As a founder or business owner, the importance of using audience data to inform your marketing strategy cannot be overstated. The most effective businesses understand how to use customer data to split people into groups through customer segmentation.
Many marketers admit they don’t feel confident in understanding customers and their needs. Don’t let that be your marketing team. With the right customer segmentation model, you’ll be able to focus your efforts on a specific subsection of your audience to improve your marketing campaigns. This level of personalization can lead to higher profitability for years to come.
Keep reading to learn how customer segmentation can improve your marketing efforts and how to choose the best customer segmentation model for your organization.
What Is Customer Segmentation?
Customer segmentation is the process of creating groups of customers based on shared characteristics. These characteristics can include:
- Demographics (age, gender, location, etc.)
- Psychographics (lifestyles, interests, personality traits)
- Behavioral data (buying behavior, online engagement)
- Needs (pain points, customer support, usability)
Not all customers are created equal. Identifying which customer segments are most valuable to your business is a key part of your startup’s growth framework.
Understanding how different characteristics affect a potential customer’s decision to buy from you can help you create more targeted marketing campaigns. No more wasting precious marketing dollars on people with no interest or need for your product or service.
Why Use Customer Segmentation Models?
A 2021 study from McKinsey shows that an overwhelming 71% of consumers expect the brands and businesses they buy from to create personalized experiences through their marketing.
Here’s how personalizing your customer experience can directly influence buying behavior across all stages of the customer lifecycle (McKinsey 2021):
- 76% of consumers said they’re more likely to consider purchasing from brands that personalize
- 78% said that personalization would drive them to repurchase
- 78% said they were more likely to refer businesses who personalize to their friends and family
With so many options at their fingertips, it’s easier than ever for consumers to switch to a new store, product, or service if your business fails to personalize your marketing messages. By segmenting your target customers, you can find the best content, channel, and timing for your target market.
Here are some other ways customer segmentation models can streamline your marketing efforts:
- Attract new customers with messaging that speaks to their unique challenges
- Improve customer support by better understanding customer needs
- Find opportunities to upsell, cross-sell, and identify new products and services
- Generate more inbound leads and improve ROI
- Reduce churn and improve customer retention, ultimately increasing customer lifetime value
7 Types of Customer Segmentation Models
When it comes to customer segmentation models, there is no one-size fits all. Each business has a unique customer base with different needs. By understanding the types of segmentation models out there, you can choose the one that works best for you.
Let’s take a closer look at seven ways customers can be segmented.
1. Demographic Segmentation
Demographic segmentation involves grouping people based on demographic data such as age, gender, household income, marital status, or education.
Businesses that offer products or services to many different types of customers typically use this type of segmentation model. Take Airbnb, for example. On one hand, their short-term rental service might appeal to working professionals out of town on a business trip. It’s also used by families looking for rentals for their next vacation. By understanding the differences in each group, Airbnb can run different marketing campaigns to target these unique demographics.
2. Geographic Segmentation
Geographic segmentation models segment people based on their location, including their city, town, state, and country, and whether they live in rural or urban areas. Companies that offer products and services to customers across many different locations can benefit from geographic segmentation.
By understanding the geographic context of their users, businesses can personalize their messaging with references to local events, norms, and trends. A great example is entertainment giant Ticketmaster, which can target users with different marketing campaigns depending on what events are happening in their area.
3. Behavioral Segmentation
Behavioral segmentation groups customers based on exactly that — behavior. Behavior can refer to a customer’s habits, motivations, frequent actions, routine, as well as their buying behavior.
For example, businesses with an e-commerce component can segment customers based on behavior like purchase history or engagement on their online store or social media platforms. Behavior segmentation is an important consideration for your customer retention strategy — you can offer purchase incentives like loyalty programs or member-only discounts based on behavior.
4. Psychographic Segmentation
Psychographic segmentation groups people based on psychological characteristics, such as personality, values, attitudes, or interests.
Psychographic datasets aren’t always readily available but can be captured by surveys, polls, and user assessments. For instance, a fintech startup selling investment-based products might look at psychological traits such as risk tolerance. To find this data, they might require users to fill out a short risk assessment during the process of onboarding onto the platform.
5. RFM Segmentation
Also referred to as value-based segmentation, RFM stands for recency, frequency, and monetary value. This is one of the most popular customer segmentation models for segmenting customers into high-value and low-value.
An example of RFM segmentation is e-commerce businesses that use retargeting campaigns. These types of marketing campaigns work by targeting users who frequently visit their online store or social media pages. Since they’ve already shown a strong interest in their products, they’re more likely to convert to paying customers.
