The 8 methods of customer segmentation

Brands using segmented campaigns have seen a 760% increase in sales (Data & Marketing Association).

That's the potential of successful customer segmentation.

Here we'll unveil its subtleties, exploring the different techniques, their benefits and how to apply them successfully in your business.

Are you ready?

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What is customer segmentation?

Customer segmentation refers to the process of dividing a customer base into distinct groups.

Each segment represents a subset of a market, with its own unique characteristics and needs. 

For example, a segment might consist of young adults interested in eco-friendly products, while another might include middle-aged professionals looking for luxury items. 

Recognizing these differences enables businesses to craft personalized marketing messages, offer relevant loyalty program, and engage with each segment in the most effective way.

In e-commerce, understanding and implementing customer segmentation can lead to increased loyalty, higher conversion rates, and ultimately, enhanced revenue. 

It's not just about selling products. It's about building lasting relationships with different customer groups by addressing their specific wants and needs.

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8 customer segmentation techniques

Here are the 8  customer segmentation techniques:

1. Demographic segmentation
2. Geographic segmentation
3. Psychographic segmentation
4. Behavioral segmentation
5. Technographic segmentation
6. Value-based segmentation
7. RFM segmentation
8. Firmographic segmentation

1. Demographic segmentation

Demographic segmentation involves categorizing your customer base based on demographic information. 

This technique breaks down the market into approachable groups based on measurable, objective data like :

• Age
• Gender
• Income level
• Educational background
• Marital status
• Occupation
• Family size

Demographic segmentation is straightforward and data-driven. 

By understanding the demographic profile of your customers, you can tailor your marketing efforts to speak directly to their life stage, income level, or educational interests. 

It's particularly useful for product recommendations, targeted advertising, and even pricing strategies.

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When can you use demographic segmentation ?

• When launching a new product line that appeals to a specific age group or gender.
• Tailoring marketing campaigns to resonate with different income or education levels.
• Creating personalized email marketing campaigns based on marital or family status.

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An example of demographic segmentation

Imagine you run an online clothing store. 

By using demographic segmentation, you discover a significant portion of your customer base is women aged 18-25. 

With this insight, you decide to launch a marketing campaign focused on this group, featuring trendy, affordable fashion.

The campaign includes email blasts with language and visuals that resonate with a younger, style-conscious audience, leading to increased engagement and sales within this segment.

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2. Geographic segmentation

Geographic segmentation slices your customer base according to their geographical location. 

This approach is based on the premise that customers' preferences and needs can vary significantly depending on where they live.

Here are some key segmentation criteria:

• Country
• City or town
• Region or state
• Climate zone
• Urban vs. rural areas
• Population density

By understanding geographical differences, you can customize your offerings and marketing to fit the local culture, climate, and consumer behavior. 

This isn't just about shipping logistics. It's about making your brand relevant and appealing wherever your customers are.

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When can you use demographic segmentation?

• Adapting product offerings for different climates or cultural preferences.
• Crafting marketing messages that resonate with local or regional values and trends.
• Setting up location-based promotions and deals.

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An example of demographic segmentation?

Let's say you run an online store selling home decor. 

With a geographic segmentation, you notice a high volume of customers from coastal areas. 

You then tailor your inventory to include beach-themed decor, and create marketing campaigns that highlight these products to customers in these regions. 

This strategic alignment with the geographic preferences not only boosts sales in these areas but also enhances the customer experience by offering products that reflect their environment and lifestyle.

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3. Psychographic segmentation

Psychographic segmentation dives deeper than surface-level criteria, focusing on the psychological aspects of consumer behavior. 

This technique segments customers based on their lifestyles, interests, attitudes, values, and opinions.

Here are some criteria for psychographic segmentation:

• Personality traits
• Lifestyle choices
• Interests and hobbies
• Values and beliefs
• Attitudes and opinions
• Life goals and aspirations

Psychographic segmentation allows you to connect with your customers on a more personal and emotional level. 

