Personalize Your Marketing With Customer Segmentation Models

Customer segmentation models help businesses understand the problems and desires of their audiences so they can connect with more potential buyers.

POST UPDATED:

January 17, 2024

Customer Segmentation Models

The key ingredient in a successful marketing campaign is the target audience.

Sure, attention-grabbing headlines might attract some extra clicks, but targeted niches beat catchy copy any day of the week. That is why customer segmentation models can help you get higher ROI on your marketing strategy.

This post explains customer segmentation strategy and how to use it to position your brand in a competitive market.

Table of Contents

    How do businesses use customer segmentation to improve their marketing strategies?

    Businesses use segmentation to divide their customer base into smaller, more specific groups based on common characteristics, such as demographics and preferences. This enables them to develop marketing strategies to fit each segment’s unique needs and interests, resulting in more effective marketing campaigns.

    What is customer segmentation?

    Let’s begin by defining what segmentation is and how it fits into the broader scope of a marketing strategy.

    Your target audience is the large pool of potential buyers you want to tap into.

    Segments are smaller groups of customers within the target audience you want to reach.

    So, for example, “small business owners” comprise a broad target audience. “Plumbing companies” (small businesses) are a customer segment.

    But there is a catch. Even though plumbers are a smaller segment of business owners, there are a lot of them. If we want our customer segmentation models to be effective, we should drill down even more. Doing so will help us create particular segments within the plumbing industry.

    Some plumbers work in homes, and others work in businesses. This gives us two smaller segments: residential and commercial plumbers.

    Still, within these two groups, we could find even smaller segments. To do that, we might use other segmentation data, such as demographic factors, buying behavior, and technographics.

    On and on it goes.

    Sometimes, it seems like customer segmentation analysis never ends. But you don’t have to go on forever. You only have to segment your audience until they are so clear you can literally picture them in your head.

    Segmentation is much easier when you have a framework to use. That is why marketers use customer segmentation models.

    Audience Targeting Strategies Mindmap

    What is a customer segmentation model?

    A customer segmentation model helps us clarify who our best potential customers are. With these models, audience segments start to look like real human beings. This is important because that is what your customers are—people.

    It is not always easy to visualize your customers so well that you can describe them physically or emotionally.

    I have learned this while working with brand audit clients. Most of the time, they simply provide me with basic details about their target customers, like name, age, marital status, and location. But once I ask them for more information, they start guessing.

    Customer segmentation models help us understand our audiences so we can connect with them. Then, we can develop marketing campaigns that will resonate with them on a deeper level. It still won’t be easy to get their attention, but we will have an advantage over the generic messages that saturate the marketplace.

    Here is an example: Single females between 30 and 40 are a common demographic segment. But within this large group, there are sub-groups. Some are divorced, and some have never married. Some have children, others don’t. Each sub-group of women has different priorities and personality traits that impact purchasing behavior. Yet, many brands do not explore these intricacies enough. As a result, they use generic marketing messages that fall on deaf ears.

    Customer Persona Example (Click to expand)

    Why should you segment customers?

    Segmenting is vital for several reasons. First, it allows businesses to understand their audience better. By exploring the unique groups within a broad target audience, businesses can align products, services, and marketing messages to solve their specific problems.

    Segmentation also helps organizations use their marketing resources efficiently. Many companies spread their marketing budgets around because they want to target everyone. However, a segmentation strategy lets you focus on the potential buyers most likely to respond to your marketing. This also means companies won’t waste resources on uninterested audience groups.

    Customer segmentation gives businesses insights that help them develop or enhance new products. Many times, brands focus on the features of their products they deem relevant. However, customers often value other product benefits. You may have overlooked some of your product’s essential benefits. The segmentation process sheds light on these missed opportunities.

    Segmentation can also give companies a competitive edge. By understanding exactly what customers want, you can position your brand in the market as their ideal solution.

    How to do customer segmentation analysis

    There are different ways to conduct a customer segmentation analysis. The most common approach requires you to roll up your sleeves and review your current customers. As you do, divide them into segments based on similar characteristics. Characteristics may include demographics (e.g., age, gender, income), psychographics (e.g., lifestyle, personality), behavior patterns (e.g., product usage, brand loyalty), and geographic location.

    So, if a clothing brand wants to segment its customers, it could divide them into groups based on age and style preferences. An example is “women aged 18-24 who prefer casual wear” or “men over 50 prefer formal wear”. This type of segmentation is simple and easy to do.

    Recency, frequency, and monetary segmentation (RFM)

    Another analysis method is RFM segmentation, which stands for Recency, Frequency, and Monetary value. This approach helps businesses identify high-value customers. These customers are usually the ones who have just made purchases, do so often, and spend more than average.

