Customers are not all the same. It therefore does not make sense to use the same marketing techniques, messages and activities for all your customers.
Customer segmentation is a system that allows you to split your customers up into smaller groups, and therefore target your marketing more efficiently and effectively.
There are a number of different techniques that can be used for customer segmentation. This page explores the broad principles and then describes some ways that you can approach the issue, and how you can use the results to improve your marketing effectiveness.
Why Use Customer Segmentation?
Customer segmentation is useful to ensure that you are:
- Using the right channels or methods to communicate with your customers and potential customers (that is, their preferred methods); and
- Sending each customer the right messages, that is, ones that are relevant to them and their needs, and will help them to decide to buy from you.
It is therefore important that your customer segmentation techniques identify these two pieces of information for each group of customers.
Most importantly, however, you need to identify differences between customers that affect their buying decisions.
These may, for example, relate to age or gender, family situation, whether there are pets, job and working pattern and geographical location. However, they may also relate to the type of purchase, and linked spending patterns. Ideally, you also need to know how these factors affect buying decisions.
Case study: Amazon’s Recommendations Engine
Amazon, the online retailer, uses customer segmentation techniques to recommend other purchases to its customers. It has fairly limited demographic information about its customers, but it does know a lot about their buying habits, and how they use purchases. The information it can draw on includes online behaviour during previous visits, purchases, reviews, and Wish Lists.
Its algorithm recommends other purchases using formulas such as:
- Customers who bought x (which you have just bought) also bought y; and
- Customers with x on their Wish List also bought y.
Amazon scores, though, because making recommendations is useful to customers.
Customers therefore have an incentive to ‘train’ the recommendations engine by asking it to ignore certain purchases, or rate others. The segmentation can therefore be improved, step by step, until Amazon can target individuals as a ‘market of one’.
Once you have identified some important differences that affect buying decisions, you can then start to group your customers together, based on their characteristics. This is customer segmentation.
One Method of Segmentation: Creating Buyer Personas
Buyer personas are a very good segmentation tool, because they identify your target customers as individuals, rather than as a group.
It is therefore much easier to create marketing materials that address them personally.
Buyer personas are descriptions of your ideal customers as individuals, with names, job descriptions, and demographic information.
They enable you to understand your customers, including their ability to make decisions, what they value, and how best to communicate with them. They are useful in both business-to-consumer, and business-to-business marketing.
Creating a buyer persona
You will probably need about three to five buyer personas to cover your target market.
The key is to use real data, and not make things up. You can draw the information from a range of sources, including, but not limited to:
- Your sales teams and networks, who should know your customers quite well;
- Your competitive intelligence gathering;
- Online analytics such as Google Analytics, to show your customers’ behaviour;
- Customer surveys and feedback;
- Any other market research that you have carried out, including focus groups or interviews; and
- From your customers themselves, which may be the most important source.
Once you have information, you can start to create a ‘sketch’ of your ideal customer(s). Effectively, what you are doing is starting with an outline, and filling in more and more detail, until you feel that you really understand your customer as a person, with clear needs and wants, and preferred ways of communicating.
Be as specific as possible. For example, you are not targeting a whole family, even if your product is for families. You need to target the person in the family who makes the buying decision, and understand how they make that decision.
Targeted Marketing: Using Your Customer Segmentation
Once you have created your customer groups or buyer personas, you can start to use them to build marketing materials and activities.
For each group or persona, think about how best to communicate with them, and what messages you want to send them.
These messages should relate to their buying behaviour, and be designed to help them to decide to buy from you.
You should be using channels they use, and methods that they like to use for communication. For example, for younger people, social media is often more effective, provided you pick your channel correctly. For older people, email may be preferred. Business buyers may be more likely to see and read articles posted on LinkedIn or your company website.
Each group will need a range of channels and messages. Even within the group, individuals have different needs, and one size does not fit all. A range of messages and offers will ensure that you can reach more of the group.
Updating Your Segmentation
Just like Amazon’s recommendations engine, remember that you can (and should) update your segmentation information each time you have contact with a customer.
This is especially true online, but it also follows in-store.
Some stores, for example, ask for email addresses to send receipts, meaning that they then have ongoing information about what customers have purchased, and can link those purchases regardless of whether online or in store. Other stores offer a loyalty card which can also be invaluable for collecting customer information.
More information — especially accurate information, direct from the customer — is always valuable, and should be used to ensure that your marketing is even more targeted in the future.