Insights Article

The Importance of Customer Segmentation
25th October 2021
customer segmentation - people in crowd

Why is customer segmentation important?

Aside from those who work within market research, many people see customer segmentation as rather dry and complex. But if you don’t understand your customers, how can you expect them to listen to what you have to say? And if the service you’re offering doesn’t meet the wants and needs of your target audience, what’s the likelihood of them buying from you again?

Segmentation is key to getting the most out of your marketing budget and ensuring that your existing customers stay with you, or buy from you again. In this article we will be exploring the importance of customer segmentation and the many benefits that it can bring for your business.

What is customer segmentation?

Customer segmentation is when a business categorises consumers into specific groups, with the aim of targeting the people who are most likely to be interested in their product or service. When forming these groups, combinations of the following factors are commonly taken into account:

  • Demographic Segmentation
  • Geographic Segmentation
  • Psychographic Segmentation
  • Technographic Segmentation
  • Behavioural Segmentation
  • Needs-based Segmentation
  • Value-based Segmentation

In an ideal world, marketing would communicate on a one-to-one basis with every customer. However, in most cases this is impossible. Every organisation needs to manage complexity by grouping its customers (and potential customers) in order to develop and implement a finite number of targeting strategies. The most effective way to group customers is through segmentation.

Segmentation is often a misunderstood term. I cannot recount the times when potential clients said “yes we have a segmentation in place: we target women 18-34″, or “we focus on our top 20% customers”.

Unfortunately, demographics on its own is a very convenient but totally inefficient way to target. It assumes that everyone in a demographic group (say women 18-34) behave the same way and therefore react similarly to marketing messages. You can easily work out the flaw by asking a couple of people of a similar age and the same gender to you what they watch on TV, or what mobile phone they own and why.

Targeting via demographics alone leads to confused customers bombarded with the wrong messages. For the organisation the result, from experience, is up to 50% of marketing or media money wasted.

How is customer segmentation done?

Segmentation is a mathematical process that groups data points, customers or consumers by comparing them across a multitude of characteristics or variables. Good segmentation produces segments whose members have very similar characteristics with each other, while each segment is very different to the other segments.

Once determined, these customer segments can then be used to guide marketing activity, ensuring that the right people are getting the right messages – saving both time and money. However, whilst each segment behaves differently, and requires a different targeting approach, it’s essential that the overall approach works as a whole. A good segmentation will show you not only how to target different groups, but how this can work as one consolidated marketing campaign, ensuring focus rather than fragmentation.

But it doesn’t stop there; effective segmentation can also be used when developing new propositions or launching a brand in a new region. It all comes back to the same point: if you can learn more about how your customers think and how they behave, then you can have a more powerful impact on the way that they interact with your brand.

What are the benefits of customer segmentation?

For nearly all businesses, only a fraction of the overall audience will be interested in buying the products or services being offered. Successful segmentation enables businesses to identify and target those who are most likely to be receptive to marketing messages, resulting in a much more efficient use of their marketing budget. For example, one survey carried out by Mailchimp revealed that segmented email marketing campaigns had a 14.31% higher open rate than non-segmented campaigns.

Moreover, when a business understands their customers wants and needs, they can adapt their product or service offering accordingly. Here are some of the key benefits of customer segmentation:

  • Identify your least and most profitable customers, so you can focus your marketing efforts on those who are most likely to buy
  • Identify the most effective channels to reach your target audience
  • Improve customer retention rates by offering services and products that your audience want
  • Maximise the use of your resources
  • Increase profits by keeping costs down
  • Identify new market opportunities

Customer segmentation in action

In order to demonstrate the importance of customer segmentation, the team at Clusters have put together this sample survey for you to see segmentation in action. We’ve created a set of financial personas to represent the different types of financial consumer in the UK. Using data from a nationally representative sample of 10,000 people across the UK, we’ve segmented using a mixture of needs, attitudes, motivations and barriers.

You just need to answer 6 short questions to find out which financial profile you belong to.

Click here to take the quiz!

If you want to learn more about customer segmentation or how it could benefit your business, why not get in touch?

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