May 6, 2023 | 8 min read

Understanding Customer Segmentation: A Key to Enhanced Marketing Strategy

Delve into customer segmentation to enhance your marketing strategy. Understand different types, the role of AI, ethical considerations, and more.

Segment audiences for insights & predictions graphic

With all the competition for consumer eyeballs and dollars, it’s absolutely critical to be able to identify and communicate effectively with diverse groups of customers. To do that, you need to be able to understand your customer base and divide them up into the right segments for marketing that works. 

What is Customer Segmentation?

Customer segmentation, at its core, is the process of dividing a company's entire customer base into distinct groups or segments. These segments share common characteristics like interests, spending habits, transaction history, or brand engagement. One of the most important characteristics for guiding segmentation is customer lifetime value. By segmenting customers into these groups, businesses can tailor their marketing strategies to cater specifically to the needs and preferences of each group, leading to a more personalized and effective approach.

Types of Customer Segmentation

There are several types of customer segmentation, each serving unique purposes in a marketing strategy:

  1. Behavioral segmentation: This approach categorizes customers based on their behaviors, including purchasing habits, brand interactions, and product usage. It offers insights into customer behavior, helping marketers tailor campaigns to match behavioral patterns. For example, a restaurant chain might have a different segment for people who mostly visit them at lunchtime.

  2. Customer lifetime value: This is a calculation of how much a customer is likely to spend over an extended period of time, based on previous interactions or similarities to other groups with better established brand interaction history. It helps marketers understand which groups to focus on and where to prioritize their efforts, which is extremely useful since the top 10% of customers can account for up to 70% of revenue. 

  3. Geographic segmentation: This divides customers based on where they’re primarily located. It's essential when implementing region-specific marketing campaigns.

  4. Demographic segmentation: This involves categorizing customers based on characteristics like age, gender, income, education level, and marital status. This type of segmentation gives a broad understanding of the target audience. Demographic segmentation is a common starting point brands might use, but it also typically relies on third-party data and operates on the assumption that people with the same demographics have the same tastes, which isn’t always true (see below).

  5. Psychographic Segmentation: This goes beyond basic demographics and behaviors to examine customers' lifestyles, values, attitudes, and personality traits. Psychographic segmentation allows for deeply personalized marketing efforts. For example, an outdoor retailer might consider starting a new paddle board class if they find a significant number of people in their audience want to get into paddle boarding. It should be noted that psychographic segmentation involves multiple factors and usually needs custom analytics.

A common segmentation strategy businesses use is to combine more than one of these techniques to determine their actual segmentation and targeting.

Using Segmentation in Marketing

When businesses segment their customers based on accurate, comprehensive customer data, it opens up a wide array of possibilities for enhancing their marketing strategy. Here's how customer segmentation can fuel your marketing campaigns:

  1. Tailored Marketing Campaigns: Understanding the preferences and behaviors of your target groups allows you to design marketing campaigns that connect with their specific interests and needs. It's no longer about a one-size-fits-all marketing campaign but rather tailored messaging that resonates with distinct groups of customers.

  2. Improved Customer Service: Customer service can be personalized and prioritized when you know your customer segments well. Predicting the needs of different groups leads to improved service and, consequently, increased customer satisfaction.

  3. Optimized Customer Journey: With segmented data, you can identify the pain points or gaps in the customer journey for each group. By tailoring your processes to address these gaps, you can enhance the overall customer experience and journey.

Creating a Customer Segmentation Strategy

To create a customer segmentation strategy that drives results, consider the following steps:

  1. Data collection: The first step is gathering relevant customer data. This could be as first-party data that you get directly from customers, including purchase history and interactions with your website or third-party data purchased from data vendors for demographic information. 

  2. Data analysis: The next step is analyzing the collected data. This involves sifting through the data to identify patterns, trends, and correlations. AI-powered tools can make this work much easier (see below).

  3. Segment formation: Based on your analysis, create segments that group customers with similar characteristics together.

  4. Segment evaluation and selection: Evaluate each segment to ensure it is both usable and potentially profitable.

  5. Strategy implementation: Finally, implement your segmentation strategy into your marketing campaigns and send segments to your activation tools to bring targeted campaigns to life.

Trust & Responsibility in Customer Segmentation

While segmentation is a powerful tool for businesses, like any customer data usage it also involves important considerations of trust and responsibility. Businesses must ensure they handle customer data with utmost respect and care, making sure it remains secure. It’s important that brands practice clear communication about how they’re using customer data, and with increasing regulatory oversight and consumer awareness about privacy options, they should be relying on data collected with customer consent.

Common Pitfalls in Customer Segmentation

It's also essential to be aware of common pitfalls in customer segmentation. For example, assuming all customers within a segment share the same preferences can be a mistake. While segmentation offers insights into broad patterns and trends, individual customer behavior may vary within a segment. Regularly reviewing and updating your customer segmentation strategy using a test-and-learn mentality is crucial to ensure it remains relevant and effective.

A humorous comparison between King Charles and Ozzy Osbourne, two very different people who share some key demographic traitsA good illustration of the pitfalls of assumption in segmentation, especially demographic

Amperity: Your Partner in Effective Segmentation

Effective customer segmentation begins with accurate, comprehensive customer data, which is where Amperity comes in. We unify scattered data into accurate and comprehensive customer profiles, enabling more effective segmentation and, in turn, more successful marketing strategies.

Customer segmentation is about much more than simply dividing your customers into different buckets. It's about comprehending your customers on a deeper level and using that understanding to enhance your marketing strategy. When fed with reliable data, it can transform your marketing efforts and drive significant business results.