Your products and services must be on point for your target customers to earn loyalty. Delivering top-notch customer experience by following best practices helps your company to retain and acquire customers effortlessly.
“Everything about your customer experiences starts with a good foundation of insights. Hire somebody to do segmentation and figure out how the brand fits in within a persona and into a customer journey map. We need to have a lot of empathy for the customer. Not everybody is close to the customer,” says Jorge Calvachi, Director of Insights at La-Z-Boy Incorporated, in Clootrack's 102 CX Expert report.
Gaining customer trust is crucial, and with the help of customer segmentation analysis, you can focus on serving groups of customers with common characteristics. Let's dive in to understand the fundamentals of customer segmentation analysis!
What is Customer Segmentation Analysis?
Customer segmentation is the process of dividing a customer base into groups of individuals that are similar in specific ways. The division can be made on the basis of demographics, behaviors, needs, and purchasing patterns. By segmenting customers, your company can better monitor marketing efforts and improve overall sales and profitability.
For example, a clothing retailer may segment their customers into the following groups:
-Age: Young (18-34), Middle-aged (35-54), and Senior (55+)
-Gender: Male and Female
-Location: Urban, Suburban, and Rural
-Purchase History: High-spenders, Medium-spenders, and Low-spenders
By segmenting customers into these groups, the retailer can gain a better understanding of their target audience and tailor their marketing strategy accordingly.
Once you segment the customers, you can analyze the customer data thoroughly and gain insights to focus your brand promotional strategies in the right direction. You can target your marketing efforts towards a specific customer segment by offering special promotions or discounts to that particular segment. Additionally, your company can use customer segmentation information to develop new products or services that would appeal to specific customer segments.
Why is Customer Segmentation Analysis Important?
Customer segmentation analysis leads to more efficient use of resources, increased profitability, improved customer satisfaction, and several benefits that result in the company's growth. It allows companies to understand and target their customer base effectively. With a proper segmentation strategy, you can comprehend where your customers are coming from, how they behave, and what they want from your brand so that you can act accordingly and generate higher ROI.
Here are the top 9 reasons why customer segmentation analysis is of utmost importance for your customer-related operations:-
1) Assist in Targeted Marketing
By dividing customers into specific segments, companies can create targeted marketing campaigns that are tailored to attract each group according to their needs and wants. Your marketing team can use this to make marketing efforts more efficient and effective, as the right message is delivered to the right people at the right time.
For example, a company selling outdoor gear may segment its customers into three groups:- hikers, campers, and hunters. By learning that a specific customer is a hiker, the company can send them marketing materials that are specifically about hiking equipment and trails. Similarly, the company could send camping-related promotions to the camping segment and hunting-related marketing assets to its hunting segment.
With an understanding of the specific needs of each segment, you can create a marketing strategy that provides more relevant and valuable offers to your customers, resulting in increased customer satisfaction.
2) Develop New Customer Solutions
If you apprehend the specific needs, wants, and pain points of each customer segment, your brand can create products and services that better meet the demands of your customers. Consistently furnishing customers with required solutions leads to increased customer lifetime value and, at the same time, provides new opportunities for revenue growth.
For instance, a company that sells home appliances may segment its customers into two groups: young families and empty nesters. By knowing that a specific customer is a young family, the company can create a new line of appliances designed to meet the needs of families with small children, such as appliances with child-proof features. Similarly, the company could create another line of appliance devices specifically designed for the needs of empty nesters, such as smaller appliances that take up less space.
By identifying the specific requirements of particular segments, you can develop new solutions to solve different customer issues and improve customer perception regarding your brand.
3) Create an Effective Pricing Strategy
You can segment customers and track their buying habits to create effective pricing strategies that serve the necessities of each group and bring profit to your organization. A robust customer segmentation strategy that values customer needs and prices the offerings accordingly will increase sales and revenue, as customers are more likely to purchase products and services tailored to take care of their interests and budgets.
