A marketers guide to customer segmentation
Read time: 14 minutes
Customer segmentation is a marketing and business strategy that can fuel your company's growth by defining who its best customers are. It also helps you make decisions based on reaching and serving your company’s priority customer groups.
Once defined, your customer segments become a North Star — guiding business decisions such as marketing campaigns, products or service offerings, and customer service or experience initiatives.
By identifying your priority customer segments, you are also defining who you are not attempting to reach or serve. It’s often said that if you try to reach everyone, you reach no one. Your message and the impact of your efforts become diluted by trying to please everyone.
In addition, attempting to reach everyone can quickly become overwhelming and expensive. In today's world of endless marketing and media channels, there are countless choices.
More insights:
There's no North Star that acts as a filtering tool in making substantial business decisions, such as whether to launch a new product, as well as bite-sized decisions, such as what to post on social media.
What is customer segmentation
Think of customer segmentation as reverse-engineering your marketing. Instead of focusing on what you sell and pushing it out into the marketplace, you focus on what your most profitable customer groups want and desire.
It's actually an approach created by the book publishing industry centuries ago, which has been further refined by the media and entertainment industries.
Businesses in these industries have long realized they can't serve everyone. Instead, they need to cultivate a specific audience in order to grow. That’s become increasingly important as industry forces have pushed media and publishing online.
A newspaper is a great example of segmentation. Some readers only read the sports section, which is written specifically for fans of local teams.
Entertainment stories are for theater or concerts fans. Political news resonates with those who believe strongly in an issue, party, or approach to governing.
It's more complicated than that, of course. But the concept is true — all three audience groups are part of a newspaper's customer base. By segmenting and prioritizing them, the newspaper is focusing efforts to serve those customers well.
For example, a sports writer should have an almost fanatical understanding of the team they follow; an entertainment writer should love visiting the latest, hottest night spots; and a political reporter should have a substantial understanding of the issues, the power players, and the candidates.
In addition, a newspaper may focus specific initiatives on certain segments.
A newsletter or text messaging may specifically serve fans of a college football team.
A social media campaign for the going-out crowd may be sent out on a specific platform a day or two before the weekend, when plans are being made.
Or an event, such as a political debate or form, may draw interested readers to engage in a different way, and may be repurposed, such as streaming or posting a video online.
More and more, businesses are taking a nod from the media industry and focusing on serving specific audience segments.
This is especially important for B2B companies, as sharing educational content that’s crafted specifically for a certain type of buyer for a certain phase in that buyer’s journey.
Why customer segmentation
Fifty years ago, the primary ways to reach customers were through media (printer, radio, or television), direct mail, or trade shows. In some ways, it was possible to reach everyone if you had enough money to spend.
Today, there are dozens of social media and online platforms, in addition to newer ways to advertise.
(Having recently attended a concert where the venue had installed a small television playing ads to show to women waiting in the bathroom line — well, let's just say the effort to reach more and more people is alive and well.)
Because there's just so much advertising — this is the most marketed to decade in history — today's buyers are more sophisticated than ever before. Meaning they expert more tailored, custom content and messages.
In part, it’s because they’ve had to tune out so much noise. They've had to wade through what can sometimes feel like an overwhelming amount of marketing or advertising.
It's also true for B2B companies, which are increasingly finding that traditional sales tactics and blanket marketing approaches are not working. That's because businesses are researching, evaluating, and even making purchasing decisions before ever talking to a sales person.
The internet has also created a wider base of competition, as a company no longer needs to be in a specific geographical area. The pandemic, and our society’s comfort level with video meetings, has accelerated this trend.
Today, more companies are willing to look outside their local markets to find a B2B solution — making the possible companies they hire exponential and the desire to find the "right fit" company even greater.
Elements of customer segmentation
Through customer segmentation, a business will identify various groups or types of customers and prioritize them.
These customer groups will likely be measurable, and part of your marketing campaigns and product development efforts, as well as immeasurable, such as buying behaviors that are critical to the customer’s journey but not readily apparent in your customer database.
These groupings — which will look different for each company — may take into account the following elements:
Demographic segmentation: Customers with similar ages, gender, income, or occupation are a few examples.
For B2B companies, this is sometimes called firmographics: Companies are grouped by the number of employees, ownership type, or industry trends, for example.
Psychographic segmentation: This is why customers buy from you. At its core, it's about understanding your customers' motivation and values.
For example, there's more interest in sustainability as a core value that influences purchases.
Behavioral segmentation: This is what may trigger a customer to purchase.
In some cases, purchases are motivated by certain events, such as a wedding (consumer) or a new product launch (business).
Geographic segmentation: This is where your customers are located.
It could be as specific as a certain zip code, or broader such as a region, state, or community. Sometimes a company will focus on geographic lifestyles, such as urban, rural, or suburban markets. Another might focus on a market size, such as every metro with an NFL team.
How to start a customer segmentation strategy
Starting the customer segmentation process can feel overwhelming. The good news is there are a few places to start based on the nuances of your company, as well as your specific industry or growth stage.
Positioning: Some companies focus first on who they want to serve in the market, which is sometimes called market segmentation. They first focus on how their company is positioned and how it is distinct or unique from its competitors.
In a crowded industry with fierce competition, this can be a helpful place to start. Often, positioning decisions can impact a company's business model.
Data analysis: Starting with existing customers can help identify trends and establish a baseline. Analyzing sales data can help pinpoint the most profitable products or services, for example, or which industries or regions are more likely to buy your offerings.
Because there's a tendency to add "more" products instead of "better-fit" products, sometimes this analysis reveals customer segments or products that take a lot of time or effort but don't have the same return on investment.
