Customer Segmentation Models: Build a Better Strategy
Customer segmentation models help businesses understand the problems and desires of their audiences so they can connect with more potential buyers.
June 27, 2023
Introduction
Ask any marketing professional and they will tell you (if they’re being truthful) that the secret behind every successful ad campaign is the target audience.
Sure, attention-grabbing headlines might attract some extra clicks. And using a bold meta description isn’t a bad idea either. But when all is said and done, a niched target segment beats catchy copy any day of the week.
If you’re reading this, then you’re probably curious to find know how customer segmentation models can help you get higher ROI on your marketing strategy.
That’s what you'll find out by reading this post.
Developing a customer segmentation strategy isn’t easy. In fact, it takes a lot of work. You’ve got to study your market and competitors. But most of all, you have to care about your customers, get to know them, and understand what makes them tick.
That's what successful customer segmentation is all about. The goal is to identify your best customers and figure out how to position your product or service as the ideal solution to their problem.
What Does It Mean to Segment Customers?
I want to make it easy for you to segment customers. To do that, I’d like to 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.
Customer segments are smaller groups that exist within the target audience that you want to reach with marketing campaigns.
So, for example, "small business owners" is a broad target audience. "Plumbing companies" (which are small businesses) is a customer segment.
But there’s one catch with the example I just used. Even though it’s true that plumbers are a smaller segment of small business owners, there are lots of them. So, we could do a much better job of creating a customer segmentation model by drilling down even more. This will help us create smaller, specific segments within the plumbing industry.
To continue with this example, there are residential plumbers, and there are commercial plumbers. This gives us two smaller segments to work with.
But even within these two groups—residential and commercial plumbers—we could find even smaller groups. To do that, we might use other segmentation data like demographics, buying behavior, and technographics to develop smaller customer segment groups.
On and on it goes.
Sometimes, it seems like there’s no end to customer segmentation analysis. But you don't have to go on forever. All you have to do is continue segmenting your audience until you've identified them so well that you can literally picture the person in your head.
That’s all there is to it.
But still, it’s much easier to do this when we have a framework to use to help us. That’s where customer segmentation models come in.
What Is a Customer Segmentation Model?
A customer segmentation model puts a structure in place to help us identify and connect with our target market.
With these models, audience segments start to look like real-life human beings. This is important because that’s what your customers are—people.
As strange as it may sound, it's actually difficult to visualize your customers so well that you can describe them in a physical or emotional way.
I’ve learned this from working with brand audit clients. In almost every case, when I ask them to tell me about their target customers, they respond with basic information like name, age, job title, and location. But once I ask them to tell me more, like, “What keeps your customer up at night?” they resort to best-guesses.
When we use customer segment models, we start to understand our customers in a way that will help us connect with them. Then, we can develop marketing campaigns that will actually resonate with them on a deeper level. It still won’t be easy to get their attention, but we'll have an advantage over the generic advertising messages that saturate the marketplace.
For example, single females between 30 and 40 years old are a common demographic audience 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 that impact purchasing behavior. Yet, many brands don’t explore these sub-groups enough. As a result, marketing messages remain generic, which means the customer won’t respond.
Benefits of a Customer Segmentation Strategy
Customer segmentation models give brands several advantages, among them:
- Better Customer Experience: Segmentation allows businesses to tailor their services and products to specific customer groups. This can improve customer relationships because they will feel the brand is paying attention to them.
- Increased Revenue: Segmenting customers can help businesses identify potential upsell opportunities. By targeting customers with the right product at the right time, businesses can increase profit.
- Effective Targeting: Segmentation allows businesses to target customers more effectively with relevant promotions and messaging. This helps to ensure that customers are more likely to respond, resulting in higher conversions.
- Efficiency: By segmenting customers, businesses can target their marketing efforts more effectively, reducing the time and resources spent.
- Customer Retention: By understanding their customers better, businesses can develop more retention strategies. This can help to reduce customer churn and increase customer loyalty.
