Tech Takes

Mastering Customer Segmentation for Business Growth

June 20, 2024

Introduction

No two customers are exactly alike. And what your brand does can serve a wide variety of people - which is good for business, but a major marketing challenge. How do you market yourself to so many disparate consumers?

The reason customer segmentation is so important is that it allows businesses to tailor their approach and message to the audience. The phrase “you can’t be everything to all people” really resonates with segmentation especially if a company’s product or service has multiple uses for different types of customers. One message will not apply to everyone and that is where, in my opinion, many businesses go wrong with their marketing.

Having separate smaller groups to market to should make marketing easier and in turn provide insights which can then turn into action. For example, a tennis ball would appeal to tennis players (for tennis!) but also dog owners (for their dogs!) Therefore, this company would have 2 distinct customer segments and the messaging would be totally different for each group.

One of the most effective ways to differentiate your business is by segmenting your customer base and catering to individual needs and expectations. Read on to find out what customer segments are and how to make them work for your business.

According to statistics, segmented and well-targeted email campaigns deliver a staggering 77% of email return on investment (ROI). Furthermore, 78% of marketers consider subscriber segmentation the most effective email marketing strategy.

A Deep Dive into Customer Segmentation

A customer segment is a group of consumers who share similar characteristics and needs. By identifying and understanding your different customer segments, businesses can tailor their products, services, and marketing efforts to better meet the specific needs of each segment. This can lead to more effective marketing, increased customer loyalty, and better overall profitability.

What are the benefits of customer segmentation? 

Segmenting customers goes beyond putting people into categories. When you segment customers, you learn about them deeply and use that info to create content for each segment's unique needs and challenges.Segmenting can improve your customer service and support efforts and help internal teams prepare for challenges different groups are likely to experience.

It also allows you to communicate with segments of customers through preferred channels or platforms and helps you find new opportunities for products, support, and service efficiently.

Let's go over some common benefits of customer segmentation.

1. Get a competitive marketing edge:

Maximoff points to Driveline, a retail brand that Belkins worked with to generate leads. To get the best results, Maximoff’s team split Driveline’s ideal customers into two segments. The first was retailers - the second, brands.

2. Target customers better with paid campaigns:

Whether you’re running PPC, LinkedIn ads, or Facebook ads, optimizing your campaign gets you a better return on your ad spend. This is one area where customer segmentation shines.Segmentation lets you engage the right customers with relevant ads, which can lead to higher click-through rates, conversions, and sales. This also ensures you spend more effort on customers that provide a high return while lowering your ad spend for less profitable customer segments.

3. Improve your email nurture campaigns:

What appeals to Gen Z might be unappealing to millennials. The same applies to entry-level workers versus directors in the same field. These are all different segments of people with unique ways of thinking and know-how.Understanding these customers lets you segment them in your email list so you can send relevant nurture emails that endear them to your brand.

What are the Types of Customer Segmentation Models?

Successful customer segmentation is not a one size fits all approach. There are a number of different models to explore:

1. Demographic Segmentation:

Demographics are population-related characteristics such as income, education level, gender, and age. The various demographic characteristics can be used together to create segmented customer groups, most useful to brands that sell a variety of products. 

For example, a company that sells both mid-range and luxury bath products for women and men may segment their customers by gender as well as income. This way they can create ads that target women with an annual income of $150,000 and separate ads for men with an annual income of $70,000.

2. Behavioral Segmentation:

Behavioral segmentation groups consumers together by habits and behaviors, rather than external demographic factors. For example, purchase history and preferred social media platform usage. You can focus ads on a certain social platform to reach and/or create reminder or sales emails to regular or repeat online buyers. 

3. Psychographic Segmentation:

Psychographic segmentation dives even deeper into the internal workings of your consumers by grouping them together based on psychological characteristics, including personality, habits, beliefs, and interests. 

