How to define your customer segments?
Why segment customers?
The general idea behind customer or market segmentation is that the more the marketing mix can be adapted towards the needs and desires of the customer, the more value is created and the customer is willing to buy the product. Market segmentation allows companies to reach more customers when having only one proposition.
What levels of customer segment exist?
There are four levels of segmentation:
- Mass marketing: The same marketing mix is offered to all customers.
- Segment marketing: The marketing mix is differentiated towards one or several large groups of customers who have some/several attributes in common.
- Niche marketing: The marketing mix is differentiated towards one or several small groups of customers who have some/several attributes in common.
- Micro or individual marketing: The marketing mix is adapted towards the taste of individual customers.
In general micro or individual marketing is considered the ultimate goal. However, one-on-one marketing is expensive and there may simply not be a business case for it. Most companies do not have the financial resources and skills to achieve this level.
What types of customer segmentation exist?
There are many ways in which customers can be broken down into smaller groups.
- Geographically: Based on city, state, region, country or continent. Geographic segmentation is the most traditional way of customer segmentation. With the rise of modern transportation and the Internet, this segmentation is used more for internal reasons than because it adds value to the customer. However, legal, tax, custom and cultural preferences may be reason to use a geographic segmentation as well.
- Demographic: The second-most traditional way of segmentation is based on demographic attributes of customers, like gender, age, family background, education/income level, occupation, religious/ethnic background and, although dubious, sexual preferences.
- Psychographic or need-based: A more modern way of segmentation is by sorting customers based on their personality, values, live style and beliefs, for example. While difficult to measure, people with the same interests tend to group together visiting the same events, reading the same magazines and following the same LinkedIn groups, for example.
- Behavioral: Differentiating the marketing mixed based on the actual behavior customers are showing has gained popularity with the rise of the Internet. This does not only allow companies to register behavior more easily but also to act upon it. Retargeting customers (See also: Trends in display advertising) based on what they have searched on the website via banners and email marketing is an example of using behavior to segment on a one-on-one basis.
How to define customer segments?
There is no golden rule how to best determine on what level and in what way customers can best be segmented. In general there are two methods:
- Top down: The customer group is broken down in increasingly smaller groups, based on gathering insights and what proves to work and what not.
- Bottom up: Here the ideal customer is defined first. This process can be compared to creating Personas (see also: What_are_personas?).
In general the following tips apply when starting to segment customers:
- Start to collect the data: most companies hardly know who their customer is. Starting collecting data is the first step. Based on the data, a statistical analysis can be performed to determine what kind of customers buy for example the same kind of products.
- Use multiple methods: Using multiple types of segmentation in both the top down and bottom up methods will give the best results.
- Continuously improve your performance: Customer segments are never final. Customer change as they themselves grow older and markets and competitors change.