An Introduction to Customer Segmentation

Sometimes referred to as market segmentation, customer segmentation is a method of analysing a client base and grouping customers into categories or segments which share particular attributes. Key differentials in segmentation include age, gender, education, location, spending patterns and socio-economic group. Relevant differentials are those which are expected to influence customer behaviour in relation to a business. The selected criteria are used to create customer segments with similar values, needs and wants.

When planning a targeted marketing campaign, it is also necessary to differentiate customers within these groupings according to their preferred means of communication.

The Benefits of Segmentation

Customer segmentation is an essential tool in customer relationship management, enabling businesses to market effectively to their customers. Businesses are expected to understand their customers and demonstrate their customer insights by sending only relevant, targeted communications to their customers. Customers want to feel valued and be treated as individuals, yet for anything other than perhaps the smallest of businesses this level of customer knowledge is impossible to achieve.

Segmentation also allows businesses to channel their resources appropriately. High value customers who purchase frequently and generate more revenue usually belong in a segment which is allocated a higher level of marketing spend.

Analysing customer demographics and psychographics gives layers of insights which help anticipate customers’ needs and plan new products and services. This in turn enables marketeers to target more accurately those customers or prospects who would be most interested in them.

Ongoing Review of Segmentation

Customer behaviour changes over time. Data analysis can be used to anticipate these changes in the customer lifecycle with predictive modelling. Therefore ongoing customer data gathering and analysis is essential to keep segmentation up to date and communications relevant.

As Michael J Croft mentions in one of his books, “The idea of dividing a market up into homogeneous segments and targeting each with a product and/or message is now at the heart of marketing theory.”