Customer Segmentation: A Step-by-step Guide

customer segmentation

People who succeed with marketing do two things well:

First, they identify each of their customer needs FAST.

Second, they put 100% of their resources into answering those needs to win their customers’ heart (…and wallet).

But you’re probably wondering:

“How can I be everywhere, knowing what each of my customers wants and respond personally?”

Well, today, I will make it easy for you.

In this step-by-step guide, I’ll walk you through everything you need to know about customer segmentation and…
…how it can help you get more customers, generate more sales, and give a better customer experience to each of your customers, time and time again.

Your customers behave differently; why treating them all the same?

Not all customers are created equally.

As a marketer, it is your goal to classify customers with similar traits, send the right message, and get more response from your marketing actions.

In fact,

Segmented and targeted emails generate 58% of all business revenue. (Source: The Direct Marketing Association, 2015)

Customer segmentation can help you focus your marketing actions based on customer’s behavior, interests, and actions. The more personalized, targeted, and relevant your messages are, the more response you get, which means more money for you.

The main idea with customer segmentation is switching from mass marketing to personalized mass marketing by treating your customers as individuals.

[yellowbox]Succeed Like Never Before with the all-in-one Customer Segmentation software. Start Free Trial Today![/yellowbox]

You might think: What’s in it for me?

Why Customer Segmentation Matters

To demonstrate the importance of customer segmentation, I’ll give you an overly obvious and simplified example.
Let’s say you’d like to email your customers offering 20% OFF discount to encourage sales. It would be ridiculous, unprofessional, and wasteful to send your email to someone who just paid full price on your product / service.

Sound funny?

Well, that’s exactly what you’re doing when you send mass marketing email (AKA email blast) to a large group of unsegmented leads. Most people receive irrelevant, untargeted, or untimely messages that they’ll simply delete and ignore.

Customer segmentation helps you look at each group’s individual characteristics, needs, and behaviors to determine the most appropriate and profitable campaigns for them.

It gets better:

Every message you send is personalized, highly relevant, and part of your big strategy to answer your customer needs in real time. You are having automated conversions with each of your customers, directing them through a unique customer journey especially for them.

Enough about the WHY. From here on, we’ll talk about the HOW.

How to Win Customer Segmentation

Let’s start with the basics.

Like in any conversation, you first want to understand who you are talking to. Is it your mom, friend, or potential customer? Once you have an idea who you are talking to, it’s time to understand the topic of the conversation. Are we going to talk about a product you are interested in? The weather?

It’s simple.
Customer segmentation is where you determine who you talking to. Behavioral segmentation is where you determine the topic of the conversation.

In this article, I will focus on customer segmentation. To know more about behavioral segmentation, you can read more here.

Back to business…

Customer segmentation helps you understand who we are talking to by looking at the customer’s profile.

Like you check someone’s profile on Facebook, Twitter, or LinkedIn, you are segmenting your customers based on any piece of information that describes who he/she is in relation to your product.

The goal of customer segmentation is to minimize your guess work (as you don’t track behavior yet) and try to understand what each customer is interested in.

The best place to start is…
…segmenting your customers based on their placement on your sales funnel. This position in the sales funnel is possibly the most important segment to determine, as it relies on customer actions, rather than other “dry” facts. The customer’s actions are placing him on the right place on your sales funnel, and if you don’t know where he/she is holding in that pipeline, how can you accurately market to him/her?

Customer Segmentation: Leads

 

Life-Cycle Segmentation

 

Every sale begins with a lead!

Newbies are one of the most important segments to watch, cater to, and analyze. They’re testing the waters, looking to see what kind of experience they can expect from your site.

So, what do you do?
Obviously, you give them an outstanding one!

86% of the customers are likely to pay more for a product to get a better experience (Source: American express).

Give these fledglings to your site/service extra perks, pamper them a little. While this may seem misleading, it is showing the newcomers what’s in store for loyal, repeat customers.

Another thing you should know:
2% of sales are made on the 1st contact
3% of sales are made on the 2nd contact
5% of sales are made on the 3rd contact
10% of sales are made on the 4th contact
80% of sales are made on the 5th thru 12th
(Source: U.S. Chamber of Commerce)

Research has shown the odds of contacting a lead are 100 times greater when a contact attempt occurs within 5 minutes, compared to 30 minutes after the lead was submitted (Oldroyd, 2007).

With this in mind, start segmenting your leads by the time they’ve entered to your database. “Leads age” segments tell you how often you should engage with the lead:

First 30 days:

The first 30 days are most important, and this is your time to shine. Most of your conversions will come within the first 30 days the lead was created. They should be contacted daily or as follows: 0,1,2,4,7,10,14,21,28,30 days.

