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.
May 26, 2023
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 analysis 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 the customer segmentation process as easy as possible so you can use it to get the results you want. To help you 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’d like 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 are a broad audience. Plumbing companies (that also happen to be small businesses) are a customer segment.
But there’s a problem 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 market segmentation 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 qualities 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 have 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 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 see what we need to learn about our target customers that will help us connect with them. Once we know that, 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 will have an advantage over the generic advertising messages that saturate the marketplace.
For example, single females between 30-40 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, while others don’t. Each of these sub-groups 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.
Given all the work you must do to develop customer segments, you should know how the process will benefit your business.
Benefits of Customer Segmentation Models
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 lead to improved customer experiences because every customer feels their needs are being met.
- Increased Revenue: Segmenting customers can help businesses to 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 increased sales and greater customer loyalty.
- 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 effective 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 demographics.
When you've finished with segmentation, you’ll know exactly how to create a meaningful customer journey. Every touchpoint in the journey will have some significance for your brand and for the customer.
For example, when you’re able to show people you understand their deepest fears, and that you can help them overcome those fears, they are 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 align marketing messages to 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’m sure I don’t have to tell you, but it’s much easier to make more profit from an existing customer base than to get new customers.
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.
Here’s a short list. I’ll summarize each of them in the sections that follow.
- Demographic segmentation
- Geographic segmentation
- Behavioral segmentation
- Psychographic segmentation
- Value-based segmentation
- Needs-based segmentation
- Technographic segmentation
This is the most common model. The goal is to put customers into groups based on age, gender, ethnicity, education level, marital status, household income level, and other demographic 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 demographic group 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.
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 looks at 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.
The behavioral segmentation model is used to divide the audience into groups based on their purchase patterns and product usage. This helps companies understand what customers want so they can personalize offers that will be more appealing to them.
For example, a retail clothing store could categorize customers into frequent buyers, occasional buyers, and one-time shoppers. By studying each group’s purchase histories, the store can send them promotions and offers based on each group’s buying tendencies. They can also adjust their inventory, stocking up on items they know certain customers are more likely to buy at certain times of the year.
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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 marketers 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 is a model used to understand how customers judge value and the impact of that view on their decision to purchase 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 messages and offers for each segment. Value-based segmentation is more accurate when you combine it with other segmentation methods, such as demographics or psychographics.
Businesses that use a needs-based segmentation model create target groups based on 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 over time. By monitoring these, companies can be sure they are providing personalized experiences for each of their customer segments. It also makes it easier for them to make adjustments, when necessary.
As the name implies, technographic segmentation uses technology-based data to understand customers’ online behavior. 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 customers to find your brand and buy from it using technology.
For this type of 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 identify which technologies customers are using to engage with brands and which devices people are using most (i.e., smartphones, tablets, or desktop computers). They may also include data on popular e-commerce 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 I mentioned earlier that many brands use when creating campaigns. Instead of spending countless hours on generic ads or emails that may get no one’s attention, you can rely on recognizable segments that help you envision the customer.
From there, you can craft offers that align with individual customer attributes.
Now, let’s look at how you can use customer segmentation to develop offers and create a competitive advantage.
A compelling offer should get attention and increase customer engagement. Offer segmentation is the practice of grouping potential buyers according to their purchasing behavior, buying preferences, and interests.
For example, an offer for a free trial subscription might be more effective to get customers or those with little knowledge about the brand. Meanwhile, a promotional discount might be better for loyal customers who are already familiar with the company.
Data points, such as customer demographics and activity levels, can tell you how to target customer using offers. For example, segmenting customers based on demographics can reveal correlations between consumption habits across different age groups or genders. Companies can also examine customer purchase frequency or track how long users spend on the company website before buying something (or not buying).
Creating segmented offers based on individual customer needs helps companies focus their efforts on the right people at the right time.
A market analysis can be helpful when creating a segmentation strategy. You must understand customer expectations and the dynamics of your sector if you want to assess how well your brand is performing.
Market expectations can vary significantly between products. Consumers may have higher standards for certain services or look for more convenience when buying certain products. By considering how customers evaluate and prioritize their purchases, companies can figure out how to meet their needs.
The market category also helps provide context when analyzing customer segments. Factors such as marketplace demand, trends, customer tastes, and innovations have a profound impact on what customer buy and how they buy it.
Market analysis can help you determine what level of service your company must provide and how to position your product or service within the sector.
Your competitors have a great deal of influence on your company’s success. To compete, you’ve got to know how customers view and compare brands before making a purchase.
Price is usually one of the biggest factors in a customer’s buying decision. So, it’s important to consider how your competitors’ pricing strategies affect your brand.
If Brand A provides similar value at a lower price than brands X and Y, then X and Y better show people how they’re different or they will be forced to match prices with Brand A.
Researching customer segments can help companies differentiate. Surveys, in-person interviews, and other forms of customer feedback reveal their “inner thoughts,” so to speak. Data analytics (i.e., websites and social media) can help you discover shared characteristics among people interested in a specific product or brand. This insight into customer behavior will also help you improve sales and customer service processes, which are two other critical differentiators.
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 strategies and goals.
Using customer personas also makes it easier to identify how user behavior influences sales, providing brands with critical insight into their markets.
Selecting the right segments to target can be tricky, even after developing customer personas. If your team is having a tough time identifying the most profitable segments, consider testing campaigns (i.e., A/B testing) to gauge customer response.
By testing different marketing messages and offers, businesses can learn which segments are most interested in their product or service. For instance, retailers can experiment with discounts to find out which segment shows more purchase intent.
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, segmentation helps brands achieve their business growth goals. This means there should be enough potential customers within that group 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 targeting and lower conversions.
The Brand Auditors' offers something different. We can help you develop highly customized segmentation models which accurately reflect even the smallest details and nuances of your customer base. We use powerful algorithms and data points to provide recommendations tailored specifically to your business goals.
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