Customer Relation

Customer segmentation – how to maximize your return on investment

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2020-06-26
Reading time: 12 minutes

For your business to be successful, you need to know your customers. In the past, Aunt Emma knew each customer personally and was aware of their individual needs.

This is not so simple in today’s world, but you too can use customer segmentation to better understand your customers and address their needs and concerns more individually. Read this article to find out how you can maximize your return on investment using segmentation.

Customer segmentation - that's what it's about

Customer segmentation describes the division of your customer base into subgroups. It allows you to divide your customer base into customer groups according to individual characteristics and adapt marketing measures to different customer profiles in the right traction channels. This creates individuality while at the same time conserving resources.

How customer segmentation assists you in marketing and sales

By splitting your customer base, you better target the needs of your customers, tailor the value proposition and your marketing efforts to different customer groups.

You also use customer segmentation to identify which customers are particularly profitable and can send individual messages to these customers.

Market segmentation vs. customer segmentation - what's the difference?

Both terms are often used synonymously, but market segmentation and customer segmentation are actually two different things.

Market segmentation is about dividing a heterogeneous overall market into homogeneous submarkets. The entire market, which is made up of potential and existing customers, serves as the basis here. The aim of market segmentation is, among other things, to evaluate which market segments are lucrative and which new or existing products are suitable for the respective segments.

Customer segmentation, on the other hand, relates only to current customers. Here, the existing customer base is segmented into subgroups. The aim of customer segmentation is to identify particularly profitable customers (see also Customer Lifetime Value). Criteria for classification are the same as those used for market segmentation. However, since significantly more information is available here, customer segmentation provides more detailed results.

How to segment your customer base step by step

Successful customer segmentation consists of several steps. This is important and helps you to apply it successfully. The following procedure will assist you in achieving a successful segmentation strategy:

Define target groups – Start by defining the customers that are relevant to the goal at hand. Which of your customers are important for your marketing or product development? The relevance of the respective customers depends on the current task.
Determining the characteristics – according to which features should the customers be classified? Possible segmentation criteria are, for example, the attitude of your customers to the product or their buying behavior.
Identify clusters – this step involves determining the influence of the respective characteristics on your customer base. Methods from market research such as surveys or discussions help you do this. The collected data is then evaluated in a cluster analysis to identify the segments.
Describe segments – based on their characteristics, the customers of the respective segments are described. Ideally, you can create personae for the different customer segments.
Use customer segments – adapt your marketing to the different groups. Depending on the segment different channels can be appropriate to address your customers. Your products can also be adapted to different customer segments if necessary. All these measures ensure that customer loyalty increases and losses due to wastage are minimized.

Customer segmentation is just the beginning!

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One-dimensional or multi-dimensional - customer segmentation approaches

A decision is to be made between two approaches for carrying out segmentation. While the one-dimensional customer segmentation only takes decisions according to one characteristic, the multidimensional one considers several factors in combination.

One-dimensional customer segmentation

The resulting parts here are not really segments, strictly speaking, because the customers within the groups are not actually homogeneous. While they all share one common feature, they can differ significantly in many other respects.

One-dimensional customer segmentation is particularly useful in providing a quick and straightforward analysis of your customer structure. It also presents the economic significance of the customer segments in a particularly transparent way.

However, its disadvantage is that only one aspect is considered. In this way, no homogeneous customer segments are formed. In addition, qualitative factors are neglected in the one-dimensional approach.

The following methods are well suited for a one-dimensional analysis:

ABC customer analysis – divide your customers into three categories (A, B and C). The customers with the highest turnover are assigned to category A and vice versa.
Purchase Frequency Analysis – Break down your customer base into one-time customers, occasional customers, and regular customers.
Usage intensity analysis – divide your users into two groups, the “heavy users” who use your product intensively and frequently, and the “light users” who use it less often.
Analysis of purchase volume per transaction – this analysis is based on the quantity purchased by a customer in a single transaction. The segments are divided according to the different purchase volumes.

Multidimensional customer segmentation

Multidimensional customer analysis combines several of the above-mentioned characteristics, which are used to form the segments.

The advantage here is that segments are significantly more homogeneous, resulting in “real” customer segments with more informative value.

The following methods are suitable for multidimensional analysis:

Conjoint analysis – Determine customers’ preferences for features of a product or service, such as price.
Contrast Group Analysis – Divide constructed segments into two groups until a stopping rule ends the process. This is how you recognize the relationships between the variables.

Classify customers according to these segmentation criteria

What characteristics you can use to cluster customers varies depending on whether your company is B2B or B2C.

In B2B, you segment customers according to the following data:

External characteristics – these include all influences that affect the environment in which your customers operate. For example, industry, association affiliation, and union or government influence.
Organization-related characteristics – these include, say, the form of the organization, the size of the company, and the technologies and know-how available.
Individual characteristics – this category includes characteristics such as the customer’s purchasing criteria, procurement policy, risk appetite and order volume.

If your company operates in B2C, you consult the following criteria:

Socio-demographic factors – such as gender, age, occupation, level of education or income.
Psychographic characteristics – these are your customers’ attitudes, motivations, preferences and values, as well as their lifestyles
Geographical data – this includes place and area of residence and cultural differences.
Behavioral characteristics – this includes things like your customers’ choice of where to shop, their price orientation, or even their brand choice and media usage

Conclusion

Customer segmentation helps you better understand your existing customer base. This enables you to tailor your corporate marketing campaign goals more effectively to the needs of your customers.

In addition, in areas such as Customer Success or Customer Support, you can address your customers and their expectations (the so-called Customer Expectations) more accurately. This improves customer satisfaction, and even more importantly, it creates customer enthusiasm and saves you resources.

Last but not least, customer segmentation will also help you identify particularly profitable customer groups.

What do you think?

Manuel Schmidt

About Me

As a customer insights expert and certified Scrum product owner, I experience the importance of customer-centric product and marketing development on a daily basis.

Working with agile optimization processes and a corporate culture open to experimentation, you will get your growth on track.