In the early days of marketing, companies offered products that were easy to manufacture without much concern for a customer’s need. Today, marketers realize that customers have diverse needs. To identify what customers want, marketers have learned to divide people into market segments based on their demographics, behaviors, location, purchasing habits, and other factors that influence their buying patterns.
What is Customer Segmentation?
Customer segmentation, also known as market segmentation, describes the process of identifying groups (or segments) of a company’s customers that are similar in terms of one or more specific characteristics or factors. The goal of this categorization is to optimize marketing to each group, such that individual customers receive the most appropriate and relevant communications, and so as to maximize the value of each customer to your business.
Benefits of Segmentation
Because customers have varying needs, desires, preferences and priorities and because getting track of every individual customer to address their expectations is not always possible, businesses need to utilize their data for developing marketing insights and for offering services, products, or solutions to the consumers on the basis of their common attributes. Hence, there are many benefits of segmentation.
#1. Increases Clarity
The first and foremost use of market segmentation is to develop clarity. After mining and cleansing your data, all you have is the most accurate and relevant information about the customers. Once you have the data ready, you can use this information to put the customers, who share particular business-relevant attributes, together in a group.
#2. Develops Consumer Insights
If “Know thy customers” has always been an oft-quoted mantra in marketing, it has become even more loaded with meanings in the digital era. Today, your customers are just a click away, expecting you to frequently pat them on their backs.
#3. Improves Customer Engagement & Brand Loyalty
Customer engagement is one of the most important strategies to identify and, sometimes, even to influence the customers’ needs and interests. Customer behavior data collected from the social network sites, mass media, discussion platforms and purchasing history helps businesses to develop a psychographic segmentation of the customers and target marketing and ad campaigns to address their needs.
#4. Streamlines Mass Customization
Mass customization is a process of providing especially tailored products or services to fit the specific needs of the large number customers in the specific segments. The growing amount of clickstream and customer behavior data has helped businesses apply more accurate customer segmentation, which has made the practice of mass customization more effective.
#5. Optimizes Cost-efficiency & Resource Management
Market segmentation is an important tool for developing business intelligence and maintaining competitive advantage. It gives a deeper insight into the market and helps business firms identify the segments of customers with greater profits and allows them to carry out more targeted micromarketing.
#6. Grows Niches Marketing Capabilities
Data plays a mission-critical role in discovering the hidden dynamics of the market and in developing newer insights and marketing strategies. Using the market/customer data to systematically segment the market can help your business to discover the potential niche markets where you can maintain your lead and domination with a rapid customer conversion and market expansion.
#7. Promotes the Application of Business Data
These days, all businesses, regardless of their size and scale, generate business data and have access to data across the industries. Companies today have the advantage of using both the a priori and post hoc methods in market segmentation. Moreover, you can also use data visualization and cluster analysis techniques to improve the process of customer segmentation.
#8. Enhances Reliable Assessment
Segmentation of the big market of customers into the small chunks not only makes customer service and marketing efforts more manageable, it also makes it easier for you to measure the success of the segment-specific projects, policies, and strategies measurable.
#9. Maintains Freshness
It would be misleading to presume that customers who fall into a group or subgroup of segmentation stay there forever. In this digital era, customers are bombarded with information, which continuously influences their preferences and priorities, increasing their mobility across the segments.
#10. Keeps Focused & Goal-oriented
The whole purpose of market segmentation is to know the customers better and to carter to their needs in an effective manner. Data provides the very precise and accurate customer insights and helps you to stay focused and targeted.
Types of market segmentation
There are many ways to segment markets to find the right target audience. Five ways to segment markets include demographic, psychographic, behavioral, geographic, and firmographic segmentation.
Demographic Segmentation
Demographic segmentation assumes that people with common characteristics will have similar lifestyle patterns, tastes, and interests that will influence their purchasing habits.
Demographics include factors like age, gender, occupation, income, and education. Surveys are one way to collect demographic information and may consist of these questions:
- What is your age?
- What is your household income?
- What is your highest level of education?
- How many members are in your household?
- What gender do you identify as?
- Do you own or rent your home?
- In what zip code is your primary residence?
- Are you married/divorced/single?
- What is your nationality/race?
- How many children do you have?
Psychographic segmentation
Psychographic segmentation divides people into groups based on their personality, lifestyle, social status, activities, interests, opinions, and attitudes. Psychographics is an excellent complement to demographics because they identify the motivations behind why people make particular choices.
Companies use psychographics for market segmentation to understand:
- How consumers perceive their products and services
- What consumers really want—and why
- Gaps or pain points with their current products or services
- Opportunities for future engagement
- How to better communicate with their target audience
Behavioral segmentation
Behavioral market segmentation describes specific steps in their ideal customer’s buying process, including what their ideal customers want, why they want it, the benefits sought, and how they go about getting their needs met.
Behavioral segmentation is used to study B2C and B2B market segments. When companies understand why people buy, they can better target their marketing messaging. Behaviors can include:
Purchasing reason. Are buyers searching for the best price, excellent ratings, safety considerations, or other criteria? What problem are they trying to solve?
Occasion or event. Are consumers buying for a holiday or anniversary? Are B2B buyers trying to use up their budget before year-end?
Product benefits. Is the buyer looking to purchase the latest technology, safest product, or be the first to buy the newest product?
Buyer’s journey stage. Does the buyer want information for a future purchase? Or are they looking to try out the brand for the first time?
Engagement level. Is the buyer a die-hard fan looking for the latest product?
Geographic segmentation
Geographic segmentation allows marketers to group people based on where they live, work, or travel. The location has a significant influence on buying habits that marketers can use to develop their marketing messages.
Marketers use various geographic segmentation variables that include the country, region, state, province, town, climate zone, or zip code. Culture and population density (urban or rural) are also crucial variables to include in their market research. These location variables will influence what problems people have in that region and how marketers can solve it.
Firmographic segmentation
Firmographic segmentation is to B2B marketers what demographics is to B2C marketers. Firmographics explains their business target market characteristics and includes their industry, number of employees, legal status, company size, financial standing, and other business-related variables.
A B2C market may have thousands of customers, but a B2B target market may have only a few large commercial companies in their target market. Firmographics provides information for marketers who want to understand companies’ strengths and viability within their target market. They focus on their financial performance and growth trends to see if the market segment is growing or experiencing a decline.
Firmographic data is available through online sources like federal and state government websites, trade journals, and other industry sources. Marketers also use surveys to collect specific data about their B2B target market.
Firmographic data examples include:
Industry classification – North American Industry Classification System (NAICS) code.
Ownership and Legal Status – Ownership status, including sole proprietorships, limited liability corporations (LLCs), limited liability partnerships, private corporations, and public shareholder-owned corporations.
Years in Business – Years in business can be an indicator of financial strength and industry experience.
Number of Employees – The number of employees shows how large the company is.
Location – Locations may include offices, manufacturing plants, or stores.
Customers and Products – What products the company makes or sells and who their target audience is.
Market Size – How large their market is, and who their competitors are.
