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Customer segmentation: Your agency guide

Updated: Nov 16, 2021

Customer segmentation pie chart on a purple background

For many companies these days, customer segmentation is no longer merely an option but a necessity. The issue now isn’t just doing it but learning how to do it well.

And it’s not simple. After all, the process can combine both advanced analytics and old-fashioned intuition, and requires collaboration among multiple departments, from production to marketing, in a given organization.

Help your clients achieve peak results by following this agency guide to customer segmentation.

What is customer segmentation?

As a term, customer segmentation refers to the process of dividing a customer base into smaller, specifically defined groups, then directly marketing to and connecting with those groups with customized messaging. You might also hear it called STP, which stands for segmentation, targeting, and positioning.

This process has become increasingly vital for businesses of all sizes, as consumers today enjoy an ever-expanding range of options and are making purchases with unprecedented speed. By focusing on more specific groups, companies can more purposefully interact with—and meet the needs of—individual segments of their customer base. Common labels for such efforts also include customizing and, at times, personalizing (although personalization technically tends to focus even more specifically on the individual, rather than any community).

For example: An e-commerce hat retailer might segment their target audience into 2 buying behaviors—those who buy hats for style and those who buy hats for sun protection. Having these two segmentations helps this retailer customize their messaging for each target audience.

Seems pretty straightforward, right?

Not necessarily. Effective customer segmentation involves multiple moving parts, and encompasses all aspects of the business funnel. The increasing sophistication of consumers is matched by the increasing sophistication of the tools and methods required for reaching them. And the use of those tools can generate results that demand further refinement of a given approach. No model is set in stone, and if it starts working, you’ll need to make sure that it keeps working.

Why customer segmentation is important for your clients

The baseline benefit of segmentation is that it allows companies to get a deeper, more nuanced idea of who their customers are and what they want, and then proceed accordingly. Instead of viewing customers as a generic mass (say, “baseball cap-wearers” or “wine drinkers”), companies isolate unique “persona” features and become better equipped to connect with these personas over time.

When executed right, segmentation works in all directions: As the company refines its understanding of and approach to its customers, customers are served more effectively and efficiently. The benefits in turn cover a wide spectrum:

  • Resource optimization Marketing remains an imperfect science, and usually requires ample resources to generate only a modest conversion-rate (i.e., “the spray-and-pray” approach). Segmentation enables a more strategic and focused use of marketing resources, boosting potential ROI.

  • Boosting engagement Thinking more particularly or “personally” about consumer-interaction can improve a company’s overall approach to customer engagement.

  • Product innovation Some customers might indicate a preference for a specific feature of a product, or use it in a unique way. Learning about these needs can inspire refinement, or even new iterations of the product itself.

  • Increasing brand loyalty By targeting specific consumers via custom methods, companies are forging a unique connection and increasing the likelihood of customer satisfaction. This can promote a strong sense of brand loyalty, with all the benefits that such loyalty entails. By spreading the message through word of mouth, the customer is in some sense becoming a part of a product’s marketing team. The customer is also more likely to make another, bigger buy with that company.

  • Increasing customer retention Given the nature of personal habits and marketplace movement, customer-retention can be a challenge even for beloved products. If segmentation is successful, the relationship should continue after the point of purchase, with the company increasing its chances of holding onto customers long-term.

  • Gaining actionable data A more engaged customer is a more useful customer—likelier to answer surveys, sign up for mailing lists, and give feedback on the customer journey. As you’ll see, actionable data is the fuel that drives product development and ongoing customer segmentation.

How to segment B2C and B2B customers

Not all segmentation works the same way. The general “textbook” categories of segmentation breakdown as follows:

Choosing your segment variables for B2C customers

  • Geographic segmentation This is the simplest kind, focusing on where customer groups are situated, and addressing, say, regional preferences or unique cultural or climate considerations.

  • Demographic segmentation Based on customer age, net worth, number of children, or religious affiliation.

  • Psychographic segmentation Extends beyond demographics into the grayer (and harder to measure) area of customers’ belief systems—their political leanings, for example, or travel preferences.

  • Behavioral segmentation Tends to focus on how customers interact in the marketplace or overall public sphere, assessing such traits as buying habits, cultural engagement, and online presence.

Choosing your segment variables for B2B customers

  • Priori Segmentation This is B2B’s version of demographics, utilizing such big-picture and public data as a target company’s size or product-type.

  • Need-Driven Segmentation As the name suggests, this segment targets clients’ and potential clients’ needs for a specific service or item.

  • Value-driven segmentation Centers on the size and potential profitability of the account to the company.

Building buyer personas

Building personas, or profiles, can often involve using a mix-and-match approach to these variables, with the effectiveness of particular data points dependent on the particulars of the products and their consumers. In certain cases, the key information hinges on frequency of use; at other times, it may be the quality of the referral-source.

Some products target mostly “seasonal” customers (say, holiday decorations); some might place a premium on a psychographic profile that indicates “adventurousness” (i.e., extreme sports equipment).

At root, the analysis is working from a core issue: need. What is the persona seeking, and how and why is that persona seeking it from a particular company?

How data can help you optimize your customer segmentation

The central building block of segmentation, then, comes down to the data and how it’s measured and analyzed. Generally speaking, data comes through three funnels:

  • Internal This is what an organization will find in its own numbers and its own business practices over time. Ideally, the sample sizes are big enough, and the data-collection strong enough, to yield actionable information, either on its own or in tandem with other data.

  • External This includes conducting interviews, surveys, and focus groups, and gathering general information on market categories. While some of this data is public, much of it requires company resources to gather or simply to buy at scale.

  • Precedents This tends to be models and lessons drawn from other, similar businesses or products.

Although these data sets seem stable, building marketing personas can be just the opposite. A company might construct a persona, for example, out of age, marital status, and product-use preferences, then discover that the use-preferences change within months of product-purchase. Data that’s even a year or two old might no longer reflect the available technology or the presence of new rivals in the marketplace. Yes, constructing predictive models can, in fact, become very unpredictable.

Meanwhile, distinct distribution and promotional methods inevitably present distinct challenges down the funnel. Taking segmentation from a need to a viable product can require the collaboration of every department, from sales to finance, working in sync from the get-go. Any lapse along the way can jeopardize the whole process.

Building customer segments together with your clients

So, One way or another, your clients need to get on top of customer segmentation, and you’re in a strong position to help make that happen—which will help build your clients brand loyalty to you.

You can start by showing the way toward effective segmentation. And from there, you can help in a variety of STP endeavors, making the customer journey offered by your clients as satisfying as possible.

Ultimately, a properly defined market segment has a few central qualities. A company must be able to measure and access the segment in question, and that segment must be comprised of capable and willing customers.