To demonstrate, consider a company that sells luxury cars and segments its customers into two groups: business executives and retirees. Consider a specific customer to be a business executive. The company can create a special offer or promotion custom-tailored for the executive, such as a leasing program. Similarly, the company could develop a unique offer specifically designed to appeal to retirees, such as a program that allows them to purchase a car at a discounted price.
You can use segmentation variables and target potential customers with suitable pricing schemes to make them happy and increase profits and customer loyalty.
4) Provide a Competitive Advantage
By identifying the specific pain points of each segment, you can develop new solutions to solve the issues of the target groups by developing relevant solutions, which can be a differentiator from their competitors. Accurate segmentation can assist you in creating an effective marketing strategy and developing a better customer support system that would position you as a leader in your niche industry.
Furthermore, by grouping customers, you can also identify opportunities to create new products or services that your competitors have not yet offered. This can give you a competitive edge in the market, as you will be able to provide something unique to your customers.
Additionally, by creating successful segments, you can identify where the profitable customers are, and focus your efforts on these segments, which can also be a source of competitive advantage, helping you stand out in the crowded market.
5) Help in Providing Personalized Services
Your brand can serve customized solutions and experiences through personalized services as your customer care and sales team will be well aware of the traits of the target segments. Customers prefer personalization as it increases convenience and makes them feel heard. It indicates how much your company cares about the customers.
For example, a company that offers financial services may segment its customers into two groups: young professionals and retirees. By knowing that a specific customer is a young professional, the company can offer personalized financial planning services, such as investment options for those who are just starting to build their wealth. Similarly, the company could create an offer of retirement planning services specifically designed to meet the needs of retirees.
You can improve customer support and experiences by understanding the requirements of every segment and providing them with best-in-class customer experience personalization services.
6) Better Resource Allocation
With a properly functioning customer segmentation project, you can allocate the organization's resources to target the most profitable and valuable segments. The essential part here is you can easily decide the priority investments that can lead to increased efficiency and effectiveness as the resources will be directed towards the segments that are most likely to generate higher revenue and drive growth.
For example, a company that sells clothing may segment its customers into two groups: fashion-conscious young adults and budget-conscious families. By having the knowledge that a specific customer segment is a fashion-conscious young adult, the company can allocate resources towards marketing and sales efforts that target this group, such as social media advertising and influencer partnerships. Similarly, the company could allocate resources toward creating promotions that appeal to budget-conscious families.
Additionally, by comprehending the needs of defined segments, you can also optimize the inventory and supply chain operations by ordering and stocking the products that are most in demand by a diverse customer base. These activities will lead to cost savings and improved organizational efficiencies that will scale up your customer segmentation efforts.
7) Deliver the Best Customer Experience
You can learn about the journey patterns of your customers and their experiences at different touchpoints and create an offer according to the segmented group they belong to deliver the best customer experience. Taking actions based on customer segmentation, you can easily retain existing customers, as customers feel that the company understands and values their unique needs.
For example, a cosmetic company can perform segment analysis and divide its customers into two groups based on age group: Millennials and Gen Z. For the millennials, the brand can surround the customer journey with classic marketing and sales tactics and an energetic color palette of makeup products. Similarly, the company could create a customer experience specifically designed to meet the needs of Gen Z audiences, such as following the trends they follow and offering them bright-colored makeup products and services that match their energy.
By delivering the most pleasing customer experience, you will also gain positive word of mouth, recommendations, and a good reputation, which can also be a significant advantage for your company.
8) Boost Organizational Efficiencies
With an understanding of the wants and purchasing practices of each customer segment, you can streamline the internal processes and operations to better serve each group. This leads to increased efficiency and effectiveness in the ways your organization function and helps you attain an optimal level of performance in customer-related operations, such as marketing efforts, customer service, and overall operations, which reduce customer churn rate.
For example, a company that sells electronic devices may segment its customers into two groups: tech-savvy early adopters and price-conscious budget shoppers. By knowing that a specific customer is a tech-savvy early adopter, the company can streamline its internal processes to better serve this group, such as offering more advanced technical support and faster product delivery. Similarly, the company could streamline its internal processes to better serve price-conscious budget shoppers, such as offering more flexible financing options.
