Customer Segmentation: How to Segment Your Customer Base

Charlie Mitchell introduces the basics of creating a customer segmentation strategy and the many benefits that such a strategy may bring.

What Is Customer Segmentation?

Customer segmentation is an exercise in which customers are divided into groups based on certain traits that they share.

Most often, these segments are very basic. Dividing customers by value, recency and channel choice is particularly common and quite simple to do.

However, models can become much more sophisticated, as customers can be grouped by personality type, interests and purchasing habits too.

Whatever the case, companies use segmentation to better manage customer relationships. This may bring many benefits…

Benefits of Customer Segmentation

Matching people by geography, personality type or even attitudes could help to build better rapport across the contact centre.

In terms of customer experience, segmentation enables sales, proactive messaging and retention campaigns to all be designed for certain customer segments.

This means that each campaign can – to a certain degree – be personalized, increasing its chances of success.

Then, think about call routing. Matching people by geography, personality type or even attitudes could help to build better rapport across the contact centre.

Also, high-spend customers can be routed through to a quicker queue to receive improved customer service, protecting their potential value.

Cross-selling and upselling campaigns can be refined too, perhaps focusing on high-spending customers or matching a customer segment to a particular product.

Finally, customer service could also be enhanced through a better understanding of the challenges that each segment is likely to face and finding fixes to best match their needs.

Common Customer Segmentation Models

Most often, a company will segment customers based on demographic or geographic data.

Of course, geographic data will segment customers on the country, city or county that they’re from.

Demographic data, on the other hand, will divide customers by traits such as:

• Age
• Gender
• Profession
• Marital status
• Income

Unfortunately, many organizations will only segment customers using this data because it’s generally easy to get a hold of. A quick look at the CRM system will give a company all the information they need.

However, there should always be an overarching goal to a customer segmentation project.

When this goal is established, an organization may realize that it would like to segment customers through different types of data. Examples can be found in the table below.

Once this is established, segments can be targeted right across the organization. From the contact centre and sales to marketing, everyone should understand each segment. This will help them to effectively target customers through different initiatives.

5 Golden Rules for Customer Segmentation

We have five secrets to success for customer segmentation ready to share below.

1. Focus on the Behaviour

Don’t consider customer segmentation in terms of what can easily be tracked. The differences and similarities between customers should be looked at through the lens of what matters to change behaviour.

After all, if the customer segmentation exercise doesn’t result in a change in how customers behave across each segment, what was the point?

If the customer segmentation exercise doesn’t result in a change in how customers behave across each segment, what was the point?

First, establish the goal and which benefits, from our earlier list, would be good to achieve. This will then dictate ideal behaviour changes and how customers are split into different groups.

2. Think About What YOU Want

Christopher Brookes

What does your company focus on: acquiring new like-for-like customers or growing the existing customer base?

“In the first instance, your focus is on the “AS IS”, directing expenditure towards finding new similar customers,” says Christopher Brookes, Managing Director of Clientship.

“Later, the less valuable customers of today – who are less content – can be worked with to find out how to achieve gains in their value.”

The second option is significantly less costly than the first option, but it means looking at which segments are the most valuable differently.

3. Remember, Customers Have Different Identities

Customers deal with organizations under different identities. Sometimes, this means that they are placed into different segments by accident.

Customers deal with organizations under different identities.

For this reason, consolidating views is very important. Much easier said than done, of course, but it comes back to the concept of the 360-degree view of the customer.

Old hat, some may say. Yet, by failing to get to this stage, companies can end up with one customer becoming multiple customers across several segments.

4. Segments Are Fluid

Each time an interaction happens with a customer, their profile changes.

Sometimes, an interaction doesn’t even need to occur. Perhaps the customer’s age bracket, address or profession will change. This could influence how they’re segmented.

With this in mind, Christopher recommends that: “The segmentation approach needs to be dynamic (or tolerant) enough to manage this.”

5. Don’t Confuse Segments With Personas

Segments are different from personas; they co-exist but have different purposes.

Think of segments as quantitative, helping to group customers on one defining characteristic. Personas, on the other hand, are a more representative reflection of a customer’s feelings and behaviours.

With that said, when personas are created, customers are sometimes grouped via which persona they’re most like. This has caused widespread confusion, so let’s look into it further.

Segmentation vs. Personas

Amy Scott

A persona is a known cluster of customer needs, wants, frustrations, motivations and so on. It focuses on the human, psychological factors that make people tick.

After all, personas come from customer observation. This is very different from customer segments and allows the contact centre to analyse customers in greater detail.