    For example, an online grocery store might use RFM segmentation to identify “customers who make large purchases every week.” Another segment might be “customers who make small purchases but do so frequently.”

    The RFM method is an effective way to increase customer lifetime value.

    Remember that no single segmentation method will work for every business. Choose the one that makes the most sense.

    Data used to create customer segmentation models

    The data used in customer segmentation models comes from various sources. The most common data types are transaction, customer behavior, and demographic data.

    Transaction Data: This includes details about customers’ purchases. Examples are the products or services bought, frequency and volume of purchases, and the amount spent. This data is especially valuable in RFM segmentation (see above).

    Customer Behavior Data: This covers data related to customers’ interactions with the business. Interactions include website visits, click-through rates, and responses to marketing campaigns. This data gives you insight into buyers’ interests and engagement levels.

    Demographic Data: This is information based on age, gender, income level, and geographic location. Demographic data is often used to create broad audience segments with specific characteristics.

    The key to interpreting the data is to look for patterns and trends relevant to business strategies. For example, if an RFM analysis reveals a segment of buyers who make frequent, high-value purchases, you could create a loyalty program to reward them. This may also encourage people to keep spending. Likewise, if a demographic analysis finds that young adults have high engagement but low purchasing rates, consider conversion strategies for increased sales.

    Would you like to know how a brand audit can provide the insights you need to improve brand performance?

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    Customer segmentation software

    Software is available to help businesses analyze and segment their customers. These tools use advanced algorithms and data analysis techniques to identify patterns and group customers accordingly.

    Some popular choices include:

    Maximizer CRM

    Maximizer CRM is a comprehensive customer relationship management tool with advanced segmentation capabilities. Businesses can use it to segment audiences based on various data points, including demographics, behavior, and transaction history. Maximizer allows businesses to create highly targeted marketing campaigns for different customer segments.

    Optimizely

    Optimizely is primarily a tool for A/B testing and personalization, but also includes robust customer segmentation features. It allows businesses to divide their audience based on real-time data. Businesses can use these segments to create personalized experiences and run targeted marketing campaigns, increasing customer engagement and conversion rates.

    Segment

    As the name suggests, Segment helps businesses collect, clean, and control their customer data. It allows brands to unify data from multiple sources, such as websites, apps, and servers, enabling businesses. This enables them to build a holistic view of their customers. With this data, businesses can deliver personalized experiences across every customer journey stage.

    Segment-customer segmentation software
    Segment-customer segmentation software

    The advantages of using customer segmentation models

    There are many advantages to using customer segmentation models. Knowing the unique needs, preferences, and behaviors of distinct customer groups lets businesses customize their messaging and offers.

    Customer segmentation models can lead to better service. By knowing the specific pain points of different segments, companies can address issues and offer solutions designed for those groups.

    Segmentation can help brands do a better job of allocating resources. Instead of a one-size-fits-all approach, businesses can focus their time and resources on the most profitable segments.

    Customer segmentation models can help businesses identify new opportunities. Exploring the desires and preferences of different groups will reveal gaps in the market. This is a great way to spark innovation and develop new products or services.

    Increase marketing conversions

    Customer segmentation models enhance marketing conversions and ROI by ensuring all marketing efforts are targeted and relevant. According to a study by Marketo, segmented and personalized marketing campaigns can increase conversions by up to 200 percent.

    Customer segmentation allows businesses to prioritize resources and focus on the most profitable segments. This is critical when trying to optimize return on investment (ROI). Personalized messaging using segmented data can increase ROI by five to eight times and boost sales by 10 percent or more.

    Customer segmentation models can also help businesses identify upselling and cross-selling opportunities within their existing customer base. This is another way to improve conversion rates and ROI. A report from Forrester showed that cross-selling and upselling strategies might increase customer lifetime value, which is a key to higher long-term ROI.

    How to Calculate Conversion Rate [+ Conversion Rate Formula]

    Conversion rate is the percentage of prospective customers who take a desired action in a campaign. Read this post to learn how to calculate conversion rates.

    Improve product development

    Customer segmentation models can enhance a company’s product development process. Leveraging the unique needs, preferences, and behaviors of different customer groups makes designing and refining products that better meet their customers’ needs possible. It also allows companies to identify market gaps and innovation opportunities. Then, they can customize their products to align with the demands of target segments.

    A study by Harvard Business Review on Procter and Gamble’s use of customer segmentation for their Febreze product is a classic example. Initially, P&G marketed Febreze as a product for eliminating bad smells. However, this approach did not resonate with consumers, and sales failed to meet expectations.

