Customer Segmentation: Types, Analysis and Strategy

What is customer segmentation? 

Customer segmentation is the strategic process of categorizing a company's customer base into distinct groups characterized by shared attributes, behaviors or preferences. This helps in delivering more personalized and relevant experiences to each group. 

This practice often involves terms like "target audience," which represents the main group of consumers interested in a product or business. The target audience is then further divided into different segments based on common traits, like industry or specific events, known as cohorts. By grouping customers into these categories, you can tailor your marketing and communication efforts for each group. Each segment receives messages and strategies customized to their unique needs and preferences.    

Remember, identifying key differences among customers such as demographics, geographic location, psychographic profiles and behavior patterns is important before you begin your customer segmentation exercise. These factors are crucial in influencing your approach to customer segmentation, enabling the development of more robust and personalized relationships with your diverse customer base. 

Why is customer segmentation important? 

The primary goal of customer segmentation is to enhance customer engagement, with the ultimate objective being increased conversions and sales. Additionally, segmenting your customers provides valuable insights into customer preferences and needs, enabling you to refine your marketing materials and strategies for maximum effectiveness.   

Personalization trumps one-size-fits-all  

One-size-fits-all marketing doesn’t work anymore. Almost 61% of customers, have said that they would consider switching to a competitor after just one impersonal experience. Customer segmentation helps in delivering the right message to the right customer at the right time. This, in turn, enables your business to understand customer needs and motivations — leading to not just better customer experiences but also more effective and cost-efficient campaigns, such as targeted ad campaigns that decrease acquisition costs. 

Maximizing resources and loyalty  

Customer segmentation allows businesses to efficiently allocate marketing resources, making cross-selling and upselling opportunities more apparent. Its personalized nature helps you create targeted marketing campaigns, ultimately boosting customer loyalty and customer retention. It also allows your organization to anticipate changes in customer behavior and evolve with them. 

Interesting Read: Your ultimate guide to building customer loyalty in 10 easy ways 

Action-centric customer segmentation  

Customer segmentation is critical for understanding how different marketing actions influence customer lifetime value (CLV). Instead of focusing solely on short-term value, you must assess the long-term impact of your marketing actions. This "action-centric" approach groups customers based on their long-term value, enabling companies to make more informed marketing decisions. 

Driving innovation  

Apart from helping understand customers' current needs and desires, customer segmentation also gives you an idea regarding what products and services are working and what aren’t and how you can go about improving them. In addition, you can enhance brand loyalty, increase customer lifetime value and deliver one-on-one experiences at scale, in line with evolving customer needs. 

Customizing customer interactions  

More than just categorizing people, customer segmentation revolves around understanding customers holistically and creating content that addresses each segment's unique needs and challenges. It enhances customer service and support, enabling your teams to prepare for unique challenges faced by different groups. Moreover, it facilitates tailored communication through customers’ preferred channels and unlocks new approaches for product development and service improvements. 

Effective targeting and communication 

Lastly, segmentation equips marketers to fine-tune their strategies for diverse audience subsets. This approach extends to both communications and product development. It enables the creation of targeted marketing messages customized to each group’s unique needs and interests. It also helps identify the most effective communication channel for each segment and drives product improvements, customer relationship enhancements, pricing strategies and more. 

Types of customer segmentation models 

Customer segmentation divides customers into different groups based on various factors. Check out the table below to see what those factors are. 

Demographic: This is all about grouping customers based on life factors like age, gender, occupation, income and marital status. For instance, a bookstore recommending children's books to parents and offering appropriate reads to different age groups. 

Read More: Social Media Demographics Every Marketer Must Know in 2023 & beyond 

Geographic: Here, customers are sorted by location or region. It includes factors like location, preferred language and cultural elements. For example, marketing swimsuits to Florida-based customers all year and switching to winter coats for New Yorkers when it gets cold.   

Behavioral: This type groups customers based on their online behavior such as previous purchases, purchase frequency and product interests. For instance, sending exclusive offers to customers who regularly purchase the same product or recommending related products to those who have shown interest.   