“With segments, there’s a risk of overgeneralizing,” says Amy Scott, a Customer Experience Consultant at Sedulous Consulting.

“For example, some will consider older customers as technophobic, disregarding those who are really switched on, your “silver-surfers.” Personas do more to get under the skin of who your customers are.”

With that said, it’s easier to group customers within segments than it is to match them up with a persona. It’s also much more practical to use segments as the basis for outbound campaigns, call routing and retention strategies.

Discover how personas can be used to improve customer service in our article: Seven Top Tips for Service Design

Think Outside the Box – A Customer Segmentation Example

As previously alluded to, it’s easy to segment customers based on demographic, geographic and – in many cases – behavioural data. It is, however, much harder with other types of data. Yet it’s not impossible.

As an example, a large, UK online clothing retailer chose to segment its customers based on confidence.

Why confidence? Well, according to Christopher Brookes: “They found that there was a correlation between confidence and positive social noise. This would result in long-term value.”

“While you may ask, why not just segment on commercial value? The company’s business profile meant that no one spent a lot of money with them. Confidence was, therefore, deemed a better base for segmentation.”

It’s easy to segment customers based on demographic, geographic and – in many cases – behavioural data.

Sure, on the face of it, segmenting on confidence seems a tricky task. However, the retailer broke confidence down into a set of principles such as:

• I understand where my package is
• I understand the returns process
• I understand why this garment isn’t available

The retailer could then work to educate segments with low confidence and increase social noise, which resulted in more brand awareness and, ultimately, sales.

If the company had chosen a more traditional model of customer value, they would have missed this opportunity. Instead, they were brave enough to not be constrained by conventional thinking and were greatly rewarded for doing so.

Mistakes to Avoid With Customer Segmentation

The first mistake of customer segmentation is to confuse segments with personas. Christopher Brookes has highlighted three others below.

Segmenting on Actual Value, Not Potential Value

Take two sets of data. One highlights customer satisfaction levels and the other covers spend.

It’s easy to say that our best customers are those who are the most satisfied and are giving us the most money. That’s quite logical.

But what a company may find is that the ideal customer segment of the future is one that groups mid-satisfied customers, who typically spend less.

What a company may find is that the ideal customer segment of the future is one that groups mid-satisfied customers, who typically spend less.

Research how things could be improved and the difference these changes would make to the satisfaction rates of this segment. The outcome could be a bigger spend influx than if the company instead focused on those who were already happy and spending well.

Only Segmenting Customers Using Easy-to-Access Data

A classic mistake is to only use the data that the business has easy access to for segmentation.

For instance, let’s say a company doesn’t hold the data for their Twitter account. Instead, they spend a lot of time on Facebook and Instagram, so put all of their money into those areas to attract a certain customer segment.

However, if that organization had dug into their Twitter account details, they might have realized that these customers spend 95% of their time on this channel, compared to 5% on the others.

But because this information wasn’t there at the get-go, it was never used. This highlights the potential negative impact of overlooking certain data sources.

Sticking to Individual Silos

Collaborating across the business and getting stakeholders involved is so important.

Otherwise, a data analyst will stick to being a data analyst, without sharing insights when customers move from one segment to another.

Collaborating across the business and getting stakeholders involved is so important.

Different departments will also approach customer segmentation from different perspectives:

• Marketeers will think: “How will I market to this segment?”
• A customer experience person will think: “How will we fix what’s broken?”
• The contact centre will think: “What do I need to do in regard to providing specialized support?”

The biggest consideration is, therefore: how do we organize ourselves around groups of customers that have special requirements, so we can fulfil them and take the business forward?

Everyone needs to be united behind this strategy for segmentation to make a profound impact on customer service, across the board.

Key Takeaways

From spoiling those who have great potential spend to retaining those who are about to churn, segmentation has many potential benefits.

To be successful, start with a clear goal, segment wisely, and target those segments with unique content and support, before keeping a close eye on customer behaviour changes.

However, it’s easy to get segmentation wrong. Customers can switch segments without being tracked or may be placed in multiple segments.

To be successful, start with a clear goal, segment wisely, and target those segments with unique content and support, before keeping a close eye on customer behaviour changes.

Finally, make adjustments to those segments, while tracking the success of initiatives targeted at certain segments.

Find more insights into how companies can build better customer relationships by reading our articles:

• What Is Stopping You From Creating Great Customer Relationships?
• Recognize the Importance of Customer Loyalty
• Creating Memorable Customer Experiences With Emotional Intelligence

Author: Charlie Mitchell
Reviewed by: Jonty Pearce