Why Customer Segmentation Is Vital for Personalization and Brand Loyalty

Customer segmentation is something of a paradox: By identifying groups of customers who have traits in common, it operationalizes personalization, enabling brands to tailor their communications and offers to the members of each group.

Below, we’ll look at the myriad types of customer segmentation analysis and the equally numerous ways to use it. First, though, let’s differentiate between customer segmentation and market segmentation. The primary difference is stated in the names: Market segmentation categorizes the members who make up the market in which a brand operates, whether it’s candy bars or construction equipment. Identifying the sectors within a market helps a brand distinguish itself from competitors, discover new audiences and optimize its marketing and pricing strategies, among other benefits.

Customer segmentation hones in on an organization’s existing customers. Even if a brand opts to target one cohort within its overall market — say, Gen Z candy buyers — the customers within that cohort will still have varying reasons, preferences and behaviors that affect their candy-buying decisions. A customer segmentation strategy can determine which factors bear the greatest weight in their decisions, leverage zero- and first-party data to organize customers by their commonalities and then tailor messages and offers to each customer segment accordingly.

The Benefits of Customer Segmentation

Using customer segmentation to group customers by relevant traits or behaviors enables a brand to efficiently and effectively present each group with offers most likely to appeal to them. And that, in turn, increases the likelihood of customers within each group continuing to purchase from the brand, boosting lifetime value and reinforcing loyalty. Presenting the right offer at the right time to the right cohort, such as a coupon for large beverages to customers who previously ordered large pizzas, can increase average order value as well.

Yet while those are reasons enough to implement a customer segmentation strategy, they’re not the only benefits.

For instance, along with revealing the product and promotion preferences and purchase drivers of cohorts within your audience, customer segmentation can reveal the most effective channels and media for interacting with each group. This knowledge enables a brand to allocate its marketing and advertising spend more productively as well as to fine-tune the actual messaging and creative. Segmentation can also show that certain customer sectors have distinct customer service preferences that should be catered to.

Over the long term, maintaining a customer segmentation strategy can reveal consumer trends a brand might easily overlook or might not notice until much later. If a significant portion of customers in a high-value segment move into a lower-value cohort, say, exploring why could reveal new market opportunities (perhaps these buyers have aged out of a brand’s primary offering, suggesting that the brand could benefit from introducing a product more suitable to their new circumstances) or point to nascent issues to address (dissatisfaction with value or service, perhaps).

And while customer segmentation is typically viewed as a tool for reducing churn, increasing sales and strengthening brand loyalty, it can also help with customer acquisition. Knowing the characteristics of an organization’s best-performing customers can help it create lookalike models for prospects most likely to convert as well as a map for how best to reach them.

The Types of Customer Segmentation

Determining the type of customer segmentation strategy to choose depends on the purpose of the segmentation and the data available. Often brands will want to conduct several types of segmentation analysis so that they can determine not only who their customers are but also how they think and behave. Below are the most common categories of customer segmentation.

Demographic or firmographic segmentation

These are perhaps the simplest type of customer segmentation analysis to perform. Demographic segmentation, used by brands that market to consumers, organizes customer cohorts based on age, education, gender, marital status and other personal characteristics. Firmographic segmentation, the B2B equivalent, categorizes by industry, number of employees and other company characteristics. A subset of demographic/firmographic segmentation, geographic segmentation classifies customers by location; this is important for local SEO and media buying, as well as for offerings reliant on climate and other localized characteristics. Organizations can easily source missing demographic or firmographic data points from government agencies such as the Census Bureau and numerous commercial databases as well as via customer surveys. This sort of client segmentation enables brands to fine-tune their models and marketing efforts.