6. Needs-Based Segmentation
Needs-based segmentation looks at the current physical, emotional, and financial needs of specific groups. This model often requires large amounts of data but can be a powerful tool when used effectively.
While this qualitative data may be harder to obtain, it can be collected through surveys and lead generation forms on your company website. You can also check out competitor reviews to find out where customers feel they are lacking.
A company that has achieved huge success by understanding audience needs is the payment platform Stripe. At their inception, Stripe noticed that while other payment processors existed, they were difficult to use, had long waiting periods, and involved several extra fees. By listening to potential customers’ needs, they were able to create a better solution and achieve rapid organic growth almost entirely through word-of-mouth marketing.
7. Technographic Segmentation
Popularized in recent years, technographic segmentation divides your audience based on the technology they use. Customers can be grouped by use of mobile devices, desktop computers, apps, and even software tools.
Consider a company in the SaaS space. By identifying other software platforms their customers use, they can position their tool as an add-on or replacement for their current software. This degree of personalization has the potential to majorly impact the ROI of their marketing campaign.
Once you’ve decided which characteristics you’ll use to segment your customers, you may create buyer personas to represent each group. Buyer personas are semi-fictional representations of your target customers. They can help focus your time on top prospects, guide product development, and further aid in developing your marketing and sales messaging.
How to Create a Customer Segmentation Strategy for Your Business in 5 Steps
Now that you understand the main types of customer segmentation models, it’s time to put these models to work.
Here’s a step-by-step guide on how to build a customer segmentation strategy using existing audience data:
1. Get clear on your business goals
Your customer segmentation strategy should always tie into your business goals. Not every model will fit every situation, so break down your goals to determine the best customer segmentation model for each stage of your buyer’s journey.
For example, if you’re a B2B startup trying to entice people to attend a free webinar, you might target people with specific job titles on LinkedIn (aka demographic segmentation). However, if you’re trying to increase digital course sales, you might target people who have already attended your webinar and subscribed to your email list (behavioral segmentation).
2. Decide which segmentation tools you’ll use
Before you segment your customers, it’s crucial to have access to data. No matter what stage you’re at in your business, you likely have access to some form of customer data you can use for audience segmentation.
Most of today’s e-commerce or software platforms offer audience insights, from demographic information like location, age, and gender to more detailed data like visitor frequency and device usage. A tool like Google Analytics can also offer detailed audience insights, especially if you incorporate unique tracking links for your campaigns, also referred to as UTMs.
Don’t forget about social media. Platforms like Instagram, Facebook, and LinkedIn can reveal detailed insights about your audience, from the times of day they’re most active to their job titles and what company they work at.
3. Determine which segments have the highest customer value
Now that your audience is split into segments, it’s time to identify which groups are most valuable to your business.
Start with a basic hypothesis: “I think X segment will be most valuable because of Y.” Back up your hypothesis with industry research and existing segmentation data to create a justification for targeting each segment.
If you’re finding that certain groups are more profitable than others, it makes sense to concentrate your efforts there. You can test your hypothesis with a third-party audience segmentation tool or by examining the ROI of past marketing campaigns targeting different segments.
Don’t forget to account for the volume of each segment. Depending on your budget and goals, it might make more sense to target a smaller group of high-value customers over a large group of lower-value ones. By collecting data around the average order or lifetime value of your customers, you can focus on the audience segments you want to target in future campaigns.
4. Create campaigns tailored to different customer segments
Once you’ve identified which customer segments are most valuable for your business, you need to figure out how you will reach them. This means selecting the right channels with the right messaging at the right time.
Consider how you can target people at each stage of the customer journey. Whether you’re targeting new customers or longtime customers, you should establish messaging and an outreach strategy that meets people where they’re at.
5. Analyze and adjust
Consumer behavior tends to evolve over time. Over the last few years, for example, we’ve seen social media platforms like TikTok completely transform how consumers discover new brands.
The best way to keep up with your audience’s changing needs is to run regular customer segmentation analysis. This lets you identify high and low-performing segments and adjust your marketing campaigns according to changes in buyer behavior.
Hire an Experienced Marketing Team to Segment Customers For You
Using customer segmentation models not only helps grow your business faster, but also helps you develop deeper, more personalized relationships with your customers. Segmenting customers will ultimately make your marketing campaigns more effective and increase your ROI.
Looking for support with creating effective customer segmentation models? Our team of experts has a great track record of helping lean teams segment their customers.
By identifying the best customer segments for your business to target, Delverise can help you streamline your marketing efforts and grow your business faster.