Customer segmentation: Definition, benefits, & methods

What is customer segmentation?

Every customer journey is unique, and a one-size-fits-all approach won’t work for everyone. Today, consumers demand a 1:1 personalized customer experience from brands, and this is where customer segmentation is key to a marketing team’s success.

Customer segmentation is the organization of customers into specific groups based on common characteristics such as demographics and behaviors to deliver more relevant customer experiences. 

This segmentation process allows businesses to align their marketing strategies with customer interactions to better understand how to market more effectively to each group of customers.

How does customer segmentation work?

In a customer segmentation strategy, marketers create groups of customers according to how and why they purchase. Using segmentation, businesses can gain a deeper understanding of the needs and buying behaviors of their customer base and discover what is important to each segment.

Customer segmentation uses key differentiating factors to divide customers into different groups — the most common of which are customer demographics, geographical location, psychographic information, personality characteristics, and behavioral information. (We’ll look at each of these in more detail.) 

These smaller, more specific segments are then targeted with relevant messaging. Tailored marketing efforts improve campaign effectiveness with messaging that is more likely to lead to conversion.

Benefits of customer segmentation

A well-implemented customer segmentation strategy holds many benefits for businesses.

Fine-tuning your messaging

Messaging that directly relates to your customer base will grab their attention and cause them to engage with your brand more, increasing the chances of conversion. 

Customer segmentation helps you identify how to communicate with your customers in the most effective ways using the most effective means. The more relevant your messaging is to your customer’s needs, the higher their engagement will be with your products or services.

Improving the customer experience

Customer segmentation allows businesses to create new products and services that customers want and give them the experiences they are looking for. Personalized content and messaging matched to a particular customer segment can make those customers feel appreciated and understood. A customer segmentation strategy can tell you what emails customers want to receive, if they prefer to buy online or in-store, and even whether they prefer to interact with a chatbot or a real person for customer support.

Increasing your ROI

Segmenting customers allows you to create content and messaging that speaks directly to specific segments — helping you better understand how to turn prospects into customers and increase the purchasing frequency of existing customers. 

It can also highlight who your most valuable customers are. They might be high-income users who buy your more expensive products, or they could be more dependable long-time customers or subscribers. 

Narrowing down who your most profitable customers are can help you make the most of your marketing campaign budget to increase your ROI on marketing spend.

Four types of customer segmentation

The four most common types of customer segmentation models are demographic, psychographic, geographic, and behavioral.

Demographic segmentation

Demographic segmentation involves categorizing your target audience into segments based on information such as age, gender, income, and job title. In B2C marketing, this form of segmentation allows you to present personalized offers such as clothing recommendations based on age or gender.

 In B2B marketing, it allows you to target individuals based on pain points associated with their job title, for example. Examples of demographic information include the following:

• Age
• Gender
• Income
• Job title
• Religion
• Marital status

Psychographic segmentation

Why do people purchase your products or services? To find the answer to this question, you need to understand your customers’ needs, habits, and lifestyles.

Psychographic segmentation creates different customer groups based on psychological characteristics that influence their buying habits, such as personality, lifestyle, social status, political views, and interests. 

Psychographic data can be obtained from forums, social media activity, and purchase behavior, as well as through your own research, such as conducting surveys. Note: It’s more important than ever to use as much zero- and first-party data as you can instead of relying on third-party data.

Marketers often combine psychographic data with demographic data to create buyer personas.

Psychographic information can include these characteristics:

• Personality
• Lifestyle
• Social status
• Attitudes
• Activities
• Interests
• Opinions
• Habits
• Political views
• Hobbies

Geographic segmentation

Geographic segmentation divides customers based on the locations where they live or shop. Segmentation can be done by country, region, city, time zone, or other geographical factors such as cultural considerations, populations, and climate. 

The premise of geographic segmentation is that people in the same locations have similar needs, behavioral patterns, and customs. 

By understanding these needs, you can create more relevant marketing messaging so customers are more likely to buy. For example, local climate or customs can have an enormous influence on demand.

If you are a global brand, using geographic segmentation allows you to offer winter clothes to your customers in the north while sending swimwear offers to those in the tropics. Here are some examples of the information used for geographic segmentation:

• Location
• Climate
• Culture
• Population density
• Urban vs. suburban
• Language

Behavioral segmentation

Behavioral segmentation divides customers into different segments based on their behavioral patterns as they interact with your company. 