Leads age 30-90 days:

Leads in this group should be emailed once every 5 days. These are another 12 emails to be sent over 2 months.

Leads age 90-180 days:

Leads in this group should be emailed with a weekly newsletter. Another 12-13 email to be sent there.

Leads older than 180 days:

After sending 34 emails, it’s time to go passive, as those leads are unlikely to convert. All you can do is send reminders, every once in a while, to stay around. Those leads should be contacted maximum every 15 days.

leads age segment

 

Segmenting by leads age changes based on the product/ service you offer. The examples above should fit most products, but it’s up to how long the sales process is. Give each stage enough time to be relevant.

But there’s more …

Now that you know how often you can contact the leads, you can add lead scoring to determine which leads have a higher potential value for your business than others. Based on various factors, such as demographics and current and past behavior patterns, you can pinpoint exactly which leads are likely to convert and which customers have the greatest possibility of being the most valuable assets to you now and in the future.

[yellowbox] Convert your leads faster and better with behavioral emails, SMS, and social ads.

Try it now for free for 14 days! [/yellowbox]

Customer Segmentation: Lead Scoring

 

A lot has been told about lead scoring techniques. To keep things simple, the two main parameters you should consider are Fit and Engagement.

leads scoring segment
The “Fit” parameter

This tells you if the customer can buy your product. Here, you consider age, role in the company, company size, and so on. This tells you if the lead is a potential customer or just another tire kicker. Fit can be mapped to a standard definition of A, B, C, D, where A is a high fit, and D is a low fit. So, if I’m 10 years old boy, and I like your product, well, you have nothing to do there, so his Fit is D and you should probably focus your efforts somewhere else.

The “Engagement” parameter 

This parameter describes the level of readiness to buy your goods. The buyer readiness stage can be classified into five stages as explained below. Each tells you what content should you be focusing on:

Awareness stage:

At this point, the lead has a no idea about your product and if it can meet his needs. At this state, tailor strategies to create full awareness of the product and grab his attention.

Knowledge stage:

Following the awareness stage, the buyer knows your product name, but is unaware of the benefits of buying it. As a marketer, it is your role to explain what this product offers. Consider free trial, demo, or any other solution, so the customer can “look around.”

Liking Stage:

From here, the customer knows your product and why he/ she should buy it. This is where the customer compares your product with competing products. The best thing you can do is to act fast and provide a remarkable experience.

Conviction stage:

It’s time for the final push. Finally, the customer is ready to buy your product. Don’t miss the opportunity to close the deal. Coupons, special offers are tools you can use.

Leads who are nurtured with targeted content produce a 20% increase in sales opportunities. (Source: DemandGen)

Anyway,

You can use segments, based on leads age, lead scoring, or a combination of both. Usually, long-term sales will use lead scoring to prioritize their leads and send relevance for every stage of the engagement. With short-term sales, leads age is probably a better option to choose from, as all the stages happens fast. Decide the best way that fits your business needs.

Want to know how to convert those leads into customers? Read here

 

Customer Segmentation: One Purchase

Yes! You’ve closed the deal. Good for you!

This segment is separated from your active customers; you should focus our messages to the specific purchase that was made.

 

One Purchase Segment

 

Three things you can (and should) do:

First, give your customer a great buying experience.

67% of customers mention bad experiences as a reason for churn, but only 1 out of 26 unhappy customers complain. (Source: Huffingtonpost)
This is a great reason you should deliver a remarkable experience repeatedly. To this segment, create a customer journey to make him/her feel valuable to your business.

Second, upsell and cross sell.

FYI, Amazon attributes up to 35% of its revenue to cross-selling (source: The future of ecommerce)
This is a good reason to pitch your new customers an offer they can only get after their first purchase. This step should happen only after your customer has completed his great experience buying your goods. The offer you are sending must be time-limited and should be something outstanding that will make the buying experience even better.

[yellowbox] Send the right message through the right channel at the right time. Try it now free! [/yellowbox]

Third, use your secret weapon: Re-sell.

Drumroll please…

After your customer made a purchase, you want to encourage repeating buying. I’ll explain with an example. Say someone bought shoes from you. Usually, people buy shoes once every 3 months. Create a segment to engage with the customer 2.5 months after the purchased was made and offer a special discount to returning customers.