Behavioral segmentation

Demographic analysis might show that most of a brand’s customers are millennial parents, but that doesn’t mean these customers buy most frequently and spend the most money with the brand. Behavioral segmentation, however, does organize customers by their shopping, purchasing and other actions. Perhaps the granddaddy of all behavioral segmentation is RFM analysis, which scores customers by the recency, frequency and monetary value of their interactions with the brand. Other types of behavioral segmentation include site visitor segmentation, which identifies subsets of customers based on how they navigate an organization’s website. The behavioral category of customer segmentation analysis is especially useful for identifying customers who have lapsed or are at risk of doing so, creating retention tactics, and rewarding high-value customers to ensure long-term loyalty.

Psychographic or attitudinal segmentation

If demographic/firmographic segmentation creates cohorts based on who customers are, and behavioral segmentation classifies customers based on what they do, psychographic — aka attitudinal — analysis considers the why behind their actions. Attitudinal customer segmentation creates groups based on customers’ lifestyles, opinions and interests, often using surveys to fill in data gaps. Armed with a foundational understanding of customer cohorts based on attitudinal characteristics, brands can create the strategic direction of their retention, upselling and cross-selling efforts before turning to behavioral segmentation to implement the tactical efforts.

Customer Segmentation in Action

There’s a good chance you’re already using basic forms of customer segmentation marketing. For instance, a snack brand that sends customers a coupon at the beginning of their birth month offering them a birthday discount is using demographic segmentation. A furniture retailer that gives customers who abandoned items in their online cart 10% off to come back and complete the purchase is using behavioral segmentation. A vacation rental company that promotes properties in the heart of city to customers who have indicated a preference for nights on the town and more-remote properties to those who have shown they value quietude is using attitudinal segmentation.

All these examples of customer segmentation focus on creating a more personalized interaction to boost sales and loyalty. Segmentation can also identify potential areas of growth: If a significant portion of your customer base prizes sustainability efforts, for example, you might consider creating an eco-friendly version of your product or switching to more environmentally friendly packaging. Or perhaps you’ll discover that many of your customers are younger than you’d assumed, leading you to test marketing to their peers via different media.

How Material can Help with Your Customer Segmentation

A customer segmentation strategy enables an organization to personalize messaging, buy media more effectively, improve customer service and hone product development — all of which will amplify sales, customer loyalty and ROI. That’s only if the segmentation is implemented and leveraged properly, however. At Material we have decades of experience developing customer segmentation solutions for every conceivable use case and type of organization. Contact us today to learn how we can help you use customer segmentation to unlock your business goals.

FAQ

How can we identify the most valuable segments within our customer base?

Assuming you’re defining “valuable” customers as those spending the most money with your business, a behavioral segmentation tactic such as RFM (recency/frequency/monetary value) will prove effective. By scoring clients for the recency and frequency of their purchases in addition to how much they’ve spent, this customer segmentation strategy accounts for the bias toward those who have been customers the longest that is inherent in average lifetime value segmentation.

How do we ensure that our customer segmentation strategy aligns with our overall business goals?

The first step is to clearly define your goals beyond “increase personalization” and “improve revenue.” Do you want to improve brand loyalty? Increase the frequency of sales? Improve return on advertising spend? What are the KPIs that matter? Next you need to gather the relevant customer data and decide on the demographic/firmographic, behavioral and/or attitudinal traits that have the most bearing on the improvements you want to impact. Only then can you segment your customers. It’s often worth turning to an outside specialist to help determine which types of customer segmentation will be most effective in achieving your goals.

How can we use customer segmentation to improve our marketing and sales efforts?

Personalization is key to optimizing marketing and sales, and customer segmentation is a tried-and-true means of facilitating personalization. By identifying cohorts within your customer base, you can craft targeted messaging and prioritize outreach to specific groups based on their common traits. For instance, a sales team might promote to value-conscious clients different products and payment plans than it would to clients who place a premium on quality and convenience.

How often should we revisit and adjust our customer segmentation strategy to adapt to market changes?

An organization should take stock of its customer segmentation strategy at least once a year, and preferably more frequently. However, if the market sector is volatile or performance deteriorates disproportionately, a company should revisit its segmentation accordingly.