Understanding the 'why' behind their purchases enables you to tailor your marketing strategies to resonate with their core values and interests, leading to a stronger emotional bond with your brand.

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When can you use psychographic segmentation?

• Crafting content that aligns with the lifestyle or values of your target audience.
• Developing products that cater to the specific hobbies or interests of different segments.
• Personalizing marketing messages to appeal to the unique attitudes and beliefs of customers.

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An example of psychographic segmentation 

Suppose your online store specializes in eco-friendly products. 

Through psychographic segmentation, you identify a segment of environmentally conscious consumers who value sustainability. 

To engage this segment, you create a marketing campaign focusing on the environmental impact of your products, aligning with their values and lifestyle. 

This approach not only increases the appeal of your products to this segment but also fosters a deeper connection with your brand, as you're addressing something they passionately care about.

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4. Behavioral segmentation

Behavioral segmentation categorizes customers based on their behaviors and interactions with your brand. 

This approach delves into how customers use your products, their purchasing habits, and their overall engagement with your brand.

For example, you can segment based on criteria like : 

• Purchasing behaviors
• Usage rate
• Brand loyalty
• Benefits sought
• Customer journey stage
• Engagement level

Behavioral segmentation is vital for understanding the practical aspects of how customers interact with your brand. 

This way, you are able to optimize your marketing strategies, product development, and customer experience based on actual customer behavior, rather than assumptions.

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When can you use behavioral segmentation?

• Tailoring recommendations and offers based on past purchasing behaviors.
• Identifying and rewarding loyal customers to foster brand advocacy.
• Customizing marketing messages for different stages of the customer journey.

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An example of behavioral segmentation

Imagine your e-commerce platform sells a variety of gadgets. 

Using behavioral segmentation, you identify a group of customers who frequently purchase the latest tech products. 

For these tech enthusiasts, you create a special loyalty program and provide early access to new releases, along with targeted emails about cutting-edge technology trends. 

This approach not only increases their loyalty and spending but also positions your brand as a go-to source for the latest gadgets.

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5. Technographic segmentation

Technographic segmentation involves categorizing customers based on their use of technology, like

• Device usage (smartphones, tablets, PCs)
• Operating systems (iOS, Android, Windows)
• Preferred platforms (web, mobile apps)
• Software and app preferences
• Level of tech savviness
• Adoption rate of new technologies

For e-commerce brands, technographic segmentation is a potent tool. 

It helps you understand how different customers interact with technology, which is crucial in optimizing your online presence and digital marketing efforts. 

Whether your customers are tech enthusiasts always chasing the latest gadget, or more traditional users who prefer straightforward, user-friendly interfaces, this segmentation helps tailor your approach.

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When can you use technographic segmentation?

• Optimizing website and app design for different devices and platforms.
• Tailoring digital marketing strategies to reach customers on their preferred platforms.
• Customizing user experience based on the level of tech savviness.

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An example of technographic segmentation

Let's say your e-commerce business specializes in home electronics. 

Through technographic segmentation, you discover a segment of your customers primarily uses mobile devices and prefers app-based shopping. 

To cater to this segment, you optimize your mobile app, ensuring a seamless shopping experience, and launch targeted mobile-only promotions. 

This strategy not only enhances the user experience for this segment but also capitalizes on their preferred shopping method, potentially increasing sales and customer loyalty.

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6. Value-based segmentation

Value-based segmentation sorts customers based on the economic value they bring to your business. 

This method focuses on segmenting customers by criteria like : 

• Lifetime value
• Purchase frequency
• Average order value
• Profit margin per customer
• Customer loyalty and retention rates
• Cost of acquisition

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Read this blog post to dive deeper into customer loyalty KPI.

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Value-based segmentation is crucial for optimizing resource allocation and maximizing profitability. 

It helps in identifying which customer groups are the most profitable and which might require more investment. 

By understanding the value each segment brings, you can tailor your marketing, customer service, and product strategies to foster higher-value relationships.

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When can you use value-based segmentation?

