06 Dec What is customer segmentation?

We often get asked, “What is customer segmentation….?” alongside the follow-up question, “… and why do we need it?”.

Well, the key to successful marketing lies in understanding who your customers are and what makes them tick. It sounds obvious, but it is worth stating that the more you know about your customers, the deeper and more durable your relationship is likely to be with them. But, given the millions of people in the UK who could potentially be customers of yours (not to mention the billions in the world beyond), how is this achieved? Therefore, understanding customer segmentation is vital.

Customer Segmentation

Which of them should be prioritised to achieve the greatest success, and how will that affect your sales and marketing strategy? There are two areas to understand when it comes to analysing your customers – customer segmentation, and customer personas. This article is primarily about customer segmentation, as this is perhaps the most important element to focus efforts on in a strategic sense, but it also looks at how customer personas – developed from data obtained from segmentation – can be constructed to give valuable insights when constructing tactical marketing campaigns.

At the highest level, pretty much every business will – consciously or otherwise – have a customer segment in mind when they start out; the people they think are most likely to be potential buyers for their products. Clearly, a company selling pet food will not expect any interest from people who don’t have pets, so a large section of the population will be right outside their sphere of customer segmentation from the word go. Proper customer segmentation really kicks in at the next level.

Demographic data

There are still millions of people who own pets, but they can be sub-divided into different segments based upon demographic data attributes, such as; age, gender, marital status, income, education and occupation. To a great extent, segments can be created using personal intuition and insight about the type of attributes customers are likely to have. It’s obvious that products aimed at teenagers need to be marketed in a very different way to products aimed at people in retirement. Where a product might appeal to both groups, segmenting them helps to establish if either group is more important, and to what degree and in what ways.

However, relying on gut instinct to create segments is somewhat dangerous – it may say more about the prejudices of the person creating the segments rather than anything useful about the people within them. Instinct may lead to incorrect conclusions about which segments are truly important, and about the particular marketing style that people within those segments would respond to. Researched segmentation from external sources based on objective data rather than subjective opinion is much more informative and reliable, although internal processes such as workshops and brainstorms can also help to paint a good picture.

For established companies, the initial data required to create segments lies in their own customer base. After all, these are people who have already bought, or expressed an interest in, the products or services on offer. Analysing an existing customer base can reveal a wealth of valuable information. Ideal analysis of this can be found in most forms of social media marketing.

Often, a relatively small proportion of customers will be found to generate a high proportion of turnover – and, much more importantly, profit. It may become clear that many of these customers share characteristics, and that they represent a clearly definable segment; those shared characteristics can point towards a successful way of marketing to them in as effective a way as possible. It also identifies the potential attributes of prospective customers that fall within this segment, and at whom marketing awareness activities could be aimed.

Even for a business starting from scratch, there is a lot of decent quality data available to undertake constructive customer segmentation. In the UK, a useful free source of information is the Office for National Statistics (ONS), whose website provides a wealth of data that shows how the population breaks down according to a whole host of factors. This can be a useful basis for starting to create meaningful segments.

Usually, though, a starting point is all this high-level data can provide. The data is demographic – it describes statistically which parts of a population fall into different groups based on objective information such as age, gender, income group and the like. While it helps answer the question ‘who?’ it doesn’t explain how they think or what motivates them to act as they do. This is where psychographic data is required.

Psychographic data

As its name implies, psychographic data is concerned with how customers think and behave their values and views, motivations, what they respond to well, what turns them on or off, how they spend their free time, and so on. In this way, we move beyond the rational and into the emotional. The art of persuasion is a crucial marketing factor in winning sales that are often undervalued. Marketing needs to speak to people’s hearts as much as their minds. This is why psychographic data is just as important as demographic data. In fact, there are studies that indicate that most people make up their minds about the house they are going to buy in just a few seconds. This is the biggest purchase they are likely to make in their lives, and it is almost entirely emotional in nature. Ditto cars, jobs – and maybe even spouses…!

Gathering this information can be accomplished in a variety of different ways.

• Gentle questioning of customers as they buy should be part of every sales process. It could be done face to face by the person making the sale, or via an online questionnaire after each purchase. Finding out why a customer is making a purchase or considering one, will open up potential insights to making further sales in the future, either in the form of repeat business from that customer, or from others who share similar motivations.
• The information gathered from day-to-day interactions with customers can be augmented by specific research involving focus groups and one-to-one interviews, where detailed insights into why people behave the way they do can be obtained. These days, the research can often be handled remotely, through online questionnaires or by setting up ‘virtual’ focus groups.
• The internet has also introduced the concept of ‘Big Data’. With the numbers of people now browsing, buying and interacting online, an astonishing amount of data is gathered by the likes of Google and Experian as a natural byproduct of their services, as well as specialist data companies such as Zizo, Esri, Intel, etc. This data can be analysed and collated to create detailed segments showing behaviours across a wide range of different activities. This data can be cut and sorted into so many combinations, they are virtually infinite: if your products are particularly popular with people in tower blocks who use social media while traveling on trains, support environmental causes and enjoy oriental food, the data can tell you.

Collecting as much psychographic data as possible will help you focus your marketing efforts and spend on the most likely buyers. If you are advertising on social media, for example, understanding psychographic details about your customers can be especially helpful in ensuring that you are targeting customers with the right sorts of behavioural traits.

However, the best customer segmentation models combine both demographic and psychographic data to build up valuable and meaningful profiles which help to improve marketing strategies. In their most refined form, these profiles become customer personas.

Customer personas

Customer personas are fully-rounded profiles of fictional customers of a brand or business. Each persona has characteristics – demographic and psychographic – identified through segmentation. It is normal to have more than one customer persona to reflect different segments of your customer base – three is in fact about average, though more or less than this is not unusual either. It very much depends upon the size and complexity of your business.

As their attributes as individuals are considered, insights emerge that could otherwise have been missed. Some aspect of your communications might suddenly be revealed as confusing, unnecessary or downright irritating. A product feature thought to be minor could turn out to be a significant driver behind buying decisions for a particular customer persona.

Marketing collateral that has customer personas in mind is more engaging, because it is created for a specific – if fictional – person. In the same way that real people change and grow, so too can customer personas develop as new data comes in and external factors, such as the state of the economy or developments in technology, change. Just as personas should be created from data, so too can data-needs be informed by personas – they help establish which of all those myriads of possible combinations are most likely to generate information valuable to a business.

More effective marketing strategies

Customer segmentation and customer personas are complementary to each other and increase the depth of understanding businesses have of their customers, thereby leading to more effective marketing strategies. Each one adds a different aspect to the mix and is worth pursuing in its own right, but investing time and effort in both areas creates a whole that delivers much more than the sum of the two parts. Businesses that recognise this are normally much more successful in generating sales leads from their marketing activities. And, of course, it’s not just about generating leads from prospective customers. Customer segmentation and customer personas can also help a business to up-sell and cross-sell, as well as making customers more loyal in nature, leading to ambassadorial recommendations and word of mouth referrals.

In fact, we would argue that establishing customer segmention and customer personas is essential to the long-term success of any forward-thinking organisation driven by a sales and marketing culture.

Keep up to date with Customer Segmentation

The world of customer segmentation changes all the time. To keep up to date with all the latest news regarding customer segmentation is almost impossible, but you can keep on top of things by following us on social media – Twitter, Facebook, and LinkedIn. If you would like to have a conversation with us about customer segmentation, please contact Stephen Brown at Abacus marketing agency London on 020 3858 7836 or stephen.brown@abacusmarketing.co.uk – you can also visit our website at www.abacusmarketing.co.uk to find out more.