A customer segmentation strategy enables us to relate to our customers personally. This process is much more in-depth and goes beyond the surface-level targeting results that come when using typical market segmentation.
When you've finished implementing customer segmentation, you’ll know exactly how to create a meaningful customer journey. Every touchpoint in the journey will have some significance.
For example, when you’re able to show people you understand their deepest fears, and that you can help them overcome those fears, they're much more likely to listen to what you have to say.
This concept is the building block for creating personalized experiences.
To illustrate the power of segmentation, Mailchimp found that segmented email campaigns received 100 percent more clicks than non-segmented campaigns. You can have this kind of success when you use customer models, too.
The information businesses get from customer segmentation gives them several other competitive advantages.
Companies that use a segmentation strategy learn more about their customers’ expectations. They find out things they could never have known without them. As a result, they discover how to improve product development, service quality, and can even shorten the sales cycle.
When you develop marketing campaigns that with the interests of potential buyers, engagement and conversions will skyrocket. This also sets the stage for higher customer satisfaction scores and repeat purchases. These contribute to greater lifetime customer value. And I don’t have to tell you how much easier it is to make more profit from an existing customer base than to get new ones.
Types of Customer Segmentation
There are several types of segmentation models. But in this post, I’m only going to cover the ones we use at The Brand Auditors.
Here’s a short list of common customer segmentation models. I’ll summarize each of them in the sections that follow.
- Demographic
- Geographic
- Behavioral
- Psychographic
- Value-based
- Needs-based
- Technographic
Demographic Segmentation
Demographic segmentation is the most common model. The goal is to group customers based on age, gender, ethnicity, education level, marital status, household income level, and other characteristics.
If you’re going to use demographics, it’s important to look at the common characteristics of each group and how the differences within a particular segments influence buying behavior.
For instance, men with an income of $40,000 to $50,000 a year may have an entirely different decision-making process than women who earn the same amount annually.
Geographic Segmentation
The geographic segmentation strategy divides a market into customer groups based on standard location data like zip code, state, country, and region.
This type of segmentation can work well for retail brands, restaurants, or other businesses that want to target a local market. It’s also possible to use information about the local climate or neighboring areas to create marketing strategies for the region.
Geographic segmentation can be included in a larger cultural analysis that uses customer insights and data points, such as occupation in or near particular areas. Organizations can also analyze trends in migration from one area to another for geo-segmenting. For instance, analyzing consumer preferences between suburban regions versus urban ones might help a brand improve content messaging or specific products.
Behavioral Segmentation
Behavioral customer segmentation divides customers into groups based on their behavior. Unlike demographic or psychographic segmentation, behavioral segmentation focuses on how customers interact with a brand.
One common example is purchase behavior segmentation, where customers are categorized based on their buying habits. This includes how frequently they purchase, the amount they spend, and the types of products they buy. A business could use this information to create discounts and promotions for customers who frequently buy high-end products or those who regularly purchase from a particular category.
Engagement segmentation is another example. This involves categorizing customers based on how they interact with a brand's online or offline content, social media presence, and customer service channels. Businesses can create special rewards or incentives to keep these customers engaged.
To use this type of customer segmentation, you'll need to gather behavioral data on your current customers' buying habits, preferences, and spending. This could include analyzing purchase histories, customer service interactions, website analytics, and social media engagement. But it's important to be aware of privacy regulations and maintain transparency about the data you're collecting and how it's being used.
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Psychographic Segmentation
Psychographic segmentation is becoming more popular because it leverages the customer’s values, beliefs, lifestyle choices, and interests. It goes beyond traditional demographic data to give your marketing team an understanding of their customers on a deeper level.
For example, companies that sell luxury items can use psychographics to create campaigns for potential customers who have disposable income and an affinity for luxury goods.
Psychographics also require you to think about how and why individuals buy certain products or services. Marketers can use lifestyle activities, marketing channel preferences, and personality traits to develop a strategy for a specific market.