By improving organizational efficiencies through segmenting customers based on different traits they showcase, you can enhance the overall performance and productivity of the company.
9) Promote Customer-Centricity
By understanding the demands and expectations of specific customer groups, you can shift the focus from product-centricity to customer-centricity, which leads to increased customer happiness and help you achieve desired business goals faster by promoting customer-first culture in your organization.
For example, a company that sells banking services may segment its customers into two groups: young families and retirees. By knowing that a specific customer is a young family, the company can promote customer-centricity by creating a service offer that is tailored to this group, such as a family money-saving package for both parents and children. Similarly, the company could create a service specifically designed to meet the needs of retirees, such as a retirement plan package that covers long-term care.
Promoting customer-centricity helps your organizations to identify new opportunities for growth and innovation by understanding the evolving needs of the customers. This can result in increased customer advocacy, which in turn can drive more profitable growth for the company.
What are the Types of Customer Segmentation?
Here are 5 major types of customer segmentation:-
1) Demographic Segmentation
Demographic segmentation is a strategy that involves dividing a customer base into smaller groups based on characteristics such as age, gender, income, education, and occupation. This type of segmentation is often used in the retail industry, allowing businesses to create targeted marketing campaigns for retail customers.
2) Psychographic Segmentation
Psychographic segmentation is a strategy that involves dividing a customer base into smaller groups based on their values, attitudes, interests, and lifestyle. This type of segmentation goes beyond the traditional demographic characteristics and looks into the consumer's personality.
3) Behavioral Segmentation
Behavioral segmentation is a strategy that involves dividing a customer base into smaller groups based on their purchase behavior, such as their brand loyalty, willingness to pay, and usage rate. This type of segmentation looks at how customers interact with a product or service by analyzing customer behavior and preferences.
4) Geographic Segmentation
Geographic segmentation is a strategy that involves dividing a customer base into smaller groups based on where they live, such as by country, region, or city. This type of segmentation allows businesses to tailor their marketing efforts and products/services according to the customer requirements of specific geographic areas.
5) Value-Based Segmentation
Value-based segmentation is a strategy that involves dividing a customer base into smaller groups based on the value they place on the product or service. This type of segmentation looks at how much a customer is willing to pay for a product or service and how much they perceive it to be worth.
What are The Steps to Perform Customer Segmentation Analysis?
It is necessary to monitor the performance of your customer segmentation analysis and refine it. Creating segments helps you to ensure that your customer divisions are still accurate and that your strategies are still effective in reaching and retaining your customers and increasing brand loyalty.
Here is a 5-step plan to conduct an effective customer segmentation analysis:-
1) Identify Your Customer Segmentation Goals
The first step is to identify the goals and objectives to segment the customers. Ask questions, such as why you want to segment customers, which customer segmentation models you are going to use, and whether they be effective. Define how you will classify your customers. For example, divide them according to demographic characteristics such as age, gender, income, and education, as well as behavioral characteristics such as purchasing habits, brand loyalty, and customer lifetime value.
2) Know Your Customers
Understanding the customer base through their responses will make the process of customer segmentation analysis effortless, as you can easily figure out the channels that your customers prefer to interact with your brand the most. This would not let you miss any customer data sources for the analysis process.
3) Collect and Analyze Customer Data
Collect customer data that is relevant to the segmentation criteria. This can include data from customer surveys, purchase history, website analytics, and other sources. Use statistical tools such as cluster analysis or decision trees to group customers into relevant segments for further processing.
4) Identify and Evaluate Segments
Create a detailed profile of each segment, including information about their demographics, behaviors, and interaction patterns. It is important to validate the segments created by analyzing the data and profile by running surveys, interviews, or focus groups to evaluate that the segments are well-defined and accurate.
5) Take Action on Specific Segments
Develop a strategy for targeting each segment, including tailored messaging, products, and promotions. Implement the segmentation strategy, and monitor its effectiveness over time. Continuously track and evaluate the performance of the segments and the strategies implemented, and make adjustments as necessary.
