Billionaire German-American entrepreneur, Peter Thiel once said, “Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.” The statement amply explains the unparalleled importance of customer segmentation in business, regardless of the size of the organisation. Customer segmentation allows marketeers to address customers most effectively and productively.
Customer segmentation is the practice of dividing the target customer base into groups based on common characteristics to market the company’s products effectively and appropriately. Also known as market segmentation, customer segmentation is done by identifying the buying needs of the customer related to the product, their common buying behaviour, and also by several other characteristics. Segmenting not only helps an organisation in strategising the marketing effort but also maximising the value of them as individual segments.
There are many benefits to customer segmentation. To segment the prospective customer base, the company has to learn about the customers deeply. This effort enables introducing products to their unique needs. Also, with the in-depth knowledge gathered on customers, the organisation can feed information to strategise other functions such as marketing, sales, and production for enhanced performance.
The convenience of creating targeted advertising and promotions campaigns becomes easier by segmenting the potential customer base. A message can be created to cater to the exact needs of the identified customer segment and it can be directed to obtain a more effective response. Further, by creating market segments, the service delivery can be offered with enhanced efficiency by understanding the unique behavioural patterns of a single segment.
Customer loyalty
As the interactions and the content are targeted to a specific group, the organisation can expect a higher level of customer loyalty. In addition, communicating with an identified precise group is easier as most often the preferred communication channels or digital platforms are similar.
There are many types of segmentation models available, often typical to different markets and based on specific consumer behaviour. A few frequently used models by marketers are discussed below that can shed some light on the subject.
Demographic segmentation is a simple model that provides greater insights into consumer behaviour and preferences. This model refers to the categorisation of the target market based on precise individual variables such as age, education, gender, and profession. Demographic segmentation helps companies strategise the marketing effort more effectively.
All communication efforts fit into the demographic segment due to the similarity of basic characteristics. Breaking the target segment into individual categories defined by demographics helps the organisation to channel resources and increase the return on marketing investment.
Geographic segmentation is ideally suited to retailers in a particular area. This model divides a target market by location allowing marketeers to serve customers in a specific geographical area. The communication from the organisation reaches customers who are located only in that selected area. Geographic segmentation also is a relatively inexpensive model where the message can be delivered even to a tiny locale. Hence, geographic segmentation is ideal for small businesses with limited budgets to serve a wide customer base in the area.
Behavioural segmentation is done based on patterns of consumer behaviour when they interact with a company to purchase goods or services. The grouping is done by analysing knowledge, attitudes, response to the product or service. Behavioural segmentation is about understanding customers not by merely analysing who they are but also by identifying what influences them in their buying decisions.
Needs-based segmentation is a compelling model for more efficient marketing productivity. With this segmentation style, the market is divided into small units of people with typically similar needs. By identifying parallel behaviour, the marketer not only can communicate with the group efficiently but also sells the most suitable products exclusive to such a group of people.
Tangible benefits such as turnaround times, flexibility, pricing benefits, more ideal promotions, can be offered to customers with a needs-based approach.
This model also can be used to provide better solutions than the competition making it a cutting edge tool to compete. These are powerful reasons for customers to choose a vendor as they might realise such organisations are trustworthy and offer tailor-made solutions.
Value-based segmentation is a successful segmentation scheme that differentiates customers by their economic value. This approach is perfect for price-sensitive prospects. In this model, customers with similar economic levels are segmented. The key difference between this model with other approaches is the particularly critical approach to pricing. The products or the services on offer are priced according to value groups with justifiable pricing and perhaps with promotional options to buyers.
The value-based model is widely accepted to convert prospects into customers by funneling them through a personalised journey. On one hand, this segmentation process can identify customers willing to pay more for a product and on the other hand determine those others who are willing to pay the exact value as they perceive it.
Psychographic segmentation is often done at the start-up stage. This is a technique where groups are formed based on psychological traits that influence buying habits. The traits such as social status, daily activities and habits, food preferences, common interests, and even general opinions are being considered through a research process. The research is mainly conducted based on how people think and what they aspire their lives to be.
Vital task
Creating a psychographic customer segment can be a vital task in developing a business. Marketeers divide the customers based on psychographics to connect with their target market based on basic psychological patterns.
This segmentation model is vital when an organisation offers a customised product range or multiple services. Due to the availability of more intimate information about individuals, this segmentation style can be more effective and productive.
Although mass marketing tactics produce results, the assumption that everyone is interested in buying a product is a misconception. Therefore, instead of using a ‘one-size-fits-all’ approach, marketers deploy successful segmentation clusters who are sharing the same behavioural patterns.
By delivering dynamic content and tactics based on segmentation lead to more effective marketing communication and also enhance the overall selling effort. It was revealed that ineffective segmentation or absence of it can push businesses to fail. Therefore, targeting correct customers through segmentation is absolutely imperative for business success.
Breaking down a large database into manageable clusters makes it easier for a company to identify targets, initiate promotion campaigns, and influence them better, increasing the marketing efficiency. In addition, grouping can open new doors for new market opportunities for cross or up-selling.
In a retail business, segmentation immensely assists organisations in distribution efforts. Also, it was recognised that customer retention can be tremendously improved by serving a segmented clientele by giving extra attention. Segmentation also can help to create targeted strategies that will capture customers’ attention to create a more positive high-value experience.
Segmentation allows organisations to make their marketing more efficient and effective. Possessing a clear idea of who wants to buy the products, when to buy, and at what price, helps to improve the whole product and differentiate the organisation from others.
The end result is that the company stands out among competitors. It also helps to obtain a competitive edge over rivals. By segmentation, the marketeers can demonstrate that they possess better knowledge about customers compared to competitors.