Tip:

The most effective channels for generating member renewals: email (77%), mail (58%), staff phone calls (37%) (Source: Marketing General Incorporated)

Next…

Customer Segmentation: Active 

Active customers can be further divided into active and actively profitable.
Some people shop frequently, but return almost as frequently. These customers aren’t necessarily bad for business, if they have a positive experience with returns etc.

 

Active Segment

 

Active customers can generate good PR for your company, but they’re not necessarily a great source of profit. Other shoppers shop frequently and rarely or never return. The second group would be a likely target for coupons or bonuses, since the return will invariably be forthcoming.

Something to remember:

A high-impact recommendation from a trusted friend conveying a relevant message is up to 50 times more likely to trigger a purchase than a low-impact recommendation.(Source: McKinsey)

Keep a close connection with your active buyers. Keep them updated with new products, offers, and constantly look for interest. Remember, every customer is a potential lead.

For a very select few VIP customers, your marketing team would do well to personalize messages and campaigns. These individuals are the big and frequent spenders that deserve your utmost attention, and they will invariably return in kind.

 

Customer Segmentation: At Risk

Naturally, it is much easier to keep an active customer than it is to reignite interest, once someone has gone off the radar.

 

at risk segment

 

One of the most important segments to watch out for is the “losing interest” segment.

Why Customers Leave, you ask?
• 68% Non-caring or feel unappreciated (They forget about you)
• 14% Product dissatisfaction
• 9% Price
• 5% Because of a friend’s recommendation
• 3% Move
• 1% Die
(Source: U.S. Chamber of Commerce)

Hence, you should identify the customer behavior patterns accurately to predict and alert you of a dwindling satisfaction rate in active clients.

Parameters you should consider are: lack of activity, complaints, and support ticket.

 

Customer Segmentation: Lost

What about past customers who haven’t returned for a while?

lost segment

 

These are often categorized as dead leads, but it could be a mistake to dismiss them all into one delete file.

There are two types of “vacant” leads: the ones who purchased only once and never came back, and the ones who were frequent purchasers but stopped shopping.

The latter group can easily be targeted with a small incentive, a friendly reminder of what they gain from using your services.

The former either had a negative experience or didn’t find your service satisfactory/necessary. These customers will be much more difficult to win over and may require more aggressive marketing tactics.

When a lost customer returns, show your appreciation.

When an inactive customer rejoins the fold, it’s important for your company to deliver ample incentives to these return customers. It’s your way of saying thank you for choosing to patronize your business again and ensuring this customer will become more active.
One last thing,
Don’t forget to include those leads that were a bust because analyzing our mistakes is one of the best ways to learn what we can do better.

 

Customer Segmentation: Categories

 

Lifecycle segmentation fits every business on the planet, but yours is special. There are some other parameters you should consider to organize your customers better.

Categories Segment
Geography:

Location can give you a great vantage point to market from, knowing the season a customer is experiencing, current events, or even something as basic, but integral, as language.

Multiple Products/ services:

If you have more than one product/ service, you first need to identify what product your customer is interested in. It is important to send the content that matches the customer’s needs. This will also help with upsell strategy.

Role in company:

If your product is B2B oriented, it’s important you market differently to varying members of a team. The CEO will not receive the same casual memo as a typical sales rep.

Language preference:

This is such an important, yet often overlooked, segment. If you are catering to an international crowd, you better make sure you are speaking the same language as the potential customer, or you can kiss them goodbye.

Income bracket:

Another major player, this segment shows marketers how much you can expect a customer to spend with your company. This also helps the sales team know who to target first.

Gender:

We’ve all heard that men are from Mars and women are from Venus, but did you know that for chocolate – men buy Mars and women buy Galaxy! Gender segmentation is an entrenched facet of the marketing industry, and the impact of it should never be underestimated.

Age:

A pop quiz, which age group uses email least? Young people (12-17) or old dears (65+)? You might have thought that older people who struggle with technology and who did not grow up with it are less likely to be reading their emails. But actually, the young people rarely use email! They like the immediacy of instant messaging or texting! Now that you know that, will it affect your engagement? Of course!

Here is an overall example of multiple segmentation techniques. Remember, this is just an example; you can play with the order of things in the best way to fit your business.

 

Segmentation Example

What’s the bottom line?

In conclusion, customer segmentation has one purpose and one purpose only. To minimize your guess work.
See, with behavioral segmentation, you need not guess; you simply track customer behavior to identify his/ her interest and react with the right message.
With customer segmentation, you are trying to identify the customer need by guessing. The better you segment, the better your chances are to guess right.
Read more about behavioral segmentation here. If you’re still not convinced, read the 5 explosive powers of database marketing

Leave a Reply

Your email address will not be published. Required fields are marked *