Customer segmentation: everything you need to know

Are you finding that your marketing campaigns aren’t getting the results you want?

Or that your products aren’t standing out from the competition?

Or maybe you’re struggling to get customers to convert before they bounce from your site?

For many marketing and business performance problems, customer segmentation can provide new insights and strategies that make the most of your budget.

You can target customers with highly personalized campaigns, offer top-quality customer service, and even develop new products, services, or approaches that help your customers in exactly the way they’ve been looking for.

In this article, we’ll give you the complete definition of customer segmentation, its benefits, and how you can implement customer segmentation at your business.

What is customer segmentation?

Customer segmentation is a way to organize your prospects, contacts, and customers by common characteristics to provide them with targeted information, a personalized experience, and products that feel designed for them.

Many B2B and B2C marketers use customer segmentation for email marketing and other campaign strategies, but you can use it for far more. You’ll frequently find customer segmentation strategies driving success in the marketing, product development, and customer service teams at the most successful businesses.

With a customer segmentation strategy, you can personalize, automate, and track key groups in your target audience. You’ll then can design highly targeted, useful, and customizable campaigns and strategies to boost the growth of your entire business.

And the numbers back that up…

A whopping 93% of B2B professionals say personalization led to revenue growth in 2020.

pie chart showing 93% of B2B professional say personalization led to revenue growth

The way we see it, customer segmentation is a win-win. Customers get a personalized experience with your company, and you get to focus your resources on what produces the best results for your business.

4 benefits of customer segmentation

Let’s take a closer look at four of the possible positive outcomes from a segmentation strategy.

Benefits of customer segmentation, including higher engagement, loyalty, and conversions

1. More Actionable customer data

A good customer segmentation strategy identifies common characteristics between your customers. This starts with using robust data sources that give you the information you need to organize your customer segments.

With this kind of data, you can launch all kinds of initiatives for your target audience, including personalized marketing campaigns — which is something 78% of marketers say they use and 42% of consumers say is important to see.

Marketer vs Consumer Perceptions of Personalization

Keep in mind, though, that plenty of personalization strategies aren’t obvious to consumers. Tactics like including a first name in your marketing emails are surface-level personalizations your customer data can reveal, but there are plenty of even more effective approaches you can pursue.

For example, your customer data may reveal what products your customers are most interested in, or concerns about things like price point or extra features. Use data like this to first create customer segments, and then build email marketing campaigns that address each segment’s concerns.

2. Increased focus on the most profitable customers

In a customer segmentation strategy, you’ll organize your customers by common characteristics like their location, age, or income. By segmenting them and then gathering data on their buying habits, you’ll quickly build a view of your most profitable or high-value customers.

The most profitable customers will look different from business to business. They might be high-income buyers after your priciest product, or they might be lifelong subscribers whose payments you can count on for years to come.

Whatever most profitable looks like for your business, create a segment for it. Then, you can devote extra resources and attention to those customers to close more high-value sales.

3. Improved customer service

With customer segmentation, you can identify niche pain points and address them in every facet of your business, from pre-purchase to customer service.

For instance, if you have a large segment of customers over the age of 65, you might consider highlighting your phone support options for this demographic. But millennials and Gen Z might be more likely to engage with live chat software or self-serve content.

4. Higher customer engagement and loyalty

When you can tap into your customers’ precise pain points, they’re more likely to engage with your brand. And if you can keep that up, they’ll come back again.

Of course, when customers are happy, engaged, and loyal, that means great things for your bottom line. Plus, your team will work more efficiently as they focus on tasks that make the most impact.

5 types of customer segmentation (with examples)

When you segment customers, you can do so according to any criteria you like. You can customize your segments to your business needs and goals.

Thinking about your customers in segments can spark new ideas and inspire your next marketing campaign or product line. You’ll be able to identify what’s truly unique about your customer base and tailor your entire business to serving those niches.

Image showing 5 different types of customer segmentation including demographic, geographic, psychographic, behavioral, and values-based.

Although you can choose your customer segments, there are five main ways to segment customers that can help jumpstart your strategy.

1. Demographic segmentation

Demographic segmentation categorizes your customers by observable traits like age, gender, marital status, or occupation. It’s one of the most common ways to segment customers because demographic data is often easier to collect than other types of data.

With broad groupings, you can create high-level strategies for large swaths of your target audience. For instance, if you have product lines at different price points or geared toward different genders or ages, you can shape an overall strategy for each segment that highlights the best products for them.

Here are a few examples of how you can use demographic segmentation in your strategy. You can segment your audience by:

  • Income to highlight products based on price point
  • Age to decide which social media platforms are most appropriate to reach potential customers
  • Family size to offer deals and packages for larger groups

2. Geographic segmentation

Geographic segmentation is pretty simple. You need to gather your customers’ location data.

Once you have that data, you’ll need to consider how specific your geographic data should be. Do you need to know a customer’s country or region, or do you need their specific zip code?

Check out this list of a few ways to use location data to segment customers:

  • By country or region to provide the correct language or currency
  • By zip code to run ads for local stores or deals
  • By urban, suburban, or rural area to offer the most appropriate products or services

3. Psychographic segmentation

Psychographic segmentation digs deep into your customers’ habits and lifestyles.

With this kind of customer segmentation strategy, you get beyond what you can easily observe your customer doing and into the way they think.

Customer personas, which are often created for marketing and sales campaigns, are a great example of the kind of information psychographic segmentation looks for. It gets into why the customer chooses certain products or brands.

