How to Successfully Segment Your Customer Base

 

 

You’re probably already aware: Only those who know their target customers and can define their needs can successfully design their customer journey—that is, their product and marketing strategy—and generate revenue. Customer segmentation is therefore also part of the customer journey. Here, we’ll explain exactly what that is and how to carry out customer segmentation.

 

 

 

When is customer segmentation necessary, and what exactly is it?

 

 

 

When you perform customer segmentation, you divide customers based on specific data. But why do you do that? Quite simply: people—and therefore customers—are different. This means there is rarely a homogeneous group where everyone has identical customer needs. 

 

 

 

Here’s a simple example. You communicate with children differently than with adults. For instance, you use different vocabulary—like “tummyache” or “ow”—when addressing parents of young children. You wouldn’t typically use that language with an adult. The vocabulary is meant to establish a connection and must be tailored to the customer.

 

 

 

Customer segmentation takes exactly this into account to avoid wasted reach. As you can see, target group segmentation is therefore a significant advantage when dealing with a large target group—both for marketing and for sales.

 

In a nutshell: Definition of customer segmentation All potential customers are analyzed for segmentation and then divided into individual groups. The division focuses on both similar characteristics of the target group and characteristics that differ. The ultimate goal of segmentation is to increase revenue through a clear and targeted approach to customers in marketing and sales.

 

 

 

 

What are the benefits of customer segmentation?

 

 

 

As illustrated, customer segmentation is a way to make your marketing and sales more efficient, ultimately generating satisfactory revenue. The following benefits result from market segmentation:

 

• Customer behavior is better understood, and forecasts can be derived more easily.
• Communication tailored to the target audience is developed.
• Existing resources are used effectively.
• Costs are reduced.
• Prices and offers are tailored to customer needs

 

 

 

What is the difference between customer segmentation and market segmentation?

 

 

 

You may already be familiar with market segmentation from marketing. And at first glance, market and customer segmentation do seem similar. However, the differences between the two become clear when examined in detail.

 

 

 

This is because market segmentation examines where the company wants to operate—whether regionally or through a specific sales channel. With customer segmentation, however, the focus is entirely on the target group. Here, existing customer bases are examined and analyzed.

 

 

 

What you need to do before customer segmentation

 

 

 

Before you begin customer segmentation, it is important to define your market. This means determining which sector you want to serve and supply. Logically, there are various industries, sectors, and thus markets that you can serve. 

 

 

 

This is a strategic decision and is typically made by choosing a business model and differentiating from competitors. The features of your offering and your company’s resources also play a role in this decision. 

 

 

 

Due to limited capacity, for example, not all markets can be served. Once the market has been defined, customer groups can be identified more precisely. Questions you should ask yourself beforehand:

 

• How will we collect or measure characteristics?
• What methodological approach do we want to take?
• Will we do everything ourselves? If so, which department will handle it? If not, who can support us?
• What are our exact goals? What results do we hope to achieve with the market research?
• How can we assess our customers’ purchasing behavior?

 

 

 

Characteristics of Customer Segmentation

 

 

 

There are various characteristics used to segment customers. To identify these, you can observe and survey all potential customers. Cluster analysis is particularly well-suited for this (more on that later).

 

 

 

Online portals and web shops in particular use this analysis because they have many visitors and buyers. Here, user behavior is measured—that is, which pages are visited, what is clicked on, and what ends up in the shopping cart and is ultimately purchased. 

 

 

 

This information is linked to data on the person’s origin (the IP address) or to data from customer surveys. Supermarkets also use this approach. They analyze receipts and loyalty cards to identify purchasing patterns and customer segments.

 

 

 

Important: Be sure to comply with GDPR regulations to avoid costly warnings. Legal portals such as eRecht24 can help with this. 

 

 

 

Distinguishing Between Business and Private Customers

 

 

 

First, distinguish between B2B and B2C customers:

 

• B2B: A business customer or commercial customer is referred to as a B2B contact if they purchase products on behalf of a company.
• B2C: Private customers are ordinary consumers or end-users who make purchases for their private households.  

 

Good to know: In fact, top customers in B2B sales usually account for 80 percent of revenue. The rest consists of small customers who, while outnumbering others, generate only low individual sales.

