21.12.2023

Customer segmentation - the key to business growth

Key information:

  • Customer segmentation is the process of dividing a customer base into smaller groups based on common characteristics, behaviors or preferences.
  • Dividing customers into groups allows us to better understand their expectations and needs.
  • Better identification of customers allows better adaptation of the offer to its requirements.
  • The customer segmentation process consists of 5 stages: getting to know the customer, selecting segmentation criteria, dividing buyers into groups.
  • The most common categories for grouping customers are: demographics, geography, customer behavior, lifestyle and values, segmentation into B2B and B2C.
  • Some of the most common challenges encountered during customer segmentation include oversimplification, over-fragmentation of buyer groups, inappropriate segmentation criteria, failure to align company activities with the results of the analysis, lack of measurable results, and failure to take into account changes in customer behavior and needs.

Details below!

What is the difference between a 6-year-old member of the Boy Scout troop walking along the sidewalk with his parent and a retired woman returning from Sunday mass? At first glance, these are 2 completely different people, but from the perspective of a candy bar company, one gets the impression that one and the same term - customer - fits them both. However... is such homogenization acceptable in the business world? NO! These are different groups of customers. A little boy wants to persuade his parents to let him satisfy his need to eat something sweet, while an old lady, buying a candy bar, most likely wants to please her grandson. This means that these 2 people have different motivations, as well as different shopping habits, and we cannot treat them the same. This example shows how important customer segmentation is!

What is customer segmentation?

Customer segmentation is the process of dividing the customer base (e.g., grocery store customers) into smaller groups (e.g., children, parents, grandparents) Based on shared characteristics, behaviors or preferences (so-called customer separation criteria). This separation is used by most companies. Book publishers first sell more expensive hardcover versions of books with nicer covers, and only later sell cheaper softcover editions. Phone manufacturers segment customers by wealth, offering both more expensive models (so-called flagships) and more affordable variants. This is what customer segmentation is all about - making the products offered fit the needs of specific customer groups as well as possible.

What is customer segmentation used for?

Why do companies segment customers into different groups? This separation allows the company to better understand customer expectations and to have a greater understanding of the needs of the different groups of people interested in buying a product or service. This results in the ability to tailor offers to specific categories of customers. What's more, proper customer segmentation allows you to develop the right marketing strategy to undertake effective marketing activities and make it easier to reach potential customers by, among other things, choosing the right sales channels.

What are the benefits of customer segmentation?

Effective customer segmentation will help you gain an in-depth understanding of the different groups of people interested in your company's products or services, understanding customers' needs and creating more added value for them. This translates into higher revenues and profits for the company, improving the customer service process, building a solid brand image and gaining customer loyalty. What's more, the conducted customer segmentation allows to indicate the appropriate direction of the company's development and helps to establish trends related to changes in the profile of a typical customer of the company.

Customer segmentation step by step

In order to successfully segment a group of customers, you need to go through a couple of key steps.

  1. Get to know your customer

To start customer segmentation, you need to consider who your customer is. If you manufacture baby strollers, your target audience is parents of infants. If you produce protein nutrients, you should be aware that the product you sell will mainly target people interested in building muscle mass. By contrast, when creating charging stations for electric cars, you should be aware that your main customers will be, well... electric car owners. The reasoning carried out above may seem trivial, but it is an extremely important first step, without which segmentation is impossible.

  1. Select segmentation criteria

Another key activity is to select appropriate grouping categories from among various customer segmentation criteria. Examples of segmentation criteria can be:

Demographics

When you run a coffee shop near a high school, you may notice that a significant portion of your customers are its students. Moreover, you know that people who are at this stage of life do not yet have enough money to use your services regularly. In this case, you can introduce discounts upon presentation of a student ID card. This will help you get more customers in this age range, and students who have already used your services will buy coffee much more often.

Geographic

If a company produces computer games and the cost of selling another copy is negligible, then setting the same price for the United States and India may not be the most successful idea. It is worth using customer segmentation here. While a resident of New York can afford to pay $80 for entertainment for 20 hours, the wallet of a Deli resident no longer anticipates such an expense. Therefore, it is often very important to use this kind of segmentation - geographic.

Customer behavior

Different customer segments have different behaviors. Some people go to coffee shops every day. Others, on the other hand, are there only when meeting friends. To encourage specific groups of customers, the owner of the establishment must take various steps. The first segment can be encouraged, if only by introducing loyalty cards. On the other hand, such action will do little for the latter group.

Lifestyle and values

Depending on the customer's attitude toward ecology, he may be willing to pay extra for more environmentally friendly products. Such a situation can currently be observed, among others, in the clothing market, where clothes made from recycled materials have started to become popular, despite the higher price.

