What is Customer Segmentation? – A Detailed Guide

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customer segmentation

Understand Customer Segmentation for Business Growth

Learn the Ways to Segment your Customers


Let me ask you a question. What do businesses exist for – to make profits or serve customers?
Well, many of you might say businesses exist for making profits since, in business; money is all that matters at the end of the day.

Though profit is indispensable for any business, it is in true sense the result sought from any business. The cause that derives this result is the customer. Markets and hence profit exists due to customers. Therefore, customers are at the heart of any business.

But serving and targeting each customer individually in a business is not possible due to their large number. The question which then arises is “what is the method to effectively serve all your customers?”

The answer is SEGMENTING them. Customer segmentation is one of the most important building blocks of a business model.

What is customer segmentation?  – The definition

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Customer segmentation is the division of customers into groups that share common characteristics. Thus targeting customers for activities like marketing, product development, testing, etc. becomes easy, effective, and appropriate with segmentation.


The need for customer segmentation

 The need for customer segmentation can be known by measuring its effectiveness i.e. comparing the benefits that we gain and miss with & without it respectively. The following table clearly outlines its effectiveness.


Ways to segment customers

Based on the type of business you are in (B2B or B2C) and on your offering, customers can be segmented in different ways. Following are the popular ways to segment customers:

Based on demography

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This is the most common type of customer segmentation. For B2C businesses, the customers are segmented based on the parameters such as:

  1. Age – For example, science fiction for adults and comics for kids.
  2. Income– luxury goods for customers with high disposable income and low-cost goods for those with lower income.
  3. Gender – women like to spend more on cosmetics than men

Customers can also be segmented based on education, religion, marital status, etc.  Here the data from the customers based on these parameters can be acquired through online forms, or survey through emails.

For B2B types, a different way of classification needs to be used due to the existence of people’s hierarchy in the businesses. Here the user of your product may be different from the buyer. The segmentation is as follows:

  • Recommender – He suggests whether the product is worth buying to the decision-maker and influencer. For example in a valve manufacturing company, spares for the machines are suggested by engineers in the maintenance department. Since they have experienced the performance of the spares, they are in a good position to make suggestions for a particular brand.
  • Influencer – He is a person who influences the decision-making process through his research and knowledge regarding the product. Sometimes the influencers and recommenders are the same people as in the case with our example where engineers in the maintenance department play both roles.
  • Decision-maker – He is the one who decides whether to buy the offered product/ service or not. The Head of the maintenance department is the decision-maker in this case.
  • Buyer – People in the finance department make payments to spares supplying companies. Hence they are the economic buyers
  • End-user – artisans in the maintenance department use spares. So they are end-users in this case.
  • Saboteur – He is a person whose job might be at risk due to the offered product or service. In our example, a machine-maintenance specialist hired for a particular machine might become insecure from a set of spares that do not wear out for say 5 years and eliminate the need for preventive maintenance of the machine.
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Based on Psychographics

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It categorizes customers based on their personalities. Their lifestyle, interests, motivation, or sub-conscious beliefs play a great role in their buying preferences.

For example, many of the families in India prefer traditional mud stoves over LPG for cooking food even when they can afford clean cooking options.

Also, customers with strong opinions against the use of pesticides and interests in health & fitness products can be targeted for organic foods.


Based on Behavior

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Here the customer segmentation is based on their buying habits, behavioral preferences, their browsing history, and the way they interact with your brand.

For instance, people in the age group of 22-35 are more brand conscious than those in between 18-22 years.

Another example can be e-commerce companies that target their customers based on their recent purchases or products they viewed recently.


Based on Geography

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Under this, customers are grouped based on region, country, city, or even climate. Grouping can also be based on their locality i.e. rural or urban.  This strategy of customer segmentation is adopted when your target audience has preferences based on their location.

For example, farm equipment is marketed largely in rural areas compared to urban.

Different product mixes are also offered by various companies based on geographical regions. For instance, certain car manufacturers modify some features for warm regions they cater to.


Based on Customer Journey

Sometimes it is important to know the stage customers are at, in the buying process. For example, a customer who has already purchased from say, an e-commerce platform, has to be targeted differently from the one who did not buy anything from that store in the past few months.

The following is the screenshot of a message delivered to a customer who made a recent purchase online.

Another screenshot shows an email from Starbucks sent to a customer who did not visit the store for some time.


When to start segmenting customers?

Customer segmentation is an indispensable strategy for any business. While you are in the stage of commencing your business, you should start to identify the most suitable ways to segment your customers as soon as you begin the process of customer discovery. While interviewing potential customers about their needs, pains, their jobs, their social or emotional expectations, etc., you should start to design the persona of your customers.

When you know their motivation, income, expectations, their role models,  etc. in very early stages, it becomes easy for you to target your offerings to them during your ‘launch’ stage as they had already revealed to you everything at the stage of customer discovery including the channels that they would prefer to buy your offering.


Conclusion

Customer segmentation is a prominent part of the business & startups for increasing revenues, market, and profitability. It helps to deeply understand your customers. Once you understand your customers well, you can serve them in the best possible ways which in turn helps you to gain their trust. The customers in your target market then become loyal to you and feel more connected to your brand. This is reflected in your increased sales and revenue.


Do you feel there is something more to be included? Kindly write to us. We will be more than happy to consider your valuable suggestions.