 

 

 

Characteristics of business customers for your customer segmentation

 

 

 

The purchasing behavior of business customers is key to your customer segmentation. In the following list, we’ll share some characteristics to help you categorize B2B customers. By the way: Such characteristics that describe business customers are also called “firmographics”:

 

• Define the framework: industry, company size, competitive landscape, location.
• List operational characteristics: technologies used, employee expertise, and logistics.
• Identify procurement characteristics: This includes requirements for suppliers and their products, purchasing criteria (technology, quality, price, service), purchasing, awarding, or payment guidelines, and purchasing cycles.
• Characteristics of the people involved: communication between buyer and seller, risk tolerance in purchasing decisions, and authority in the purchasing and decision-making process.
• Situational characteristics: urgency, order volume, and seasonal factors.

 

 

 

Characteristics of private customers for your customer segmentation

 

 

 

The goal of defining these characteristics is to clearly distinguish between customer segments in order to gain a clear picture of the customer group. This will help you better understand purchasing behavior. To better define private customers, you should identify the following characteristics:

 

• Demographic data: age, gender, and marital status.
• Regional characteristics: Place of residence and region.
• Sociographics: Income, education level, occupation, and living conditions.
• Psychographics: Values, attitudes, behavior, and lifestyle.
• Behavioral characteristics: price sensitivity, media usage, preferred shopping options, and daily routine.

 

B2C example: A bicycle manufacturer distinguishes between customer segments: “Young Urbanites” and “Silverriders.” The “Young Urbanites” segment includes younger people who ride bicycles daily. They live in the city and have a certain budget at their disposal. They also prioritize quality. The “Silverriders” customer segment comprises people aged 50 and older who use their bicycles in their free time and value service and reliability. They tend to live in rural areas.

 

 

 

What models are available for customer segmentation?

 

 

 

There are two main models for target group segmentation. These, in turn, include smaller analytical methods. To make it simpler: The specific model is always chosen based on your objectives, the size of your customer base, and the available data.

 

 

 

One-Dimensional Customer Segmentation

 

 

 

Basically, one-dimensional customer segmentation offers a good, straightforward overview of the customer structure. However, with one-dimensional segmentation, you only get few, detailed, homogeneous segments. 

 

 

 

This means that customers who do not resemble one another in terms of their sociographic or demographic characteristics may be grouped together in a single segment. This can skew future forecasts. 

 

 

 

Examples of one-dimensional customer segmentation include: 

 

• The ABC analysis: This analysis shows you which customers are important to your business—that is, which customers buy a lot and which buy less. Each letter represents a group of customers: 

 

 

 

Group A is the most important, while Groups B and C are less important. This classification can also be used to calculate marketing and sales expenditures. Naturally, companies spend more on A & B customers than on C customers. 

 

• Purchase Frequency Analysis: Similar to the ABC analysis, this examines how often each customer makes a purchase. To do this, you divide your customer base into three groups: regular customers, occasional customers, and one-time customers.
• Usage intensity analysis: The central question in this analysis is how often a service or product is used. “Heavy users” use your product or service frequently. “Light users” use it rather rarely.
• Purchase Volume per Transaction: How much do your customers buy on average? Which customer group buys large quantities and which tends to buy smaller amounts? This distinction can become more complex in the analysis when combined with the purchase frequency analysis.

 

 

 

Multidimensional Customer Segmentation

 

 

 

Multidimensional customer segmentation is significantly more complex than one-dimensional customer segmentation, but it also provides more information. Generally, multidimensional customer segmentation is defined by combining different criteria, which makes the similarities between customers more precise. Forecasts are significantly clearer.

 

 

 

This is where it gets trickier, as you have to delve deeper into the field of statistics. The following analysis methods are available for multidimensional customer segmentation:

 

• Factor analysis: In factor analysis, you identify so-called supervariables from customer characteristics. 
• Neural network analysis: Neural networks are essentially algorithms that model our brain and its functions. You are essentially imitating customers’ purchasing processes.
• Discriminant analysis: Customers are classified based on various predefined characteristics. 
• Multidimensional scaling: This analysis helps you identify similarities and differences, as well as the distance between them.
• Cluster analysis: Cluster analysis also groups customers based on their similarities. Various criteria are used for this purpose.
• RFM analysis: This is a scoring method that categorizes customers based on three characteristics. The goal is to identify customers who respond to marketing and advertising efforts and consequently make a purchase. 
• Machine learning: This is an AI application. It analyzes customer data and automatically identifies patterns and correlations. Many companies have been relying on this form of analysis for years. 