Psychographic: This involves understanding customers' attitudes, values, lifestyles and interests. It segments customers by their hobbies, values, personality traits and more. For example, grouping customers who love hiking and then having another group filled with those who prefer going to the gym, which is useful for a health supplement brand. 

Technographic: In this model, customers are grouped based on their technology preferences, online behavior and devices they use. For example, sending SMS alerts to customers who prefer text messages or reaching out to customers who found the brand through social media platforms like Instagram or TikTok on their preferred platforms. 

Value-based: This model segments customers based on their satisfaction scores, purchase frequency and the overall value they bring to the business. For instance, offering exclusive rewards to loyal customers or providing special incentives to those who make repeat purchases. 

How to perform a customer segmentation analysis in 10 steps 

Customer segmentation analysis helps businesses connect more effectively with their customers. By breaking down your customer base into distinct groups, you can tailor your strategies to cater to the specific needs of each segment. To get started, follow these steps:  

Step 1: Collect relevant data 

Look at the bigger picture by examining industry-wide data to gain a broader perspective on market trends, competitors and customer behaviors. Then, focus on your own customer base. Gather details like demographics, purchase history, behavior patterns and any other relevant information about them. 

Step 2: Identify common traits 

With data in hand, start identifying common traits among your customers. This could be age, gender, location, buying habits or other characteristics. For instance, you may find that a group of customers tends to make larger, more frequent purchases, while another group prefers occasional, smaller transactions. 

Step 3: Select segmentation variables 

Now, it's time to choose the variables you'll use to segment your customers. These traits could be simple facts about them (like age), what they like (their interests), or how they behave (like what they buy or do online). Think about what matters most for your business goals. 

Step 4: Use customer experience data 

To better understand your customers, collect data on their experiences. Use both direct and indirect streams of data collection: 

• Direct streams: These involve obtaining data through customer surveys, feedback forms or post-purchase surveys, providing direct responses from customers 

• Indirect streams: Insights derived from data not obtained directly, such as social listening or omnichannel analytics, can point to crucial trends in customer behavior 

Step 5: Create distinct customer segments 

Based on the traits you've identified, group your customers into segments. For example, you find that your younger customers show a stronger preference for one product, while older customers have a different product preference. You can use these segments as the basis for your targeted marketing and customer engagement. 

Step 6: Align with objectives 

Make sure these segments align with what you want to achieve as a business. Your customer segments should be in sync with your business goals for your strategies to be effective. For example, if your goal is to gain a competitive advantage, you will segment your customers in a manner that helps you understand what sets you apart from your competitors.   If you're introducing a new product, customer segmentation can help target the audience who are most likely to buy it. Similarly, when expanding into new markets, your segmented customer data can prove useful in understanding and meeting the specific needs of those markets. It is worth a mention that a global brand may have broader segments targeting a wide range of customers, while a niche business may have more specialized segments. 

Step 7: Personalize the experience 

Use your segmented data to personalize customer interactions and close any experience gaps. This means understanding their unique needs and preferences. If you do this right, it will ensure that your customers have a smooth and satisfying experience with your brand, which can foster loyalty and retention. 

Step 8: Monitor and adapt 

Your customer segments should remain flexible. Regularly monitor and adapt them to changing market conditions and customer behaviors. Are they still accurate, or do they need adjustments? Compare how well they're doing against your business goals. Be open to feedback from your internal teams and customers. 

Step 9: Put your customer segments into action 

Once you've defined your segments, put your findings into action — to shape your marketing, sales and customer service strategies. Customize your messages and approaches to resonate with each group of customers. 

Step 10: Evaluate and improve 

Continuous improvement is key. Always assess the effectiveness of your strategies. Are your segments performing as expected, or are there areas that need enhancement? Customer behaviors can evolve, and market conditions can change, so be ready to adapt and improvise your segmentation strategies. 

8 step-by-step tips to segment customers effectively 

It's essential to employ a sound strategy for segmenting your audience to effectively engage your customer base. Here's how it’s done.  