Segmentation on B2B and B2C

Companies often offer different prices to companies and individuals, thus treating them as 2 separate customer segments. In some cases, companies are able to obtain lower prices than individuals (e.g., purchase of construction materials), in other cases (e.g., access to databases, some services of banks) the reverse relationship will occur.

  1. Divide buyers into customer groups

Once you've managed to determine the criteria for segmenting your buyers, you can think about which particular groups of customers you are able to segment into. If you determine that your main customers are: young children who spend their pocket money on the snack you produce, the parents of those children who will occasionally buy a candy bar for their child, and grandparents who want to spoil their grandchildren, then you are in a position to tailor your sales channels and marketing efforts to these 3 customer segments.

  1. Conduct a customer needs analysis

Once you have divided your buyers into individual customer categories assigned to clearly defined groups, you should conduct a customer needs analysis for each of them. If the resulting customer categories are too many, you can consider only selected customer groups that you consider the most important and profitable. Such a situation can be observed among game producers, who, having divided customers into market segments, which is an example of segmentation by geography, translate their productions only into selected languages, the inclusion of which in the product will be most profitable.

  1. Adjust your strategy

After analyzing the customer profile, for each of the groups formed after segmentation, one can begin the process of adjusting the company's operations strategy, including, among other things, sales strategy and marketing strategy. Mentioning an example with a candy bar manufacturer, one can conclude that each of the predetermined categories of customers expects us, as a seller, to take different marketing actions.

The most common challenges in customer segmentation

Although at first glance, customer segmentation does not seem like an overly difficult task, several challenges can arise in the process. What mistakes can occur when you want to separate customer groups?

An oversimplification

When it comes to creating a product aimed at gamers, you can't lump together fans of strategy games, role-playing games and people who kill time on the bus playing mobile games. If we define all these people as a homogeneous group of customers, we greatly overestimate the potential sales of a specific product aimed at meeting the needs of only one of these groups.

Too many market segments

If you have distinguished as many as 20 groups of people interested in your product, it is likely that not all of them are equally important. Not all of the identified segments will be the same in size, and the customer value will also vary between different groups of buyers. It makes sense to focus only on those target groups where the returns on your efforts are higher than the cost of implementation.

Inappropriate segmentation criteria

There are situations when a company chooses incorrect segmentation criteria, so that the result obtained is not able to contribute much to the activities undertaken by the company.

No personalization

The segmentation carried out by the company is not just for writing it out on a piece of paper. The division made is a tool, the full use of which requires adjusting the company's strategy to the results obtained. If a manager knows that it is impossible to identify the single largest group of customers, and that his potential customers are divided into 2 equally important groups, then he should not devote all his efforts to only one particular customer segment.

No measurable results

How do you determine whether market segmentation and target group identification have been successful? Unfortunately, some managers do not do this at all, or conduct the evaluation in a subjective manner. In order to correctly determine the results of the segmentation carried out and the actions taken as a result of it, it is necessary to choose a couple of objective indicators that will be used to evaluate the activities carried out (for example, if we carried out marketing activities on the services provided by the bank, good measures of success could be the number of loans granted, or the number of deposits opened, among others).

Failure to take into account changes in customer behavior and needs

A one-time successful market segmentation is not the end of the whole process. We can tell what a customer's needs are today, but does that mean they will have the same needs in a year, two or five? This may be the case, nevertheless it does not have to be at all. A manufacturer may be focused on making clothes for the employees of corporations. However, what if corporations begin to take a more casual approach to the dress code? Does a given customer still have the same need to wear elegant clothing? A bank may want to extend as much credit as possible. However, the government may introduce higher contribution requirements. In this case, won't the demand for the bank's services for obtaining loans by individual customers change?

Times of crisis and segmentation?

Customer segmentation is crucial in times of economic crisis. Proper segmentation and subsequent analysis of customer groups allows you to determine which categories of customers are responsible for the largest share of revenue. Segmentation allows the company to optimize its strategy and focus on activities that are most profitable for the company. What's more, proper segmentation helps isolate customer segments that will incur high expenses when trying to reach them. In such cases, it may turn out that the potential revenue generated will not recoup the costs incurred on marketing.

Customer segmentation as part of market research?

This is one of the key elements market research. By properly segmenting business customers or effectively segmenting individual customers, you can better understand buyers, resulting in better alignment of product offerings, sales channels and marketing activities with customer needs.

Other market research tools

Other popular market research tools include:

Segmentation allows you to understand customer expectations and needs

Customer segmentation is one of the most important actions taken by companies to understand customer expectations and needs. It allows for various benefits that ultimately result in increased profitability and profits for the company, as well as strengthening the brand and gaining customer loyalty.

David Stopa

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