Psychographics are great for lifestyle brands that want to align themselves with consumers who live or aspire to live the lifestyle that the brand promotes. Brands that sell outdoor camping gear, for example, want to connect with outdoor and travel enthusiasts.

4. Geographic Segmentation:

Geographic location is important to brands in a number of industries. Real estate agencies, for example, want to connect with homeowners selling their homes, potential buyers, and people looking to relocate to a specific area. 

Other businesses may sell products tailored to people living in particular climates. Understanding the needs and challenges of consumers living in different locations is a core element of successfully marketing your products or services in those locales.

5. Technographic Segmentation:

Technographic segmentation, or creating subgroups and customer profiles around the technology your consumers use, is becoming increasingly popular. As more businesses have moved their operations online, this has opened the door to growth in industries like SaaS and online marketing analytics. 

Technographic segmentation lets you target consumers that use different types of software or online services in a highly personalized fashion.

6. Firmographic Segmentation:

Millennials vs. Gen X’ers vs. Gen Z vs. Boomers – we’re becoming more and more comfortable with the idea of these generational divides. So much so that firmographic segmentation, or creating subgroups simply around the decades or eras into which your consumers were born, is also on the rise. 

And it makes sense – someone born in 1980 will be at a different stage of life, with different needs and concerns, than someone born in 2000.

7. Needs-Based Segmentation:

Needs-based segmentation begins with a simple question: Who needs what you’ve got? 

Dividing your consumers into groups around their needs is a great way to keep your marketing messages focused tightly on your products or services and how they meet those needs. A clothing company can market office casual wear to business professionals, athletic gear to yoga enthusiasts, and kids' clothing to families.

8. Value-Based Segmentation:

This model takes the lens and focuses it more directly on what serves your brand. Which group or groups of customers are currently providing the most value – the most return business, the highest return on your ROI? 

Using lifetime value as your measuring stick, you can target your marketing messages to the consumers that are your biggest supporters and focus on continuing to build that loyalty and trust.

Major Challenges In Customer Segmentation

We have seen the importance of customer segmentation, but just doing customer segmentation is not enough. There are many challenges in doing proper customer segmentation, especially for businesses. Here are the challenges to customer segmentation:

1. Multiple Decision-Makers To Segment:

To deal with many decision-makers. customers have to go through many channels before finalizing the purchase so it becomes difficult exactly who you are trying to segment.The hierarchy of decision-makers in your client’s business makes it even more complicated. You have to fulfill all their criteria before a deal can be finalized. Otherwise, it increases customer acquisition costs for your company when you are trying to get new customers. 

2. Complex Products And Longer Purchase Finalizing:

Because there are so many decision-makers, it takes a long time to finalize the purchase in a business. It might take your clients months as they are trying to go through the process of vetting your competitors.This customer segmentation is even more difficult because you have to plan for the long run. And in doing so, there are times when the deals can be canceled midway through. That is why the longer purchase period makes it difficult to segment your customers properly.

This complexity in customer segmentation is not helped by products and services being a bit more complex than other products. For example, if you are a SaaS company, your clients might not understand why they need your product. Or, they might not understand why your product is better for them than other competitors. Similarly, if you are in the wholesale ecommerce business, clients might not fully understand how your product is better than the rest. That is what makes it difficult to efficiently segment customers. 

3. Smaller Target Audience And Overlapping Segmentation:

Smaller might seem easier to segment, but the limitation is the data available. A larger target audience yields more data that you can do proper analysis on the whole market. However, the smaller audience leads to a low volume of data available to accurately segment customers properly.

4. Volatile Market Conditions:

What makes customer segmentation different for  businesses is the volatility of the market. Demands may increase or decrease without any warning, even on a day-to-day basis. Now take this volatility and think it through a customer’s mindset. If demands shrink, they might no longer want to do business with your business. This makes meeting customer expectations tough and proper customer segmentation even tougher. 

You might even wonder “Why put customers into different segments for a business when it is so difficult?”. That is where segmentation strategies can help overcome these challenges.

