What Is Customer Segmentation and How to Leverage It to Drive Conversions?

There are many ways to increase customer retention, and one of them is by building and nurturing relationships with your customers. Customers who feel more connected with your business are likely to stay loyal to your brand. 

Unfortunately, building long-lasting customer relationships is often easier said than done, especially for small businesses. Many startups and small businesses still struggle with maintaining a positive customer relationship, probably because of limited resources.  

If building long-lasting customer relationships is a challenge for your business, implementing customer segmentation can be an effective solution. Customer segmentation is a great way of getting to know your customers better so you can meet their needs. This strategy also helps you ensure a satisfactory customer experience and a more defined customer journey. 

What is customer segmentation? 

Customer segmentation is the process of dividing your target market into distinct groups or subsets according to a shared characteristic or background. The type of segments you create can depend on the type of business you have.

For instance, if your target market is the typical consumer, you can segment according to demographic data like gender, age, and purchase history. If your business offers services or products to other businesses, you can segment according to factors like niche or industry and number of employees.

Market segmentation can be useful in personalizing your marketing strategy and sales, and service efforts. This can help attract potential customers and expand your customer base, increasing your bottom line. A report found that 76% of customers are more likely to buy from a company that personalizes, and 78% of them are more likely to make another purchase.

To apply strategies such as behavioral segmentation to your customer base, you will need to gather data on purchase history, analyze the data and identify useable patterns, and choose a segmentation model. We will discuss the process further below.  

Customer Segmentation Types and Models 

The customer segmentation model is what you use to divide a customer base into targeted groups. There are many types of customer segmentation, and below you can find common ones you can use for marketing campaigns and other strategies.

1. Demographic Customer Segmentation 

Demographics refer to various characteristics of a population, including race, sex, age, marital status, and similar characteristics. In demographic segmentation, you can apply five different customer segments: gender, age, education, occupation, and income level.

Traditionally, you can collect demographic data through surveys and censuses. But these days, gathering customer data has become easier, thanks to the rise of social media platforms, search engines, and specialist list providers. You can now find customers’ demographic information, including age, gender, and relationship status, online with ease. 

Let’s take age segmentation as an example. You own a fashion business catering to all consumers of all ages. You can apply segmentation to your customer base and divide it into generations like Baby Boomers, millennials/Gen X, and Gen Z. This way, you can optimize and personalize marketing strategies so they appeal to each generation.   

2. Geographic Customer Segmentation

Geographic segmentation is dividing your customers based on location (country, state, city, and town), climate and season, timezone, cultural preferences, language, and population type. This type of segmentation works best when you have multiple business locations or you ship products to different parts of the world.  

For example, if you ship products worldwide, setting up groups of customers based on language can be helpful. It’s inevitable that you’ll encounter consumers who prefer to use their native tongue. In this case, you can consider using a local language when running a marketing campaign in countries where English isn’t the first or second language. 

3. Behavioral Customer Segmentation

Behavioral segmentation is one of the more complex types of segmentation. You’ll need to conduct thorough research and analysis during the segmentation process to determine the behavior patterns of your customers. Generally, there are four main segments you can use: purchase behavior, occasion or timing, benefits sought, and customer loyalty.

One of the companies that have been using this type of segmentation is BabyCentre UK, a pregnancy and childcare resource. They gather data through the Facebook Messenger application. They ask the user a series of questions and offer personalized advice and targeted recommendation based on the user’s answers.

One way to gather data for behavioral segmentation is to use website analytics tools. These tools can reveal data on site visitors, like how much time they spend on your business’ website, which pages they visited, and their entry and exit points on your website. You can analyze this data to get a clearer picture of what your customers are looking for. 

4. Psychographic Customer Segmentation

Psychographic segmentation is another tricky process, as it aims to divide a customer base based on five main segments: personality, attitudes, lifestyle, social status, activities, interests, and opinions.

This type of segmentation can be helpful in creating effective marketing strategies, as it allows you to show how your product or service can be of value to different consumer segments. You can highlight specific features that meet a particular segment’s unique pain points.

More than growing your bottom line, though, learning these details about your customers can help you engage with them in more meaningful ways.

Why Is Customer Segmentation Important

Customer segmentation can bring a variety of benefits, in addition to driving conversion and improving customer relationships.  