• Developing tiered loyalty programs.
• Creating targeted marketing strategies for high-value customers.
• Allocating resources more effectively to acquire and retain profitable customer segments.

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An example of value-based segmentation

Consider you run an online specialty food store. 

Thanks to value-based segmentation, you identify a segment of high-spending gourmet food enthusiasts. 

For this group, you develop an exclusive rewards program offering special discounts, early access to new products, and personalized gourmet recommendations. 

This approach not only nurtures their loyalty but also encourages repeat purchases, enhancing the profitability of this high-value segment.

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7. RFM segmentation

RFM segmentation is a method that evaluates and categorizes customers based on their purchasing behavior. 

This technique looks at : 

• how recently a customer made a purchase (Recency),
• how often they purchase (Frequency),
• and how much they spend (Monetary).

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RFM segmentation offers a clear, quantitative method to identify your most engaged and profitable customers. 

This method helps in crafting targeted marketing strategies and personalized experiences based on the customer's interaction with your brand. 

Understanding these aspects enables you to encourage repeat business and increase customer loyalty.

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When can you use RFM segmentation?

• Identifying and rewarding your most loyal customers to foster brand advocacy.
• Developing targeted promotions for customers who have not made recent purchases.
• Creating personalized marketing campaigns based on purchasing patterns.

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An example of RFM segmentation

Imagine you manage an online bookshop. 

Through RFM segmentation, you identify a segment of customers who frequently purchase and have done so recently. 

For this group, you create a special loyalty program offering early access to new releases and exclusive author events. 

Meanwhile, for customers who haven’t purchased in a while, you send tailored re-engagement offers. 

This strategy ensures that each customer receives attention based on their specific interaction with your store, enhancing their engagement and your revenue.

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8. Firmographic segmentation

Firmographic segmentation is a method used primarily in B2B marketing, where companies are segmented based on organizational attributes. 

This approach is akin to demographic segmentation but applied to businesses rather than individuals.

For example, you can segment by : 

• Industry or sector
• Company size (number of employees, revenue)
• Location of the company
• Type of business (public, private, non-profit)
• Growth stage (start-up, growth, maturity, decline)
• Market share

Firmographic segmentation enables you to tailor your products, marketing strategies, and sales efforts to meet the specific needs and characteristics of different businesses. 

By understanding the profile of each company you deal with, you can create more relevant and compelling value propositions.

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When can you use firmographic segmentation?

• Tailoring product offerings to suit businesses in different industries or of different sizes.
• Creating targeted marketing campaigns that resonate with specific business types or growth stages.
• Adjusting sales strategies to align with the unique challenges and needs of various businesses.

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An example of firmographic segmentation

Suppose your e-commerce platform offers office supplies and equipment. 

Using firmographic segmentation, you identify a segment of small start-up companies that are rapidly growing. 

For these businesses, you create a tailored product bundle that includes essential office supplies at a discounted rate, along with flexible payment options. 

Additionally, you launch targeted marketing campaigns emphasizing efficiency, cost-saving, and scalability, which are key concerns for such businesses.

This targeted approach not only meets the specific needs of this segment but also positions your brand as a supportive partner in their growth journey.

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What are the benefits of segmentation?

Segmentation is a powerful approach in marketing, offering numerous advantages for e-commerce brands seeking to enhance their connection with customers and improve their overall strategies. 

Let's break down the key benefits:

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Enhanced personalization

One of the standout benefits of segmentation is the ability to personalize your marketing efforts. 

Tailored product recommendations, customized email campaigns, and targeted advertising all become possible. 

This personal touch resonates with customers, fostering a deeper connection with your brand.

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Increased marketing efficiency

Segmentation ensures that your marketing resources are not spread too thin. 

By focusing on specific segments, you can craft messages that are more likely to convert, ensuring that your marketing dollars are being spent wisely and effectively.

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Improved customer retention

When customers feel understood and valued, they're more likely to stick around. 

Segmentation allows you to address the specific needs and preferences of different groups, leading to higher satisfaction and loyalty.