    P&G then conducted extensive consumer research and discovered a new potential market segment. They found people become accustomed to the smells in their own homes and might not be aware of odors. Instead of focusing on eliminating bad smells, P&G shifted the positioning of Febreze towards creating a pleasant, fresh-smelling environment as part of a cleaning routine.

    Then they targeted a new segment of consumers who were interested in the aesthetic and sensory rewards of cleaning. The company repositioned Febreze as a product that consumers could use after cleaning to make rooms smell as clean as they looked. This approach appealed to people who took pride in maintaining a fresh and tidy home.

    The result was a significant increase in sales. P&G’s use of customer segmentation to identify and target a new market segment showed the power of understanding consumer behavior and adapting marketing strategies accordingly. People often refer to this case study as an example of successful market repositioning and highlight the significance of customer insights in product marketing.

    Develop superior experiences

    Customer segmentation models help brands create superior customer experiences. For example, Deloitte revealed how healthcare consumer segmentation helped companies understand diverse patient attitudes and behaviors. They identified four distinct consumer groups—Trailblazers, Prospectors, Homesteaders, and Bystanders—each with unique healthcare needs and preferences. Using these segments, healthcare stakeholders can tailor interactions and services to these varied groups, enhancing patient engagement and care efficiency. This approach exemplifies the significance of understanding consumer behavior for better service and satisfaction.

    Models can also guide brands in providing appropriate service for different segments, enhancing the customer journey. A report by McKinsey shows that companies that offer personalized experiences enjoy higher levels of customer satisfaction and loyalty.

    What are the customer segmentation models used in marketing?

    There are four primary models of customer segmentation used in marketing: demographic, geographic, psychographic, and behavioral.

    Demographic segmentation

    Demographic Segmentation sorts customers based on age, gender, income, education, and occupation.

    Imagine you are a company selling high-end skincare products. Your products are scientifically formulated using premium ingredients. They also come with a price tag to match. Who do you think would be more interested in your offers—a college student working part-time or a successful professional in her 30s? The latter, most likely. And that is where demographic segmentation comes in.

    By grouping customers based on demographic characteristics, you can better understand who your customers are and what they want. In our skincare example, the company could use demographic segmentation to identify and target affluent women aged 25-45 who value quality skincare. By designing marketing campaigns tailored to this group, they can show how their products fulfill the luxury, effectiveness, and value desired by these customers.

    But it doesn’t stop there. Demographic segmentation also enables you to create a personalized customer experience. You can tailor every touchpoint, from emails and social media posts to product recommendations and customer service interactions, to align with specific demographics. This kind of personalization boosts customer satisfaction, loyalty, and sales.

    Demographic segmentation can also provide valuable insights for product development. Knowledge of customer demographics can identify product gaps and inspire innovative solutions.

    Age Demographic Comparison (Click to expand)

    Geographic segmentation

    Geographic Segmentation categorizes customers by their physical location, such as city, state, country, or region.

    Let’s say an online clothing retailer offers a wide range of clothing items, from heavy winter coats to lightweight summer dresses. It would not make much sense to promote your new collection of winter coats to customers in tropical regions, would it? Instead, you would want to focus on areas where winter is setting in and people are likely looking for warm clothing.

    This is geographic segmentation at work. By segmenting your market geographically, you can ensure that your marketing messages are relevant and timely for each location. This increases the likelihood of purchase and enhances your brand’s reputation for understanding and meeting customer needs.

    Geographic segmentation can also guide product development, operations, and expansion strategies. For example, if you notice a high demand for a particular product in a specific area, you might introduce additional similar items. Or, if a specific region experiences rapid sales growth, you might open a physical store there.

    Geographic segmentation can enhance your other segmentation efforts. Combining it with demographic, psychographic, or behavioral segmentation gives you a holistic view of your customers.

    4 Types of Customer Segmentation (Click to expand)

    Psychographic segmentation

    Psychographic Segmentation considers consumers’ attitudes, interests, personalities, and lifestyles.

    Unlike demographic and geographic segmentation, which focus on external attributes like age or location, psychographic segmentation leverages the internal aspects of your customers. It is about understanding who your customers are and why they behave like they do.

    Consider this: You are an eco-friendly fashion brand. Your products are made from sustainable materials, and you invest some of your profits into environmental conservation initiatives. Who is more interested in your products: convenience and cost-driven individuals or sustainability enthusiasts willing to pay more for ethical products? Probably the latter.