3 Ways That You Can Use to Confirm if Your Customer Segmentation Analysis is on Track
Ensuring that the implementation of customer segmentation analysis works well for your brand is crucial for the success of your customer experience strategy. You must assure the particular solution you are going to provide to a customer segment aligns with your CX endeavors so that you deliver an exceptionally good customer experience.
Here are 3 ways that you can use to confirm if your customer segmentation analysis is on track:-
1) Monitor Marketing Efforts
Use social media analytics to monitor customer engagement with your brand on different platforms. This will give you a better understanding of how different segments interact with your brand online. Keep an eye on changes in the market and how they might affect your target segments. This will help you adapt your strategy as needed. Monitor your competitors to see how they target similar segments and learn from their successes and failures.
2) Keep a Check On CX Governance Strategies
Understanding the value of each customer segment over time will help you to prioritize your CX efforts and resources accordingly. Use analytics tools to track customer behavior, such as website visits, purchasing history, and engagement, to have a perfect customer experience governance system in your organization. This will help you comprehend how each segment interacts with your brand. Test different CX strategies for every customer segment to see what works and doesn't and make adjustments accordingly.
3) Align Segmentation Variable with Business Goals
Continuously align your segmentation and targeting with your overall business strategy and goals. Use A/B testing to test different marketing and sales strategies, messages, and channels to see which works best for each segment. Use the data you gather to update your segmentation analysis regularly to ensure that it remains accurate and relevant. Use metrics such as conversion rates, click-through rates, and ROI to measure the effectiveness of your marketing campaigns for each segment.
What are the Challenges of Customer Segmentation Analysis?
Here are 3 potential challenges that you might face during the process of customer segmentation analysis:-
1) Lack of Resources
Customer segmentation analysis without resources like limited data, tech stack, and necessary aid creates an imbalance in the segmentation process as the outputs are not as per the organization's requirements. For example, if a company does not have access to detailed customer data or does not have the budget for advanced analytical tools, it may be more difficult for them to accurately segment its customer base.
Solution:- Keep stakeholders' support by showing them the previous positive results and future strategies so that they do not hesitate to invest the required resources.
2) Incorrectly Defined Segments
Incorrectly defined segments can lead to inaccurate or ineffective targeting of customers. It happens if the criteria used to define the segments are not properly chosen or if the data used to classify customers into segments is inaccurate or incomplete. Additionally, if the segmentation is too broad or too narrow, it can lead to a lack of actionable insights and not delivering the expected results.
Solution:- Validate the segmentation through customer feedback and testing and regularly review and update the segments as necessary.
3) Difficulty in Integrating Segmentation
Difficulty in integrating segmentation limits the ability to effectively use the analysis findings to inform business decisions and improve customer engagement. One major difficulty in integrating segmentation is the lack of alignment between different teams and departments within the organization.
For example, the marketing team may identify certain customer segments as high-value, but if the sales team does not use the same customer segments, they may not effectively target those same customers.
Solution:- Establish clear communication and coordination between teams, and ensure that segmentation is integrated into the company's overall strategy and decision-making processes.
Leverage Customer Segmentation Analysis For Better Customer Experience
Customer segmentation analysis is crucial for any business looking to engage its target audience effectively and serve the best solution to a target customer. By identifying and understanding the unique characteristics and wants of different customer segments, your brand can tailor marketing efforts and strategies to reach and convert those segments without much hustle.
An effective customer segmentation analysis not only leads to increased sales and revenue but also helps to create a more efficient and effective business strategy overall. In addition to that, the customer segmentation process allows businesses to understand better their customers and what they are looking for in their products and services.
Companies can gain valuable insights into customer behavior and preferences by identifying patterns and trends among different segments. This information can be used to enhance products, services, and overall customer experience.
Furthermore, by identifying the most valuable customer segments, businesses can prioritize their efforts and resources to maximize return on investment. Overall, customer segmentation analysis is a vital tool for any business looking to stay competitive and grow its customer base.
Related Read:- What's Next for CX: 8 Customer Experience Predictions 2023.