Customer Segmentation Strategies To Overcome Challenges

1. Availability and reliability of marketing data:

  • The best way to help ensure robust and accurate data is to rely on multiple sources for collecting data, including customer surveys, CRM systems, third-party data providers, and social media insights. 
  • A diverse range of sources can help you gather more data and cross-verify the data you already have.

2. Lack of data expertise:

  • Data expertise can’t be faked, so the key to addressing this challenge is to invest in training programs focused on data analytics and interpretation. 
  • This should be done for anyone involved in working with market segmentation data. With these additional skills, segmentation efforts will be more precise and therefore more effective.

3. Complex buying cycles and decision-making structures:

  • Perhaps the most powerful thing market segmentation enables is personalization of marketing messages. So instead of segmenting your target customers by industry, company size, or any other high level factor, segment them by role.
  • This will help you speak directly to and build relationships with individual stakeholders regardless of where the overall organization is in their specific buying cycle.

4. Fluid market conditions:

  • Continuous market research can help you understand which portions of your target markets are known to be in flux and in what way. 
  • You can then divide your segments so they present one type of message to targets more likely to be interested in buying and another type of message to targets who may be interested in a year or two.

5. Market fragmentation:

  • One approach to correcting this is to conduct regular market analysis to identify emerging sub-segments early.
  •  When you discover a new fracture in the market, you can adjust your segmentation accordingly. 
  • This results in more, smaller segments, which allows you to be more nimble in how you target markets.

6. Failure to align with broader marketing strategy:

  • Segmentation needs to be weaved into the strategic planning process.
  •  Before the strategy is complete, you should be able to identify which market segments are high value to your brand. 
  • This will help you formulate your marketing more effectively, since you will already have a clearer understanding of your audience and what their needs are.

How to Adapt Your Segmentation Strategies Over Time

As your business grows and evolves, it's important to adapt your segmentation strategies to keep up with changes in the market, customer needs, and your business itself. Here are a few steps you can take to adapt your segmentation strategies over time:

  1. Re-evaluate Customer Segments: Regularly reevaluate your customer segments to ensure that they still accurately reflect your target market. As your business grows and changes, your customer segments may also change, so it's important to stay up-to-date.
  2. Gather Feedback: Regularly gather feedback from your customers to understand their needs and preferences. This feedback can be used to make changes to your segmentation strategies and ensure that you are targeting each customer segment effectively.
  3. Monitor Market Trends: Stay up-to-date on market trends and changes in consumer behavior. This information can be used to make adjustments to your segmentation strategies and ensure that they are relevant and effective.
  4. Analyze Data: Regularly analyze data related to your customer segments, such as sales, customer feedback, and conversion rates. This data can help you understand the effectiveness of your segmentation strategies and make adjustments as needed.
  5. Experiment and Test: Don't be afraid to experiment with new segmentation strategies. Try different approaches and test the results to see what works best. This process of experimentation and testing can help you continually improve your segmentation strategies over time.

Conclusion

In conclusion, adapting your segmentation strategies over time is crucial for staying relevant and effective in the market. By reevaluating customer segments, gathering feedback, monitoring market trends, analyzing data, and experimenting with new strategies, you can ensure that your segmentation strategies are up-to-date and effective.Customer segmentation allows your business to improve relationships with your customers. It helps make marketing decisions easier to make and more efficient. 

But customer segmentation is challenging to pull off. That is why overcoming challenges in B2B customer segmentation is made easier when you know the right strategies to use, even when you combine the strategies. With the right data analysis of your customers, implementing customer segmentation is made easy. Segmentation strategies are a powerful tool for small businesses to target their market effectively and increase conversions. 

It's important to regularly adapt your segmentation strategies over time by reevaluating customer segments, gathering feedback, monitoring market trends, analyzing data, and experimenting with new strategies. By implementing effective segmentation strategies, small businesses can increase their success in the market and grow their customer base.

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