What is Customer Segmentation and How is it Used?

What is Customer Segmentation and How is it Used?

Customer segmentation is one of the most powerful customer analytics tools in marketing, however, it is also the most misunderstood.

What is customer segmentation?

Customer segmentation is the process of dividing customers and prospects into different groups, each of which share characteristics and behave similarly within a segment, but look and behave differently across multiple segments.

How will customer segmentation improve my business?

Not all customers are the same. Segmenting allows you to more precisely reach a customer or prospect based on their specific needs and wants. Segmentation will allow you to:

  • Better identify your most valuable customer segments
  • Improve your return on marketing investment by only targeting those likely to be your best customers
  • Increase customer loyalty by tailoring your services to your best customers
  • Improve customer service
  • Positively impact revenue and reduce waste across your organization

What are the different types of customer segmentation?

comparison of demographic vs. psychographic customer segmentation

Here is an overview of the most common types of segmentation:

  1. Demographic: The simplest segmentation option, and the most common. Demographic segmentation groups consumers by information you might see in a Census, such as: Age, gender, income, education, nationality, family size, etc.
  2. Behavioral/Psychographic: These types of segmentation commonly look at lifestyle and personality characteristics that influence purchasing and consumption decisions.
  3. Geographic: Geographic segmentation groups consumers based on location. This might include examining consumers by country, region or city, or taking a deeper dive to determine if they are in an urban, rural, or suburban area.
  4. Combination: Often times, it makes sense to use multiple types of segmentation to capture the best picture of your customer. When there is an absence of customer data, businesses may turn to reviewing demographic and geographic information to get a basic understanding of their best customers, or work with an analytics partner to leverage enhanced customer segementation insights. 

What type of customer segmentation should I use?

Selecting the approach that’s right for your business depends on your business objectives and the data at hand. No matter which option you choose, segmentation will better allow you to target your ideal customers and reduce the costs spent targeting those outside of your ideal customer segments. 

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