    That is what psychographic segmentation allows you to do. Understanding your customers’ psychographics allows you to tailor your marketing messages to resonate with their beliefs, interests, and lifestyles. For our eco-friendly fashion brand, this might mean emphasizing fast fashion’s environmental impact, highlighting the sustainability of its materials, and showcasing its conservation efforts. This kind of targeted messaging captures attention and fosters a deep emotional connection, turning casual browsers into loyal customers.

    Psychographic segmentation can help brands improve product development, customer service, and business strategy. Understanding customer attitudes and behaviors helps design products, provide services, and create strategies that meet their needs and exceed expectations.

    Customer segmentation report (Click to expand)

    Behavioral segmentation

    Behavioral Segmentation is based on users’ spending and consumption habits, product usage, and previous interactions with the brand.

    Research shows that 91 percent of consumers will shop with brands that recognize, remember, and provide relevant offers and recommendations. That means nine out of every ten customers crave personalized experiences. And behavioral segmentation can help you deliver them.

    Let’s illustrate this with another story. You are a fitness app developer. Your app offers a range of workout plans, from high-intensity interval training to yoga. Would it make sense to promote your new HIIT plan to a user who only uses your app for yoga? Probably not. Instead, you would want to focus on users who have shown interest in or completed HIIT workouts before.

    By understanding your customers’ past behavior, you can predict their future actions and adjust your marketing efforts. The fitness app could send notifications to users interested in similar workouts to increase brand engagement.

    Other customer segmentation models

    There are many other types of segmentation models. Below are some popular examples.

    Firmographic segmentation

    This is like demographics, but used for B2B markets. It groups businesses by industry, company size, and revenue. For instance, a software company may target small businesses for its budget-friendly office suite.

    Needs-based segmentation

    This model groups customers by their specific needs and wants. A fitness center, for example, could offer different classes and equipment for those wanting to lose weight, gain muscle, or improve cardiovascular health.

    Value-based segmentation

    This method categorizes customers by how much they are worth to your business. Airlines often use this model, offering premium services to high-value customers.

    Cultural segmentation

    This model separates customers based on culture, religion, or social groupings. This method is especially useful for businesses offering products or services with strong cultural ties.

    Life stage segmentation

    This model categorizes customers based on their stage in life, such as students, young professionals, or retirees. Businesses can use life stage segmentation to cater to each group’s unique needs and preferences.

    Multi-variable account segmentation

    This advanced model incorporates multiple variables to create very specific segments. A healthcare technology firm might use this to segment hospitals based on their size, number of patients, location, and technology adoption rate.

    How to choose the right customer segmentation models

    Quality data is the key to successfully segmenting your customer base. You can get this data from a variety of sources, such as customer feedback, social media interactions, website analytics, and purchase history.

    Look for patterns and trends in the data to uncover your customers’ needs and preferences. For example, if you discover many of your customers are young mothers, consider creating marketing campaigns for this demographic.

    Choosing the right model depends on your business goals, product or service, and data. Geographic segmentation might be your go-to model if your product is location-specific, like a real estate firm. If you sell lifestyle products, the psychographic or behavioral model may serve you best.

    Consider the following when choosing a model:

    • What kind of information do you have about your customers?
    • What are your marketing and sales objectives?
    • Which model will yield the most actionable insights?
    Customer-Centric Strategies Driving Business Excellence with Segmentation (Click to expand)

    Implementing customer segmentation models

    1. Define Your Objectives: Determine what you aim to achieve with your segmentation—i.e., increasing sales, enhancing customer retention, or launching a new product.
    2. Collect Data: Compile as much customer data as possible from diverse sources.
    3. Analyze the Data: Identify patterns and trends in the data to create meaningful customer segments.
    4. Create Customer Profiles: Develop comprehensive profiles for each segment, detailing their needs, preferences, and behaviors.
    5. Test Your Segments: To assess their effectiveness, validate your segments with targeted marketing campaigns.
    6. Refine Your Segments: Based on the results, fine-tune your segments for more accurate targeting.

    Remember, customer segmentation isn’t a one-and-done task. It requires regular updates and refinements as your customer base evolves and market conditions change.

    Improve your brand with customer segmentation models

    Many businesses rely on generic customer targeting techniques. However, these one-size-fits-all models cannot capture each unique customer’s needs or interests.

    The Brand Auditors offer something different. We can help you develop a customized segmentation strategy that explores your target market’s minor details and nuances. We use proven strategies to help you reach the best customer groups.

    Click the button below and schedule a free consultation with a strategist to learn more.

    Chris Fulmer

    Chris Fulmer

    Brand Strategist | Managing Director

    Chris has over 15 years of experience in brand development and marketing. He has designed strategies across various industries, such as technology, B2B services, and healthcare. His areas of expertise include brand positioning, competitive analysis, content marketing, and web development.

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