1. Targeted Marketing

One of the most significant benefits of customer segmentation is its ability to facilitate targeted marketing efforts. Rather than adopting a one-size-fits-all approach, you can create personalized and relevant marketing campaigns for each customer segment. By understanding different customer needs and preferences, your marketing team can deliver tailored messages that resonate with your customers.

For instance, a clothing retailer can segment its customer base into various groups based on factors like age, gender, style preferences, and shopping habits. Armed with this information, the retailer can design targeted email campaigns, social media advertisements, and promotions that speak directly to each segment. Consequently, this approach is likely to result in higher engagement rates, increased conversions, and improved customer loyalty.

2. Efficient Resource Allocation

In any business, resources such as time, money, and manpower are finite. Customer segmentation helps in allocating these resources more efficiently and effectively. By focusing on high-potential customer segments, you can concentrate your efforts on the most profitable areas of your business.

For example, a software company that offers both enterprise-level solutions and individual subscriptions may discover through segmentation that its enterprise customers generate a majority of its revenue. In response, the company can dedicate more resources to enhancing its enterprise products, providing top-notch customer support to those clients, and tailoring marketing campaigns specifically to attract more enterprise customers. This focused approach can lead to higher returns on investment and accelerated growth.

3. Competitive Advantage 

In today’s business landscape, gaining a competitive advantage is essential for sustained success. Customer segmentation can provide valuable insights that competitors might overlook. When a business understands its customer base better than its rivals, it can develop products and services that precisely meet consumer needs, leading to increased customer satisfaction and loyalty.

Additionally, a company that utilizes customer segmentation effectively can identify and target niche markets that competitors might have ignored. By catering to underserved customer segments, a business can create a loyal customer base and establish a unique selling proposition that sets it apart from competitors.

Moreover, customer segmentation allows companies to track changes in customer behavior and preferences over time. This adaptability enables businesses to stay ahead of industry trends, innovate proactively, and continuously refine their strategies, maintaining their competitive edge.

 4. Improved return on investment. 

Effective customer segmentation will help you determine the most valuable group of leads and customers so you can focus your efforts accordingly, resulting in better ROI. In addition, the process can help you identify new opportunities for growth, such as untapped customer needs and new markets. 

How to Segment Customers in 6 Steps 

Before implementing your customer segmentation strategy, you have to determine what exactly you are trying to achieve with this process. Is it to organize your customer base, manage targeted communications, or choose top sales prospects? A clear goal will ensure no effort is wasted when segmenting customers.

1. Define your segmentation criteria. 

After identifying a business goal, you can define your segmentation criteria. Do you want to segment customers based on demographics, geographic, behavioral, or psychological? You can create multiple segments depending on your business and goals. 

Creating buyer personas could be helpful when identifying a segmentation model to adopt. A buyer persona is a detailed description of someone who represents your specific audience. For example, you can create a buyer persona named “Jane” to represent busy, working moms looking for easy-to-use products. The persona is fictional but it can give you a sense of your customer’s demographic and geographic details. 

2. Collect relevant customer data.

After determining your segmentation criteria, the next step would be gathering relevant data. Surveys are a great way to collect and segment data. You can conduct surveys when customers first visit your ecommerce website or after they make a purchase. You can ask them what inspired them to buy your product and how they feel about using it.

Other methods you can use to get all information you need are interviews, focus groups, general research using published data about market categories, in-person conversations, loyalty programs, purchase history, customer support interactions, and even customer reviews. Market mapping may also become useful.

In collecting relevant data, tools like a CRM and survey tools can make the process faster and more cost-efficient.   

3. Analyze and identify patterns.

After collecting enough data, the next step would be customer segmentation analysis. Study the quantitative and qualitative data and take note of major trends and patterns, which might include social media posts that garner attention and engagement and common reasons for buying a product. 

Data analytics tools can come in handy in this part of customer segmentation. 

4. Conduct a product analysis. 

Before finalizing your customer segments, it’s essential to evaluate how your products or services fit each group’s needs. Analyze which products are popular among specific segments and identify any gaps that need to be addressed. This analysis will help you align your offerings with the preferences of each segment, which can be especially helpful with new products. 

5. Validate and refine segments. 

Customer segmentation is an iterative process, and it’s essential to validate and refine your segments continually. One way to do this is by conducting targeted marketing campaigns for each segment and analyzing the response or engagement rates. If certain segments do not respond as expected, it may indicate that they need further refinement or re-evaluation. Stay open to adjusting your segmentation criteria based on new insights and market changes.