Customer research: Once a specific baseline is established through data analysis, it's critical to conduct customer research to understand your customers deeply.
This can be done in-house or with a third party, which offers customers more freedom to speak about concerns without the fear of engaging in a dialogue or the conversation becoming a sales call.
Qualitative research focuses on gathering information through one-to-one interviews, while quantitative research focuses on confirming information through data-gathering methods such as surveys.
Industry trends: Regardless or how much money or time or energy you spend marketing, it’s difficult to fight industry trends.
In declining industries especially, it can feel like a never-ending uphill battle: Few people under the age of 40 buy print newspapers anymore, for example, and the current generation has practically killed the paper napkin industry.
Other industries are booming, however, and a company can ride its industry wave as it grows. Unlike other areas we’ve discussed, industry forces are out of a business’s control.
Smart leaders know that it’s better to face industry trends head-on, taking these forces into consideration when setting business goals and objectives, and through strategic investments and initiatives.
How to create a customer segmentation strategy
Each segmentation strategy will be as unique as the company executing it. We advise considering two elements in each strategy:
A measurable segment, which will likely appear in your customer database.
Buying behaviors or influences that may not appear in your database, but are important to personalizing the buying journey with relevant messages, touch points, and calls to action.
Here’s how a B2B Company might walk through a segmentation strategy:
Identify the business objectives of the company, which will guide your research and strategy. For example, if a company is increasingly worried about online competition that is siphoning away services for startups, then the goals may be different than a company focusing specifically on selling complex manufacturing equipment.
Collect and analyze sales data, which ideally is already differentiated in your accounting system. With this analysis, you can identify your best selling product or service line, as well as your entry-point products or services, in which buyers begin with but then upgrade or expand later.
Identify the priority products or services you want to focus your efforts on. This is a key part of business strategy alignment, and why involvement from a company’s leadership team is so important.
Collect and analyze customer data for your priority product or service. You’re looking for measurable trends which could be identified in your customer database, or added with additional effort. This will vary widely by business, here are some examples:
Geography
Industry
Company size
Product usage
Product delivery
Unique customer needs
Conduct customer research to better understand the intrinsic motivators or decision drivers of your customers, which will be critical in better understanding what messages or campaigns resonate. This might include:
Qualitative research, such as 1-to-1 customer interviews, which ask broad and open-ended questions to better understand why a customer purchases from your company, as well as what might caused them to leave, among other detailed information gathered.
Quantitative research, such as customer surveys. These are typically shorter in nature, but have a wider base, making them ideal for confirming findings from the qualitative research.
Industry trends that impact your customer base. For example, if there’s economic forces at play in the construction industry, which is a priority segment, understanding those trends is critical.
Create a strategy of prioritized initiatives as well as customer personas, sometimes called buyer personas, which make the customer research more digestible and easier to understand. It’s important that these initiatives are in alignment with your business objectives, and have the support of the leadership team.
Create a specific marketing plan with specific tactics based on your marketing strategy and personas. This may be as specific as the campaigns you’ll run in Q4 on specific platforms. Personas should aways be used as reference points and act as your North Star when crafting marketing messages or campaigns. When writing, speak directly to the customer in your persona, and address their unique motivators, desires, and preferences.
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Creating a customer-oriented company
Customer segmentation is a foundation for your marketing efforts and product development initiatives.
Unfortunately, it's also a step that many skip in the urgency to sell, even though grounding your company’s marketing in customer research has been proven to make businesses more effective.
Think of customer segmentation, and the customer research behind it, as the foundation of your business, similar to the foundation of your home. If you build a strong foundation, it is more likely to withstand strong winds that are out of your control, such as industry forces, competition, or changes in the marketplace.
But if you skip ahead to the creative aspects of design, then you may have a beautiful interior and quality furniture and art, but not the strong basement and frame that defines your home, shapes your space, and protects it from outside forces.
In many ways, customer segmentation is also a mindset or culture adopted by a company that's eager to double down on its best, most profitable customers.
A clear segmentation can inform all business decisions, from what product or service to offer, to what and how to market or advertise to the type of customer service or experience.
While the outcome of segmentation will not directly produce sales, it will create specific tools that are customized to your company and customer base that can be used to become more effective and efficient at marketing. These include:
Buyer personas: Sometimes called customer personas, buyer personas help each segment feel "real" by creating an example person that is based on customer research.
By thinking of a specific persona, marketers can more effectively target the specific customer group they want to reach. This helps them tailor content marketing or advertising campaigns that are more likely to reach and resonate with that specific customer group.
Targeted messaging: Based on the personas and buying behaviors identified, companies can also craft more compelling messages, which is critical in both advertising and content marketing.
For example, more B2B buyers are researching solutions online well before they engage in a sales conversation. Understanding their specific pain points, what questions they have, and how they're evaluating their options is a critical element of writing or producing effective content.
Campaign and channel recommendations: Especially in today’s social media world, customers may not be on the platform where your focusing your content efforts.
With segmentation, you should be able to identify where your customer segments spend their time online, including specific platforms.
Product or service offerings: Many companies take their customer segmentation to the next level by crafting products or services specifically for their highest-priority segments.
For example, a company may extend a product line of a best seller. Or it may discontinue a product line, freeing resources to focus on products that are tailored to its best customers.
Customer service: Many companies walk through the segmentation process and realize their best customers value their service, and decide to focus their entire decision-making process based on their service initiatives.
Understanding these buyers at a deeper level can create customer loyalty through customer care or experience initiatives.