Behavioral data may be related to the customer lifecycle (e.g., buying a home), seasonal patterns (e.g., holiday shopping), or previous interactions with your business (e.g., purchase history or responses to marketing messaging). 

Using a behavioral segmentation approach, you can track specific behaviors such as opening an email, completing a purchase, cart abandonment, or raw data from clicks as the user moves around the business website. This information helps you gauge metrics such as customer retention, engagement, and experience. 

With this data, marketers can identify the most loyal and valuable customers, uncover roadblocks in the customer journey, and enhance the customer experience for new and existing customers. Behavioral segmentation can make use of the following information:

• Purchasing behavior
• Customer journey stage
• Customer loyalty
• Customer satisfaction
• Engagement level

Customer segmentation examples

Here are some examples of customer segmentation in action.

Using customer income to highlight products based on price point

Disposable income can influence which products customers purchase and how often they purchase. A demographic segmentation strategy that targets potential customers based on income can help you focus on customers who you know can afford your product, and prevent you from spending valuable marketing dollars on those unlikely to buy.

Recommending new items based on customer personality

Using psychographic segmentation, an online shoe store might discover that many of its customers who buy running shoes are environmentally conscious. The store could then target these customers by suggesting environmentally friendly shoe brands.

Showing different products depending on where the customer is based

Using geographic segmentation, an ecommerce store can display different products to customers based on where they live. This could mean displaying higher-end products to people living in more expensive areas such as New York or San Francisco, or, for global companies, showcasing winter gear to customers in North America in the fall while showing swimsuits to those in the southern hemisphere.

Distinguishing between first-time visitors, returning visitors, and existing customers

A behavioral segmentation process can help you tell the difference between first-time visitors to your website, those who have visited multiple times but never purchased, and actual customers, so you can market to each one specifically. 

You might offer a first-time visitor a site-wide discount coupon but send a returning visitor a coupon specific to an item they keep returning to the site to view. Existing customers could be invited to join your loyalty program.

Considering data and privacy laws when it comes to customer segmentation

In today’s world, the tightening of privacy laws around data significantly impacts how marketing teams can collect and use customer data. Additionally, consumers must also be able to trust brands with their data to feel comfortable buying from them.

To keep in line with government laws and remain ethical when it comes to customer data usage, consider using a cloud data platform or warehouse in your MarTech stack, which collects data in one place and keeps it secure.

Customer segmentation with a Customer Data Platform (CDP)

In this post we’ve looked at the basics of customer segmentation, what it means, and how it can benefit your business. But without a comprehensive customer data management solution, the process of collecting customer data, separating it, and segmenting it into usable categories can be long and complex. 

A customer data platform (CDP) ingests data from a cloud data platform like Snowflake and creates a unified database and comprehensive customer profiles for all your company’s data sources to give you a 360-degree view of your customers. Consolidated customer profiles allow marketers to create custom segments to increase personalization and tailor communications. 

CDPs can also ingest data from other platforms — such as customer relationship management (CRM) tools, data management platforms (DMPs), and multichannel marketing hubs (MMHs)—for greater audience segmentation and personalization.

Using AI-powered customer segmentation within a CDP

AI-powered customer segmentation is revolutionizing the way marketers understand their audiences. AI and machine learning algorithms are capable of going far beyond traditional demographics to analyze enormous datasets of customer behavior. 

They can identify intricate patterns, connections, and trends that would take humans much longer to uncover, if they could be found manually at all. This allows businesses to create highly specific customer segments based on shared behaviors, preferences, and purchase histories.

The precision unlocked by AI-powered tools makes marketing campaigns laser-focused. Marketers can use their CPD to understand the exact product features that resonate with a specific group, or quickly learn the type of messaging that will pique their interest. 

This level of targeting eliminates wasted resources on generic campaigns. AI segmentation helps to deliver the right messages to the right people at the right time, significantly increasing the chances of engagement and conversion.

Sign up for a demo to learn more about how Simon Data’s customer data management solutions can help you segment your customers and improve your messaging and customer experience.