Everyone is Not the Same
The next time you go to an amusement park, take note of just how many different types of people are being catered to.
When it comes to rides, there are roller coasters that seem to be taller than a mountain, but also slow rides that even great grandma can enjoy. If you’re hungry, there are sit-down restaurants with servers, mobile carts offering grab-n-go popcorn, and every option in between. Entertainment offerings include mid-morning parades for those who want to come and leave early, and late night fireworks for those who like to be the last to go home.
The point is, the creators of these parks understood that not all of their customers would be the same. They realized there would be a diversity of wants and needs. An amusement park that only catered to, for example, 30-45 year olds who wanted sit down restaurants, slow rides, and early nights, would not last very long. To be successful, an amusement park needs to offer a variety in all of those categories in order to create more personalized experiences for all.
Amusement parks really are a crash course in Customer Segmentation 101.
What is Customer Segmentation?
Cue boring textbook-like customer segmentation definition: customer segmentation is the process of dividing your customer base into smaller groups based on certain characteristics.
These smaller groups (segments) will vary in both their size and importance. For example, a segment may be divided into a very narrow age group (e.g. 60-65), and therefore be quite small in number. However, market research may show that this age group will be among your most valuable to target because of certain spending habits. The inverse of this can also be true where a larger segment has an overall lower propensity to buy or spend.
Bottom line: the size of the segment is not directly related to its overall profit potential.
What are the Benefits of Customer Segmentation?
If you’re going to put in a lot of time and effort into a project, you want to see results. When it comes to segmenting customers, the amount of legwork involved is greatly outweighed by the benefits.
First, customer segmentation increases the chances that existing customers stay with you. It allows for the creation of personalized products and services for a target audience. When someone sees a message or product tailored to them, they‘re more likely to stop looking elsewhere, and instead, keep coming back to you. That's important because it can be up to 25 times more expensive to attract new customers than to retain the ones you have. That last sentence regarding loyal customers is worth reading again. Go ahead.
Very simply:
- Customer segmentation = customer retention
- Customer retention = doing RevOps well
- Doing RevOps well = your business thrives
In addition, segmentation allows you to understand the value of each customer group. As previously mentioned, it’s important to understand that larger groups are not necessarily more profitable. Smaller segments allow for deeper analysis of a group’s tendencies, enabling you to allocate resources accordingly.
Understanding customer segments can also help a company identify new business opportunities and make strategic decisions about product development and distribution.
What are the Customer Segmentation Models?
My grandpa used to tell me that there is only one way to do something, and that way is the right way. Clearly the man was not familiar with the practice of customer segmentation though, as there are about 5ish (depending on how a company breaks things down) types of customer segmentation strategies.
Demographic Segmentation
If you were to describe customer segmentation to someone who had never heard of it before, this particular type is probably what they would envision as it’s one of the most basic forms. This is when segmentation is based on characteristics such as age, gender, income, and education level.
The value of this type of segmentation lies in its ability to help businesses understand which products or services are most popular among different age groups or income levels, and adjust their outreach efforts accordingly. For example, while it may be tempting to target a wealthier sector of the population, it’s not profitable if it turns out that income bracket wants nothing to do with the product you’re offering.
Behavioral Segmentation
As the name suggests, behavioral segmentation involves looking at customer data such as their purchasing behavior, loyalty to a brand, or usage of a product or service.
The value of this type of segmentation lies in its ability to help businesses understand which customers are most likely to make repeat purchases or to recommend a product or service to others. A customer evangelist is one of the most powerful (and valuable) resources a company can have. Why? Because it’s one thing for a company to advertise and tell someone how great their product or service is, but it’s quite another for a human being to say, “Hey, I’ve tried this product, it’s amazing, and here’s why…”.
RFM Analysis
A subset of behavioral segmentation is RFM analysis, which stands for recency, frequency, and monetary. It specifically looks at how recently a customer has made a purchase, how often they make purchases, and how much they tend to spend. This can be key when attempting to identify which customers are most valuable.
Geographic Location Segmentation
While some companies may choose to include a customer’s home or work location in their demographic segmentation, it’s often more effective to categorize it on its own.
The value of this type of segmentation lies in its ability to help businesses understand which products or services are most popular in different regions and tailor their marketing efforts accordingly. This type of segmentation can be especially powerful when it involves regional preferences regarding food. If you are a food-based business, this might be your go-to form of segmentation.
Firmographic Segmentation
This type of segmentation is different from the others because it takes direct focus off of the customer, and instead places it on the company the customer is a part of. More specifically, it is a method of dividing a market into different groups of companies based on data points such as size, industry, location, and revenue.
The value of this type of segmentation lies in its ability to help businesses create targeted marketing campaigns and sales strategies for different segments of the market, and to identify potential customers and key decision makers within each segment.
Psychographic Segmentation
Psychographic segmentation involves grouping customers based on their values, attitudes, interests and lifestyle. What sets this model apart is that while most other types of segmentation focus on visible characteristics, psychographics looks at traits that are internal and intrinsic.
The value of this type of segmentation lies in its ability to help businesses improve their marketing strategy by understanding the motivations and desires of different customer segments.
Customer Segmentation Takes Commitment
In the world of business and marketing, there are certain tasks that only need to be completed once; from there you can just automate the process or use the same template over and over. Easy.
This isn’t one of those things.
Customer segmentation is an ongoing process. As your business grows and evolves, so will your customers. As such, it's essential to regularly review and update your segments to ensure they are still relevant and accurate.
Customer Segmentation for the Win
If you’ve ever been to a crowded amusement park, you’ve witnessed the power of customer segmentation first hand. If you're envious of the idea of people standing in line just for a chance to use your product, then learn how to target the wants, needs, and interests of a variety of different groups all at once.
By targeting specific segments, you can create personalized marketing campaigns that will resonate with them. This can lead to higher conversion rates, a better customer experience, and ultimately, more revenue for your business.
