Today’s buyers demand a personalised and intuitive experience, and they have easy access to a wealth of providers. By leveraging the power of data, segmenting customers based on factors such as age, location, attitudes and interests —companies can meet these expectations, building relationships with customers and reaping the rewards of loyalty.
As Adam Herbert, CEO of marketing and data specialist at Go Live Data says, “Visionary leaders recognise that understanding and connecting with their customers on a deeper level is key to unlocking growth for their businesses and, to support this, segmentation becomes a powerful tool. Leaders can empower their teams to craft marketing messages or offerings that resonate with their audience’s needs and aspirations.”
Segmentation equips organisations to deliver a more personalised experience at every touch point of the user journey. It also plays a role in leveraging a FOMO (Fear of Missing Out) strategy, with different segments responding to different triggers. By understanding how to identify customer segments and implement an effective strategy, businesses can improve the overall customer experience, in turn boosting retention and increasing sales.
What are the four types of customer segmentation?
There are four commonly adopted customer segmentation models. Each one plays a different role, and the optimum one will depend on the business and its objectives. In many cases, a holistic integration of more than one of these models will prove most successful.
Demographic customer segmentation
Perhaps the most common segmentation model is demographic customer segmentation, which categorises audiences into data points such as age, gender, household income, job titles and marital status. By creating groups of people based on one or more common characteristics, businesses can tailor communications or services to overcome specific pain points or meet needs unique to that group. As Herbert says, demographic segmentation “provides a foundational understanding of who your audience is.”
For example, a grocery chain might target families with young children with products such as nappies, baby food or kids’ snacks, while tailoring its marketing to university students around instant meals and basic cooking ingredients.
Demographic segmentation can also enable companies to track trends and map customer journeys to anticipate demand or plan future marketing campaigns, for example.
Geographic customer segmentation
By grouping customers based on their location, companies can not only tap into insights into the audience’s town, city, county or country but their language and culture too. For example, Wales has nearly 900,000 Welsh-speaking people, with the highest proportion in Gwynedd, Cardiff and Carmarthenshire [1]. Companies segmenting customers geographically, with sizeable audiences in these parts of Wales, might benefit from producing marketing and communications in the Welsh language as well as in English.
For companies with global audiences, an understanding of the seasons, climate, language and cultural nuances will also be key to powerful audience engagement, requiring marketers to use a different tone of voice and CTA based on the data.
Building a skilled team of marketers to effectively execute and capitalise on segmentation is key. One of the benefits of the American Express® Business Platinum Card is its annual Indeed benefit, which helps organisations build their best team and tap into the right talent. Companies get up to £75 in statement credits every quarter when they spend with their Amex® Business Platinum Card on uk.Indeed.com, potentially saving up to £300 on recruitment costs every year¹.
Psychographic customer segmentation
Psychographic segmentation is based on people’s personality traits, attitudes, values and interests. For example, a magazine publisher might group people based on their political persuasion as well as their hobbies and lifestyle to resonate emotionally and drive engagement with the optimum product.
Understanding and tapping into people’s psychological makeup enables brands to personalise communications that strike a moral or intellectual chord, as well as drive word-of-mouth endorsement from like-minded people, boosting engagement and loyalty.
Behavioural customer segmentation
By grouping people based on how they interact with a brand — such as their browsing behaviour, buying habits and response to marketing communications — companies can tailor offers to different segments, as well as personalising marketing.
This data could be used to group customers with a high customer lifetime value, for example. By segmenting this valuable audience, companies can invest in retention initiatives such as bespoke discounts or VIP loyalty programmes. This approach can also underpin a FOMO strategy, creating exclusive members-only deals to drive loyalty and entice others.
Companies can also use behavioural insight to segment and target both high-volume one-off customers, and long-term customers with a higher transactional value, thereby improving the predictability and profitability of sales.
While it can differ depending on business size and industry, Herbert says behavioural segmentation is “perhaps the most powerful” model.
Implementing customer segmentation in your business
Customer segmentation is rooted in data. For a business to implement segmentation proficiently, data must be gathered, organised and analysed. Segments can then be identified and created, and strategies devised for each group.
As Herbert says, “Without accurate and up-to-date information, segmentation efforts can be based on flawed assumptions, leading to misguided marketing strategies.”
There are several key steps involved in implementing customer segmentation successfully.
Key steps to identifying customer segments
How businesses analyse and organise their data to create segments will depend on their product or service, sector and audience, which will collectively determine their core objectives. For example, their goal might be to improve return on investment (ROI) on marketing through greater personalisation, or it might be to increase sales using a carefully tailored sales strategy.
Once business goals have been identified, customer data must be collected in accordance with relevant data protection laws and compliance procedures. This should be from numerous sources, such as sales transactions, social media, website analytics and customer surveys. This information can be organised into categories based on the different segmentation models to ensure that a meaningful volume of people falls into each grouping.
As Herbert says, choosing the right segmentation criteria can be tricky. “There's a temptation to oversimplify and segment based solely on demographics. While these factors can be insightful, they often fail to capture the nuances of customer behaviour and motivations. SMEs need to strike a balance between meaningful segmentation and actionable insights.”
Data can then be analysed to identify common characteristics or behaviours, and spot patterns and trends. Aiming for between three and eight segments is often advisable, enabling a company to tap into enough useful data without it becoming too granular.
Tools and software for customer segmentation
Customer segmentation software is increasingly sophisticated, and automation plays a valuable role.
There are a wealth of tools leveraging AI to facilitate the segmentation process. For example, Hootsuite automatically adds tags to posts to make segmenting social data easier. Hootsuite also accepts the American Express® Business Platinum Card, which gives businesses up to 54 days until payment is due, making the management of cashflow easier².
Customer segmentation in action
Go Live Data recently worked with an SME insurance firm to implement customer segmentation. This was achieved by analysing policyholder data to identify distinct groups based on demographics, buying behaviour, and risk profiles.
Herbert says Go Live Data discovered that younger customers preferred digital interactions, while older clients valued personalised service, so by tailoring marketing strategies and product offerings to each segment, the insurance company was able to increase customer engagement and satisfaction.
“Based on our segmentation work, they introduced mobile-friendly insurance plans for the younger customers and enhanced their support for older ones, leading to a 20% increase in policy renewals and cross-selling opportunities,” says Herbert. “It also boosted overall customer retention.”
Tips for effective customer segmentation
- Define objectives: start by clearly defining your goals and analysing metrics
- Invest in quality data sources: accuracy is crucial
- Integrate data from various channels: a holistic view is key
- Use advanced analytics: these will help to uncover insights and predict trends
- Regularly review and update segments: customer needs and preferences evolve over time
Applying customer segmentation to better understand customers, optimise marketing spend and meet the needs of different audiences is a critical part of staying competitive in today’s fast-moving world. The proliferation of data, coupled with increasingly sophisticated software, means companies are more empowered than ever before; harnessing this potency is vital.
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Sources:
[1] UK Government, Welsh language data from the Annual Population Survey: October 2022 to September 2023