 

 

 

You may have noticed: The segments used to define multidimensional customer segmentation are significantly more complex than those in one-dimensional customer segmentation. 

 

 

 

It also requires in-depth knowledge of statistics. Non-experts quickly reach their limits here. Furthermore, this type of segmentation is more time-consuming. Does this model make sense for the size of your business? You should ask yourself that question first. 

 

 

 

How does customer segmentation work in detail?

 

 

 

You must carry out this process to define the customer segments:

 

1. Clarify the task

 

 

 

All tasks and questions are collected here. The goal is always to present customers with an irresistible offer to increase the likelihood of a purchase. Specifically, tasks might look like this:

 

• The marketing department should run different advertising campaigns to better reach customer groups through personalized ads.
• Formulate sales pitches for your sales team.
• Your product development team wants to know if and which product variants should be available for the respective customer segments and which product features and functions are important for them.

 

2. Needs and requirements of your target audience

 

 

 

These questions help define the needs the offering must meet. This helps clarify your target audience. Answer the following points:

 

• Who needs your services or product?
• What problem does your product solve?
• Why is your product needed?
• What benefits does your product offer, and what does the customer know about them?

 

3. Define characteristics and target audiences

 

 

 

To identify the right characteristics of your customers, you need to conduct a customer analysis. This means you must understand what your customers think about your advertising, your offers, your products, and your services. After all, this is what distinguishes them from non-buyers. 

 

 

 

To do this, you need to identify the characteristics of your target audience. You then describe what shapes your target audience’s perceptions. To do this, you can analyze situational, demographic, sociographic, functional, regional, psychographic, behavioral, operational, or formal characteristics.

 

4. Identify the customer segments

 

 

 

Through market research, you can measure the prevalence of these characteristics in your target market. The key question is: Which characteristics occur, and how frequently? The collected data is then statistically analyzed, for example using cluster analysis. 

 

 

 

This reveals smaller groups and clusters that indicate the frequency of similar characteristics among certain members. This helps you understand which characteristics occur together particularly frequently—and which do not. Your clusters are also your customer segments.

 

 

 

In addition, the analysis shows what percentage of the target group falls into each cluster. This allows you to determine the size of your customer segments and the market segment. This is a key metric for taking further steps.

 

5. Description of Customer Segments

 

 

 

You already know the specific characteristics of B2B or B2C customers. In addition to this information, you can create so-called psychograms. These make customers’ purchasing behavior even more tangible. 

 

 

 

A psychogram encompasses attitudes toward the company and your products, as well as what interests customers about your company and what preconceptions non-customers currently still hold. A persona is then derived from these values. These personas are particularly important for marketing.

 

B2B Example: A company in the IT & technology sector manufactures hardware and software and distinguishes between two customer segments: “Dynamics” and “Global Players.”The “Dynamic” segment includes small and medium-sized enterprises in the technology sector that are experiencing strong growth, are tech-savvy, and have a high level of user expertise. They pay less attention to price, but their annual order volume is relatively low. The “Global Players” customer segment includes large enterprises that are highly price-conscious but have low user proficiency. However, they have a high order volume.

 

6. Addressing Customer Segments

 

 

 

Ultimately, you align your activities in marketing, sales, and product development with the individual customer segments. For each customer segment, you can offer a suitable product, adjust prices, and provide an upsell—that is, an additional offer. This also makes advertising easier to design and aligns with the initial objective of customer segmentation.

 

 

 

Conclusion: Successful customer segmentation—here’s how it works!

 

 

 

You now know how to successfully implement customer segmentation and are ready to get started. However, you might also be thinking that this is exactly the point where you’d like to work with an experienced agency to receive professional guidance.

 

 

 

This makes particular sense when segmenting customer groups, as an agency can take an unbiased and objective look at your business and your offerings. We at Waterproof Web Wizard are happy to support you in this process. Be sure to read our customer reviews beforehand to get a better sense of who we are.

 

 

 

Apart from that, we are specialists in SEO strategies, which are an important part of marketing. We cover the following areas:

 

• Search Engine Optimization – SEO 
• Local SEO
• Technical SEO
• SEO Audit

 

 

 

Feel free to contact us with no obligation: You can reach us by phone at +49 751 95 89 92 17 or send us a message via our contact form.