What Is Customer Segmentation? Everything You Need To Know

Every customer your business interacts with has unique needs, tastes, budgets, and more. So, it doesn’t make sense to treat all your customers alike. A marketing campaign that tries to speak to your customers equally will likely miss the mark.

That’s where customer segmentation comes in. Customer segmentation involves dividing your customer base into groups determined by demographics, shared tastes, loyalty, or other attributes, usually with the help of a CRM software platform. It’s a powerful way to ensure your marketing efforts reach the right customers with the right message.

In this guide, we’ll explain everything you need to know about customer segmentation, including how it works and how it can help your business thrive.

In this guide:

• Key Takeaways
• What Is Customer Segmentation?
• Benefits of Customer Segmentation
• Common Types of Customer Segmentation
• Tips for Segmenting Your Customers
• Final Thoughts
• FAQs

Key Takeaways

• Customer segmentation involves dividing your business’ customer base into groups determined by shared characteristics.
• Customer segmentation is important for understanding your customers, crafting more personalized marketing campaigns, and increasing customer satisfaction.
• Common customer segmentation models include demographic, geographic, psychographic, and behavioral segmentation.

What Is Customer Segmentation?

Customer segmentation is the process of dividing your business’ customers into groups or segments based on attributes they have in common. The goal is to target customers with personalized marketing messages and engagement efforts that are more likely to resonate than non-specific campaigns aimed at your entire customer base.

It’s up to you to decide what attributes to use when grouping customers and how broad or narrow to make your segments. For example, you could segment customers in the US into broad categories based on geographical location, such as whether they live on the East Coast, the West Coast, in the Midwest, or the South.

Alternatively, you could make narrower customer groups by segmenting according to which city or state customers live in.

Benefits of Customer Segmentation

Customer segmentation can help your business in several key ways:

• Gain a better understanding of your customers: The process of segmenting your customers requires you to analyze their needs, purchasing behaviors, values, and more. You can use this information to craft effective marketing messages and make strategic business decisions, like opening a new store or launching a new product line.
• More personalized messaging: You can send distinct communications to customers in each segment, focusing on the attributes that define the group. This makes your marketing feel more personalized and encourages customers to engage with your campaigns, which helps to drive customer loyalty.
• Enhanced customer satisfaction: Your business can offer products and services that meet the needs of a specific customer segment. This results in higher satisfaction among customers in that group and increased revenue for your business.

Common Types of Customer Segmentation

There are many different ways you can segment your customers into groups. We’ll explore some of the most widely used customer segmentation models and explain why they’re effective.

Demographic segmentation

Demographic segmentation groups customers based on demographic attributes like gender, race, income, etc. Here are some popular approaches:

• Gender: While some products and services are not gender-specific, many are—especially in retail. For instance, segmenting customers by gender can ensure you’re marketing women’s clothes to female customers and men’s clothes to male customers.
• Age: Customers of different ages often have different tastes, budgets, and comfort with technology. For example, young customers may prefer low-cost products with Bluetooth and other tech features, while older customers may have more disposable income or prefer products with fewer tech-driven elements.
• Income: Segmenting by income helps you match customers to products and services within their budget. It won’t do your business much good to market a $1,000 product to someone who only plans to spend $200.

Geographic segmentation

Geographic segmentation is important if your business has multiple locations or sells to customers globally. It can also help you better understand the needs of different customers who live in urban or rural environments. Segmentation examples include:

• Climate: Retail businesses need to keep in mind that seasons are different in different places. For instance, it might make sense to stock and market heavy winter coats for customers in New York but not for customers in Miami.
• Language: Customers in different countries (or different communities in the US) may speak different languages. Your business should always aim to engage with customers in their preferred language.
• Urban/rural: Urban, suburban, and rural customers have different needs, especially if you sell products or services related to home living. For example, you might market lawn care products to suburban and rural customers but not to those based in urban areas.

Psychographic segmentation

Psychographic segmentation involves grouping customers based on interests, values, or personality traits. Some examples include:

• Interests: Grouping customers by interest can help you include pertinent events or address specific needs with your marketing strategy or product offerings. For instance, golfers might be excited to hear your business mention the US Open in your marketing campaign and pay more attention to your products as a result.
• Values: You can also group customers based on values like civic engagement, family, climate-friendliness, and more. This can be especially powerful if your business partners with value-driven groups (like a nonprofit focused on the environment) since you can highlight that partnership in your company’s branding and marketing campaigns.

Behavioral segmentation

Behavioral segmentation involves grouping customers based on their past purchases or interactions with your business. These segments can include:

• Loyalty: Segmenting customers by loyalty is a good way to reward your most important customers and keep them engaged with your business. For example, you can send exclusive discounts to customers in your most loyal segment to make them feel valued and keep them coming back.
• Purchase history: Grouping customers based on what they’ve purchased helps to advertise related products they may be interested in. For instance, a department store could segment customers based on whether they bought kitchen products, outdoor products, or clothing in the past six months, then send marketing campaigns that feature more products in each of these categories.

Tips for Segmenting Your Customers

Deciding how to segment your customers can be challenging. To make the process easier, here are a few of our top tips for building a customer segmentation strategy.

Consider your business goals

Your customer segments should directly relate to your business goals. For example, you might use different segments if you’re interested in increasing sales versus developing a new product.

To increase sales, you could use loyalty-based segmentation and send discount codes to frequent customers. To develop a new product, it may be more helpful to segment your customers by income and geography and then design a product that meets the needs of that specific group.

Experiment with cross-segmenting

You don’t have to choose just one segment—and in many cases, it’s more effective to use multiple attributes to segment your customers. This is known as cross-segmenting.

For example, you can segment customers first by age, then by gender, then by location. With each additional segmentation step, you’ll further divide your target audience and get more specific about what defines each group.

This can be useful because broad segments don’t always let you personalize your message enough. If you’re a retailer marketing fall-season clothes to customers, for example, you may want to market very different products to women aged between 20 and 30 in New York and women aged between 40 and 50 in Los Angeles.

Avoid over-segmenting

While cross-segmenting can be a powerful tool to target your marketing efforts, be careful not to make your segments overly specific. Otherwise, you could end up with hundreds of different segments. It’s simply not realistic to be able to manage hundreds of different marketing strategies.

In most cases, it’s better to create a handful of medium-sized customer segments that clearly reflect different audiences with which your business wants to engage.

FAQs