Customer segmentation is the practice of dividing a customer base into groups of individuals that are similar in specific ways relevant to marketing, such as age, gender, interests and spending habits. Customer segmentation is also called consumer segmentation or client segmentation. A customer or market segment is the name for the grouping of customers that share certain characteristics. Understanding your customers-their similarities, their differences-is one of the most fundamental and important steps in quantifying the customers' relationship with your product and company. This procedure includes:

  • Deciding what data will be collected and how it will be gathered
  • Collecting data and integrating data from various sources
  • Developing methods of data analysis for segmentation
  • Establishing effective communication among relevant business units (such as marketing and customer service) about the segmentation
  • Implementing applications to effectively deal with the data and respond to the information it provides

The only way to answer the question of how to best segment your customers is to first define what your objective is for the segmentation. In other words, you must first define what you want the segmentation to “do for your business”.  Examples of common segmentation objectives include:

  • Develop new products
  • Create segmented ads & marketing communications
  • Develop differentiated customer servicing & retention strategies
  • Target prospects with the greatest profit potential
  • Optimize your sales-channel mix

Customer segments allow you to understand the patterns that differentiate your customers. But collecting and analyzing data just to understand patterns doesn't make sense unless you're going to do something with it. While the type of product or service will determine the customer attributes that are worth segmenting, there are some fundamental attributes that most organizations should be familiar with and collect data on. Unfortunately most customer information isn't collected automatically. Website tools like Google Analytics don't track even basic demographics. Instead you'll need to identify other ways of obtaining the data. 

Companies employing customer segmentation operate under the fact that every customer is different and that their marketing efforts would be better served if they target specific, smaller groups with messages that those consumers would find relevant and lead them to buy something. Companies also hope to gain a deeper understanding of their customers' preferences and needs with the idea of discovering what each segment finds most valuable to more accurately tailor marketing materials toward that segment.

Other benefits of customer segmentation include staying a step ahead of competitors in specific sections of the market and identifying new products that existing or potential customers could be interested in or improving products to meet customer expectations. Not only do companies strive to divide their customers into measurable segments according to their needs, behaviors or demographics but they also aim to determine the profit potential of each segment by analyzing its revenue and cost impacts. Value-based segmentation evaluates groups of customers in terms of the revenue they generate and the costs of establishing and maintaining relationships with them. It also helps companies determine which segments are the most and least profitable so that they can adjust their marketing budgets accordingly.

In closing, segmentation can be tricky and complex, and no doubt requires real expertise & experience. Putting in place a flawed segmentation strategy can be far more detrimental to a business than not having one at all. However, when designed the right way, segmentation strategies can provide tremendous returns relative to default, “one-size-fits-all” approaches.