free shipping or valued member discounts.
- Customers who scored 4-6 are your middle 60%. This middle group needs to be sliced a bit more to separate the wheat from the chaff. If a customer has high recency, but low monetary value and frequency, they might be a new customer who is just testing you out. Be sure to capitalize on all recent purchasers for cross-selling opportunities. If you can identify them as new customers, give them special incentives to buy again soon.
- Customers with a score of 3 are your bottom 20%. This group needs help. Don’t ignore them. Look for ways to win them back. Send them a message to make sure they still want to receive offers. Remove those who don’t from your mailing list and search a way to reengage those who do.
If you have a larger list and want a more detailed segmentation, you can easily sort and divide your list to create an RFM index.
- Start by sorting your customer list by recency from most recent to least recent.
- Then divide that list into 3 equal segments.
- Now, you have five unique lists. Give the top 20% 3 points, the next 20% 2 points and the bottom 20% 1 point.
- Now, sort each of your three lists and sort by frequency.
- Using the same scoring system, divide those lists into 3 new lists, giving you nine segments.
- Sort each of the nine lists by monetary value and apply the same scoring system.
This process creates 27 customer segments from your most valuable to your least valuable with a point value assigned to each customer.
How to Use Customer Segmentation
It’s time to put all that data to work for you. Now, that your customers are segmented, you can try out a few marketing emails and see which group responds to what message. Keep experimenting and refining.
Every business owner knows that customers who’ve purchased recently are the best prospects for another sale. Strike while the iron is hot. Be sure that as part of any ongoing marketing effort that you’re always approaching your recent customers with engaging offers.
The customer segments you’ve created can not only give you insight into how best to approach your customers, but over time, you can develop new product lines and offerings that appeal to your best customers.
Your customer segmentation can also help you market beyond email. Print marketing can be expensive, but now that you know who your most profitable customers are, you don’t have to send pieces to everyone.
You can also use your new-found knowledge to refine your SEO efforts to target more prospects like your top 20%. Once you know what makes them tick, you can use that information to find more like them. This filters over from SEO into your AdWords and AdSense campaigns. Use the tools in Google Analytics to view and create new segments to find your true sweet spot keywords.
Remember, customer segmentation isn’t static. People will move from segment to segment, so be sure to stay on top of your data. Segmentation isn’t a one-time exercise; it should be an ongoing part of your marketing cycles. Keep refining your segments and your methodology and your efforts will be sure to pay off.
About the Author
Monique Martin served as chief operating officer for a successful online insurance marketing firm for five years.