1. Start with clear goals 

Your customer segmentation strategy should align with your overall business goals. Knowing what you want to achieve as a company helps you: 

• Organize your customer data 

• Communicate more effectively with different customer groups 

• Identify your top potential customers 

2. Define your customer segmentation goals 

Think about the goals for your customer segments. If you have buyer personas (profiles of your typical customers), it's easier. For example, if it’s a small business owner, a CEO or a mid-level business owner. Assign specific conversion goals to each persona based on your products and pricing. This helps you tailor your approach for each group. 

3. Prioritize your goals 

In customer segmentation, setting priorities is essential. With a lot of data, it's easy to get overwhelmed. That’s where prioritization comes into play. Prioritize by: 

• Starting with the largest segments — these segments often have the most substantial impact on your business, so it makes sense to address them first 

• Ranking segments by performance, like purchase value. By doing so, you can identify the high-performing segments that are bringing the most value to your business 

Setting these priorities not only ensures that you allocate your resources effectively but also helps you streamline your marketing efforts. This way, you can tailor your approach to engage with the most valuable customer segments and maximize your returns. 

4. Plan your segmentation 

For each customer segment project, follow these steps: 

• Set clear objectives: Define your goals for each segment project. How will you measure success? What's the timeline? 

• Involve stakeholders: Discuss with internal teams, employees and other relevant parties to avoid siloed projects 

• Define the scope of the project: Set clear boundaries, including the number of segments, data sources, resources and budget 

• Define project deliverables: Specify what you'll achieve with each project, like segment profiles and workflow wireframes 

5. Collect and organize customer data 

Gathering and sorting customer data is important in segmentation. It equips you with valuable insights about your customers. This data includes details like where your customers are located, their age groups, purchase history and how they behave online. To do this efficiently, businesses often rely on advanced tools like Sprinklr. With a thorough analysis of this data, you can look for patterns, like locations, age ranges or gender ratios. It helps you create meaningful segments. 

6. Create your customer segments 

Build segments using the data you've collected. Remember: 

• Keep them user-friendly and clear by avoiding complex categorizations 

• Consider using machine learning to save time 

• Make sure the segments are large enough to make a real impact on profits 

• Focus on stable segments to ensure long-lasting value 

• Ensure your segments relate to your existing products or services 

• Combine different models like behavioral and demographic to create more effective segments 

• Don't forget about your loyal customers – they're a valuable segment too 

7. Target and market to your segments 

Creating segments isn't enough — you need an action plan. Use the data and insights from your customer segments to: 

• Craft customer-centric communications 

• Tailor your marketing strategies for each segment 

• Customize the content and its scheduling 

• Enhance the overall customer experience 

8. Regularly analyze your segments 

Change is constant, so you need to analyze your segments regularly to ensure they continue to be effective. You can achieve this by: 

• Reviewing customer data to spot any shifts in their behavior or preferences 

• Using data analytics tools to track the performance of each segment 

• Conducting periodic customer surveys or feedback collection 

• Staying updated on industry trends and market dynamics to adapt your segments accordingly 

Make customer segmentation easier than ever — with Sprinklr  

Sprinklr's audience insights tool leverages real-time digital data to refine customer segmentation by identifying interests and affinities. This facilitates custom segment creation — leading to new business opportunities and enhanced ROI. It also offers advanced analytics for demographics and preferences, custom segment building from social signals and insights through pre-built dashboards.  

Additionally, Sprinklr's AI-powered social listening tool taps into 500 million daily digital conversations to supercharge customer segmentation. It enables proactive listening across various channels, ensuring relevant conversations are engaged with effectively. With historical insights dating back to 2014, it's easier to understand customer behavior. You can use this data to refine customer segments, improve marketing, content and overall customer experiences ultimately boosting your business’s sales and revenue. 

Final thoughts  

We have now learned that customer segmentation is a powerful technique to optimize your marketing campaigns and increase conversions. Another plus is that it ensures your content and strategies resonate with your audience. By keeping a finger on the pulse of your customer needs, you can provide a more personalized and engaging experience, ultimately leading to better business outcomes. So, make the most of customer segmentation to connect with your audience, enhance ROI and stay competitive.