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Enhanced product development

Understanding the diverse needs and preferences of your segmented customer base can inform your product development process. 

This leads to the creation of products or services that are more closely aligned with what different segments are seeking.

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Better customer insights

Segmentation also acts as a window into your customer base, offering valuable insights into their behaviors and preferences.

These insights can drive strategic decisions, from marketing to product development and beyond.

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Competitive advantage

In a crowded e-commerce space, segmentation can give you a competitive edge. 

By understanding and catering to specific segments more effectively than your competitors, you can carve out a niche and strengthen your market position.

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Increased profitability

Finally, segmentation can lead to increased profitability. 

By targeting the right customers with the right messages and products, you can boost conversion rates, increase average order values, and reduce marketing waste, all contributing to a healthier bottom line.

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What makes a great customer segment?

A good customer segment should be measurable, accessible, substantial, differentiable, and actionable.

Let’s dive deeper into these 5 requirements:

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1. Measurable

A good segment should be measurable, meaning there is quantifiable data available about it. 

It means your team should be able to accurately assess the segment's size and potential, which will guide them how to allocate resources and time in their projects. 

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2. Accessible

Your segment must be within reach of your marketing efforts. 

Accessibility means understanding and utilizing the communication channels that best connect with customers. 

This is vital to focus your strategies and ensure that your marketing model effectively engages the target audience. 

It's not enough to know who your customers are. You must also be able to reach them effectively.

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3. Substantial

A segment needs to be large enough to justify tailored marketing strategies but not so large that it loses its defining characteristics. 

Finding this balance is key. 

The segment should be substantial enough to ensure that the time and resources invested are likely to be profitable, making it a viable and valuable part of your long-term business strategy.

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4. Differentiable

Each segment should have unique characteristics that set it apart from others. 

This differentiation is critical for creating tailored marketing strategies. 

Recognizing and understanding these differences allows your team to avoid generic approaches, ensuring that your marketing is relevant, effective, and resonates with the unique needs of each segment.

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5. Actionable

Finally, a segment must be actionable. 

This means that the insights you gain from your analysis should be practical enough to inform and inspire your marketing strategies. 

It's about having the tools, capabilities, and understanding to not just analyze the segment but also to effectively act upon this knowledge. 

An actionable segment allows the learnings from customer analysis to directly influence and enhance your marketing efforts, driving better business outcomes.

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7 steps to successfully segment your customers

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1. Gather comprehensive data

Start by collecting detailed customer information. 

This involves looking at purchasing history, online behavior, feedback, and any other relevant data that gives insight into your customers' preferences and habits. 

Ensure this data is accurate and up-to-date to form a solid foundation for your analysis.

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2. Analyze customer behavior and preferences

Delve into the data to identify patterns and trends. 

Focus on how customers interact with your products or services, their purchasing patterns, and preferences. 

This step is crucial for understanding the different needs and expectations within your customer base.

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3. Identify key characteristics

From your analysis, pinpoint key characteristics that define each group of customers. 

These characteristics could be based on purchasing frequency, spending habits, product preferences, or lifestyle choices. 

Ensure these characteristics are clear and distinct for each group.

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4. Develop segmentation criteria

Based on the key characteristics identified, develop criteria for categorizing your customers. 

These criteria should be clear, actionable, and relevant to your product or service offering. 

Ensure they align with the goals of your business and can be easily applied.

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5. Create customer profiles

Construct detailed profiles for each customer group. 

They should include information on purchasing habits, preferences, and other key characteristics. 

They will guide you in tailoring your strategies to meet the specific needs of each group.

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6. Implement tailored strategies

With your customer profiles in hand, implement strategies tailored to each group. 

This could involve customizing your product offerings, personalizing your communication, or adjusting your service approach. 

The aim is to cater to the specific needs and preferences of each segment.

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7. Monitor and adjust

Finally, continuously monitor the effectiveness of your strategies. 

Use customer feedback and performance data to assess whether your categorization is achieving its intended goals. 

Be prepared to adjust your approach as necessary to ensure ongoing relevance and effectiveness.