What is Customer Segmentation?

Customer segmentation means dividing customers into homogeneous individual segments based on common characteristics. Therefore, the customers are similar within each piece, and each component contains different buyers.

Customer segmentation enables companies to more accurately assess their consumers and use more targeted marketing measures that are more likely to convince customers to purchase and become long-term loyal business contacts.

What is the Size of a Segment?

The size of customer segments depends on the company, the market, and the customer base. Larger companies or those with many services and products on offer tend to have customer segments of more significant numbers of people. However, there may also be customer segments that consist of just two people.

What Types of Segments are there?

The division into customer segments is based on previously defined characteristics. Therefore, customer segments differ for each company and vary depending on whether the approach is one-dimensional or multi-dimensional. While it only differs by one character, the second combines several elements.

Customer Segmentation

There are also differences between private and commercial clients in the criteria used. While business customers consist of multiple people participating in a purchasing decision, private customers are individual consumers.

One-Dimensional Customer Segmentation

The one-dimensional segmentation of customers does not create conventional segments since people are not usually utterly homogeneous within these groups. Still, they can continue to show heterogeneity in some characteristics. This type of customer segmentation is especially suitable for capturing customer structure quickly and easily. Its typical approaches include:

ABC Customer Analysis: Customers divide according to their importance using ABC analysis. Group A consider the essential segment, and therefore the most elaborate marketing measures apply to it.

Analysis of the Intensity of use: Customers divide into two groups: users who use the product/service frequently and those who use it reasonably infrequently.

Analysis of the Frequency of Purchase: The Company classifies its customers into three groups: regular customers, occasional customers, or unique customers.

And also, Analysis of the Purchase volume per Purchase Act: With this analysis, a company wants to know how many customers buy in each purchase act. Consequently, they divide into groups that make large purchases and fewer purchases per purchase.

Multi-dimensional Customer Segmentation

For multi-dimensional customer segmentation, different variables use simultaneously. It creates subgroups of customers that are similar in some characteristics and therefore differ from the other groups of buyers.

It is the case, for example, of a cluster analysis of website visitors. Information such as the device used, the products consulted, the page visits, or the purchase value record to develop qualitative clients’ profiles and specific guidelines. The following analysis methods also pertain to multi-dimensional customer segmentation:

Factor analysis (analysis factor): Your goal is to filter out “super variables” (important factors) of all the features.

Multi-dimensional Scaling: The EMD sorts objects (in this case, customer groups) in an array so that their distances show how similar or different they are from each other.

Neural Networks: Artificial neural networks use to simulate the information processing of organisms. Within a network structure, the connections between processes and clients represent.

Interaction Automatic Detection Analysis: This method, also known as AID analysis, is used to discover relationships between variables. The segments formed divide into two groups until their size reaches an established minimum or until the differences between the mean values ​​of the groups are not significant.

Discriminant Analysis: In this case, customers divide into different groups using the so-called discriminant function to make the most straightforward possible distinction between groups of other characteristics.

Conjoint Analysis (conjoint analysis): This analysis use to identify customers’ specific preferences regarding the characteristics of a product or service. It is one of the most collective qualitative market research methods.

Customer Segments in the B2C area

Private clients can divide into client segments according to the following characteristics:

Sociodemographic: gender, age, occupation, income, level of education

Geographic: locality, neighborhood, spatial distribution, specific cultures

Psychographic: attitudes, motivations, values, lifestyle, preferences

Behavior-oriented: Price orientation, choice of place of purchase, use of media, selection of brand

Customer Segments in the B2B area

Customer segmentation in the B2B industry use to explain the purchasing behavior of business customers. The following characteristics allow you to perform segmentation:

Environmental: by sector, technological status, association membership, state or union influence

Organizational: according to the form of organization, the technology used, the size of the company, the skills, and the know-how

Individual: according to the acquisition policy, the purchase criteria, the order volume, the risk tolerance

Difference between Market and Customer Segmentation

While market segmentation includes all prospects, current and former customers, customer segmentation focuses exclusively on the current customer base. For customer segmentation to work, you first need to define and segment the market. The delimitation of the market represents the relevant market for the company. This market then subdivide into segments, such as high and low prices. Customer segmentation only occurs once the relevant market has identify and divide.

Techniques to Characterize Customer Segments

Once the customer segments have define, it is essential to characterize them precisely. Only if the needs and characteristics of these customers are specifically known, the proper marketing measures can work. To achieve this, the following techniques can use:

People: A person represents a fictitious customer who combines all the relevant characteristics of a customer segment. People simplify the targeting process, as marketers can refer to this specific person when designing their strategy.

The DISC Model: The DISC Model divides clients into four segments: Decision, Interaction, Serenity, and Compliance. It makes it easier to respond to the particular needs of customers and therefore provide them with the best possible shopping experience.

Customer Journey or Customer Journey: With the customer journey map or journey map, the customer’s complete journey is traced, from the first point of contact to the defined objective (for example, the completion of purchase). By highlighting each touchpoint, customer behavior patterns, motives, and preferences are more clearly visible.

Summary and Procedure for Customer Segmentation

Successful customer segmentation requires several steps. Generally, the customer segmentation process consists of five stages:

Define the Target Group: First, you need to determine which customers are relevant to the company. It relate to the objective of customer segmentation: It should be carried out to launch new products, highlight specific characteristics of existing products or adjust the marketing mix.

Define the Characteristics: According to what characteristics the segments should be formed.

Identify Sets: In this step, customer segments are identified through surveys, discussions, or other survey methods.

Describe the Customer Segments: The customers of the different segments are described according to their characteristics. It results in developing the people who best represent the respective customer segments.

Use Customer Segments: Once customer segments have been defined, the final step is to adapt the marketing mix to the company’s needs. The more personalized the contact with each customer, the more likely it is to affect the company’s turnover positively.

Also read: What is a Lean Start-Up Methodology? – Apply, Advantages, and More

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