For example, psychographic segmentation might help you identify customers who are always seeking sustainable products or who prefer subscription boxes for household needs rather than going to the store.

Based on this information, you might consider developing a marketing campaign highlighting your company’s sustainability efforts or developing a subscription-based model for some of your major products.

4. Behavioral segmentation

Behavioral segmentation organizes customers based on actions they take in relation to your company. Actions like clicking on an email, purchasing a product, or contacting customer service can all be tracked under a behavioral segmentation strategy.

Often, raw data like clicks or purchases is used to gauge metrics like customer experience, engagement, or loyalty.

With this information in hand, marketers, UX experts, and other team members can optimize the customer journey to enhance the overall experience for new and repeat customers alike.

You can use behavioral segmentation to categorize customers by:

  • Previously purchased products to recommend new items the customer may be interested in
  • How often they use your product to create different marketing cadences based on level of use
  • Loyalty to offer special deals and announcements to repeat customers

5. Value-based segmentation

You can also segment your target audience based on customer lifetime value (CLV). In this approach, you group customers based on how much revenue you expect them to generate for their business throughout the duration of their relationship with you.

With value-based segmentation, you may decide to give special perks to your highest-value customers, such as implementing a loyalty program or providing priority customer service.

Or, you can identify customers with a low CLV and work toward nurturing them into a higher-value segment.

How to build a customer segmentation strategy

Ready to start segmenting customers? Follow these seven steps to build a customer segmentation strategy that’s right for your business.

7 steps for building a customer segmentation strategy

1. Decide what kind of segmentation you need

First things first: what audience segments do you want to use in your strategy?

Use the above list to decide what segments will be most helpful based on your business goals. Be sure to consider the needs of your marketing, sales, and customer service teams, as well as any product developers or other interested parties.

If this is your first time doing customer segmentation, start small. Choose a couple of ways to segment your audience and build from that as you start to see results.

2. Locate or gather customer data

You may have tons of customer data stored in your CRM, email marketing software, or other data and analytics tools.

Based on your chosen audience segments, start pulling the data you need and organizing it in a helpful way. If the data you need isn’t easily available, it’s time to dig in and start pulling reports or setting up tools that track and gather customer data.

It’s important to do everything you can to ensure you have the highest quality data. As many as 39% of marketers say they need better data to personalize their email marketing campaigns, and that need stretches to other marketing channels too.

After all, data is the backbone of your entire customer segmentation strategy.

3. Choose customer segmentation software

We’re going to be honest with you: you’re probably going to need some customer segmentation software to pull off your strategy. It’s a growing market, with U.S. marketers spending $2.4 billion on data analytics and segmentation solutions in 2019.

Many marketing software providers such as ActiveCampaign offer segmentation features, and you may be able to find them in the CRM you already use, too.

If you don’t have software with list or audience segmentation capabilities, look for one that’s easy to use, adaptable to your team’s needs, and scalable right alongside your business.

You may also want to consider a software solution with machine learning components. 46% of marketers used machine learning to personalize their campaigns in 2020, compared to 26% in 2019.

In the example below, you can see how ActiveCampaign can automatically segment customers for you based on customer behavior:

List segmentation automation sequence from ActiveCampaign. Step 1: automation is triggered by a customer visiting a product page 2. Product interest tag added 3. customer added to custom Facebook audience

4. Create customer segments and groups

Next, define each customer segment and set them up as tags in your software.

Use simple labels for each segment and make sure your entire team knows how to use them. If you can, color-code your segments to get an easy visual of your entire audience.

You might consider creating a key or guide to your customer segments to help your team understand the purpose of each segment or group. It’s also smart to limit the number of people who can alter the customer segments in order to preserve the integrity of your marketing data.

5. Set up automations

Automating your customer segmentation will save you a ton of time. Plus, you’ll be more accurate.

With customer segmentation and marketing automation, you’ll create parameters for each audience segment. When a customer meets the criteria for a segment, they’ll immediately be added to the right tags, lists, or groups.

This real-time behavioral segmentation is incredibly helpful, especially for ecommerce professionals — 68% of whom use this approach.

Some software options, such as ActiveCampaign, offer other automation and personalization features to take your segmentation strategy even further.

In the example below, a simple action like visiting your webpage triggers an automated email and sales team notification to follow up with that contact at the right cadence.

ActiveCampaign email automation example from webpage visit to sales team follow up

6. Craft personalized marketing campaigns based on segments

Now you’re ready to put your segments to the test.

Send segment-based emails, run targeted local ads, and brainstorm new products based on the segments you’ve created or discovered in your strategic planning process.

Look out for ways to use your customer data even more effectively. For example, ActiveCampaign also has features like dynamic content, which allow you to automatically pull customer data into a personalized email template.

7. Test and refine your customer segmentation strategy

As with most business strategies, your customer segments may not be perfect the first time. You may be targeting the wrong ones for your marketing goals or not using them as effectively as you could be.

Use the data you collect about both your customer satisfaction and your ROI to test and refine your strategy as you go to make sure you’re always getting the best results.

Pay attention to how your most important marketing metrics change when you add or adjust your customer segments.

For instance, if you start segmenting customers by their interest in a particular product, you’ll want to measure the change in sales for that product. An increase likely means your segmentation strategy is working, while a decline in sales might indicate you need to go back to the drawing board and think of new ways to interact with your customers.

Build a customer segmentation strategy today

Customer segmentation helps your business get better results. You’ll know more about your customers and better cater to their needs and pain points throughout the customer journey.

Ready to start segmenting your customer base? Talk to an expert at ActiveCampaign today.

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