6. Develop marketing strategies for each segment. 

Finally, armed with well-defined segments and a thorough understanding of their characteristics and preferences, you can start developing tailored marketing strategies for each segment. Create personalized messages and offers that resonate with the unique needs and interests of each group. This could include personalized email campaigns, targeted advertisements, exclusive promotions, and content tailored to address specific pain points.

By customizing your marketing approach, you will enhance customer engagement and loyalty, resulting in improved business outcomes.

Customer Segmentation Software and Tools 

Segmenting customers these days is less challenging, thanks to many software and tools you can use in the process. Here are a few of them you can consider investing in when getting started:

1. CRM

All CRM tools offer the ability to segment customers, but they differ in terms of level of detail. If you don’t have a CRM yet, make sure you choose one that offers dependable contact management, a sales cycle tracker, several types of data fields, a unified view of your customers, reports, and analytic tools. 

There are many options out there; choose a CRM specifically built for small businesses so it suits your budget while still meeting your business needs.  

2. Survey and Feedback Tools

If you’re going to use customer surveys to gather data, survey and feedback tools can be indispensable. These tools will allow you to create surveys quickly and easily. Advanced survey tools will also offer white-label capabilities so you can maintain consistent branding across all customer messaging.

3. Data Analytics and Business Intelligence Tools

Data analytics and business intelligence tools have revolutionized customer segmentation, enabling businesses to gain deeper insights into their customer base. By leveraging vast amounts of data, these tools help identify distinct customer groups based on shared characteristics and behaviors.

 Since the standard version is free, Google Analytics is a great tool small businesses can use to analyze data, specifically related to website traffic. While it has limited advanced features, it can be good enough for small businesses. But if you have the budget for this tool, you have many other options like Adobe Analytics, LeadLander, and Kissmetrics. 

4. Marketing Automation Software 

Once you’re done segmenting your current customers, the next step is to market your products and services to each customer segment. The most effective way to market your products and services to each customer segment is by utilizing marketing automation software. Marketing automation software is a powerful tool that streamlines and automates various marketing tasks, enabling you to engage with your customers in a more personalized and efficient manner.

Podium is a great tool you can use to create and carry out personalized marketing campaigns. It offers many features, like text marketing and reviews that will make marketing and communicating with your target audience easier than ever.  

Reach Your Ideal Customers 

Data gathering is a crucial part of customer segmentation, and you can find plenty of usable data in customer communications, like in emails, phone calls, and chat sessions your customer service reps have with customers. This is why managing customer communication is crucial to customer segmentation.

Fortunately, Podium has the tools you need to communicate and manage your conversations with customers. The platform comes with a centralized Inbox that allows you to manage all conversations from different channels in a single and user-friendly dashboard. With one inbox, it would be hard to miss any message. You can also respond to each chat, text, review, phone call, and even Facebook message quickly.

Podium also has a text feature that allows you to send messages to multiple customers simultaneously. You can use it to request feedback from your customers, send survey links, and even remind customers of payment. You can also use it for SMS segmentation.

In addition to communication tools, Podium offers many other solutions that help small businesses market their products effectively and expand their customer base. There’s website chat, reviews, payments, and integrations, to name a few.

FAQs 

What is the main purpose of customer segmentation? 

Businesses typically divide their customer base into groups based on common characteristics to better understand customer needs and optimize their marketing efforts for each group. Marketing customer segmentation’s end goal often involves driving conversion by preventing churn and improving brand loyalty. 

What is an example of customer segmentation?

Customer segmentation is the process of dividing a diverse customer base into distinct groups based on shared characteristics, preferences, behaviors, and many other factors.

A customer segmentation example would be a retail company categorizing its customers into segments like “price-conscious bargain hunters,” “luxury-seeking trendsetters,” and “family-oriented value shoppers,” to tailor marketing strategies and offerings to each group’s unique needs.

How do I collect data for customer segmentation? 

There are many methods you can use to gather data for customer segmentation. For instance, you can use surveys, interviews, and social media monitoring to understand customers’ preferences, behaviors, and demographics. You can also use CRM data, purchase history, and website analytics to gain insights into customer interactions. Once you gather enough data, you can start studying it for insights and create distinct customer segments.