Value-Based Segmentation
Value-based segmentation is a model used to understand how customers judge value and the impact of that view on their decision to buy a product.
Companies can use this method to optimize prices. Brands start by defining the key drivers that influence the customer’s motivation when making a decision to buy something. Examples of the elements you should explore include brand image, perceived quality, and customer satisfaction scores for competing brands.
Once you know which factors matter to customers, you can create better offers for each segment. Value-based segmentation is more accurate when you combine it with other methods, such as demographics or psychographics.
Needs-Based Segmentation
Businesses that use a needs-based segmentation model leverage the customer’s desired outcome. Brands must understand what individual customers want to accomplish and match products or services to their goals.
For example, a health and wellness brand may create segments of customers based on goals such as weight loss, muscle gain, or reducing the risk of Alzheimer’s disease. Then, the company can offer products for customers who want to lose weight, increase muscle mass, or enhance cognitive health.
Brands can also use needs-based segmentation to measure how well they are serving customers by tracking satisfaction scores. Then, companies can be sure they're providing personalized experiences. It also makes it easier for them to make adjustments, when necessary.
Technographic Segmentation
As the name implies, this model uses technology-based data to understand user segments. By analyzing the technology customers use to research, compare, and buy products, businesses can figure out how to adjust the customer experience to accommodate shoppers. Essentially, the idea is to make it easier for new customers to find your brand and buy from it using technology.
For technographic segmentation to work, companies need to look at web analytics and other sources of digital data. Social media insights are an example. This will help them figure out which technologies people are using to engage with brands and on which devices (i.e., smartphones, tablets, or desktop computers). They may also include data on popular online store platforms for product comparisons.
How to Conduct Customer Segmentation Analysis
By grouping customers who share similar characteristics and patterns, companies can run targeted campaigns that have a better chance of generating results. This strategy almost always reduces the cost of customer acquisition because response rates should be higher on the same marketing dollars spent. It’s also an effective way to increase customer lifetime value.
Modeling eliminates the guesswork that many brands use when creating campaigns. Instead of spending countless hours on generic ads or emails, you can rely on recognizable segments that help you envision the customer.
From there, you can craft offers that align with individual customer attributes.
How to Choose the Right Customer Segments
Customer personas can help you decide which target segments are most beneficial to a brand. Personas offer a detailed description of potential customers. They also include buying factors such as motivation to purchase, lifestyle, and other existing products they might already own. A company can use personas to assess which segments align with their company’s business model and goals.
Selecting the right segments to target can be tricky, even after developing customer personas. If your marketing team isn't sure which segments are the most profitable, consider testing campaigns (i.e., A/B testing) to gauge customer engagement.
By testing different marketing messages and offers, you can learn which groups are most interested in your product or service. Testing various customer groups is one of the most reliable ways to spot opportunities for growth and drive higher marketing ROI.
All customer segments you choose to target should be definable, accessible, and viable.
To make sure a segment is definable, it must have tangible, descriptive characteristics. These characteristics can relate to age, challenges or pain points, life goals, and more.
Businesses also need to consider how capable they are of reaching those audiences. For example, if a company can only serve local areas, they won’t gain much from expanding into regional or national markets until they’re comfortable doing so.
Finally, the purpose of segmentation is to help you achieve your business growth goals. This means there should be enough potential customers within each segment that have the ability and desire to buy.
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Improve Marketing Conversions with Customer Segmentation Models
Many businesses rely on generic customer targeting techniques that don't reflect the nuances and complexities of the market. These one-size-fits-all models often fail to capture each unique customer's needs or interests.
The result: ineffective marketing.
The Brand Auditors' offers something different. We can help you develop a highly customized segmentation strategy which accounts for even the smallest details and nuances of your customer base. We use powerful algorithms and customer data points to provide recommendations to support your business goals.
Click on the button below and schedule a free consultation with a strategist to learn more.
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- Increase ROI on lead generation and sales conversions.
- Reduce marketing expenses.
- Strengthen brand positioning to become more competitive.
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