Customer segmentation is a powerful tool for digital marketers. When harnessed for a single channel, it allows you to conveniently target multiple customer groups with different concerns and priorities. You can send different email campaigns to reward your best customers and loop new or lapsed ones into your current products or services, for example.
But when you harness segmentation for cross-channel campaigns, you see even more benefits. Cross-channel campaigns with proper segmentation allow you to share a consistent brand message with your customers no matter when or how they engage with you. With the right data, you can reach these customers via several avenues at once, greatly increasing the likelihood they’ll convert.
In this guide, we’ll walk through the basics of customer segmentation, including the different types available. We’ll also share best practices for getting your segmentation up and running.
Also known as market segmentation, this is the process of grouping customers based on specific characteristics or variables with the goal of personalizing marketing messages. You can also use the customer journey lifecycle to gain insights on how to divide customers into groups.
The most common factors to consider include:
Demographics
Geographic location
Purchasing behavior
Psychographic reasoning
Economic status
For B2B companies, consider the following factors:
Industry
Location
Partners
Customer lifetime value (CLV)
Since market segmentation enables you to personalize marketing campaigns, it becomes a valuable tool in customer acquisition and retention. Better ad targeting leads to higher click rates and conversions. Moreover, personalization significantly impacts the purchase decisions of consumers. 80% of customers say they are more likely to buy from a company that sends targeted offers.
You wouldn’t use identical sales pitches for clients who have different needs, expectations, and knowledge. Customer segmentation allows you to personalize your marketing messages to deliver more relevant content based on your customers’ specific needs.
In addition to personalization, customer segmentation helps foster growth in your marketing campaigns via the following benefits:
Improved customer retention: A happy customer is one who feels understood and valued. When segmentation works well, it sends the right messages that resonate with different customer groups.
Increased revenue: Proper audience segmentation lets you identify profitable customer segments and focus your efforts on these groups. That can lead to higher conversions and increased sales.
Efficient use of resources: When you know which customer groups generate the most value, you can allocate appropriate resources to reach them (and spend less time and money on the ones who don’t).
Competitive advantages: Meet your customers’ needs more effectively than your competitors who don’t pay attention to audience segments.
Brand development opportunities: When you know who your customers are and what they want, you can develop your brand to resonate with those specific wants and needs.
Ultimately, customer segmentation lets you better understand your customers on a deeper level. These improved connections make your marketing campaigns more effective and your business more successful.
Customer segmentation takes many forms. You may not use all eight types of customer segmentation to group your audiences and customers, but it’s good to understand the differences (and similarities) between them.
Demographic segmentation slices the market into smaller categories based on demographic factors, such as age, gender, and occupation. Here are four common demographic subcategories that you can target:
Age: Age segmentation slices up your target market by specific age ranges or generations, such as millennials and baby boomers. For instance, baby boomers probably aren’t your target audience for a young adult love story between vampires and werewolves.
Education: Education segmentation thinks about where people went to school, what they’ve studied, and the highest level of degree earned. For example, those with higher education levels are more likely to understand the benefits of a healthy diet. Consumers with a lower education might need to be more informed. Knowing this information helps health food organizations market to people with different educations in varying ways.
Occupation: This type of segmentation focuses on a person’s job and seniority, which can significantly influence how someone purchases products and services. To give an example, construction workers would make different clothing choices compared to company executives.
Income: Income segmentation looks at consumers’ income range to determine pricing tiers. This is used when you carry both expensive and inexpensive products or services.
Geographic segmentation zones in on geographic locations. People have different needs, depending on where they live. Here are three geographic subcategories to target:
Climate: Climate segmentation involves marketing products based on a particular region’s climate. For instance, swimsuits probably have a lower demand in Alaska than California.
Population: Population segments consumers according to urban, suburban, and rural areas. For example, lawnmowers might be more of a draw in suburban areas versus big cities.
Culture: Many companies practice cultural-based geographic marketing. One such company is McDonald’s — their menus differ according to country. Taro pies are a huge thing in China, while the McCurry is a popular item in India.
Behavioral segmentation divides consumers according to behavior patterns as they interact with a company. This includes their attitude, response, and knowledge of a product or service. Here are a few variables to track:
Purchase behavior: Measuring purchase behavior is the best way to tell what someone likes. Case in point: Amazon’s algorithm and how it recommends new products based on your past purchases.
Timing: Everyone makes different buying decisions based on the time of year. Think holidays, birthdays, anniversaries, and so on.
Engagement: Levels of engagement allow you to determine who you should spend your resources on. If people show low engagement, you don’t have to waste your time converting those low-quality leads.
Loyalty: Figure out who engages with your brand the most and makes repeat purchases. According to the 80/20 rule, 80% of profits will come from your most loyal customers.
Psychographic segmentation splices up target audiences based on consumer psychology. This type of segmentation shines a spotlight on the intrinsic traits of a consumer, which can include values, personalities, and attitudes. There are three common psychographic segmentation factors:
Social status: The social standing of your potential customers has a direct correlation to their shopping habits. A luxurious car is probably a better fit for someone of high social status as opposed to a person who’s struggling financially.
Lifestyle: The lifestyle of your target customer is essential for determining whether your products or service will appeal to them. For example, you’d put a more significant focus on marketing hiking gear to someone who prefers outdoor activities.
Personality: Your personality is made up of your beliefs, motivations, and values. By digging into consumers’ personalities, you can market accordingly and become an emotionally compelling brand.
Firmographic segmentation describes how B2B service providers group their customers by shared company or organizational qualities. Using this type of customer segmentation often takes several kinds of variables into account. The most common ones include:
Industry: A company’s industry refers to its field or sector. Think about verticals like healthcare, technology, retail, or manufacturing as appropriate segments.
Company size: You can measure a company’s size in multiple ways. You can target organizations based on headcount, for example. Other customer segmentation examples include annual revenue or market share.
Location: Where you can find a company’s headquarters or the geographical location its main operations occur.
Sales cycle stage: You can segment audiences by what stage of the sales cycle or buyer’s journey they’re in. Consider whether a company is an initial prospect, or whether you’ve nurtured the lead for more in-depth conversations.
Status: Is the company public or private? Status describes not just who owns the company, but whether it’s a startup or established firm.
Performance over time: This segmentation includes factors like growth rate, profitability, or financial stability.
Companies that rely on technographic segmentation group their customers based on technologies or groups of technologies. It’s a useful strategy that helps you know more about their strategies and business needs.
Consider a company that uses a service like, say, AdRoll. Their adoption of our product(s) indicate a likelihood to buy solutions to manage their digital marketing campaigns.
Technographic segmentation can include, but isn’t limited to, the following examples:
Type of devices used: This segmentation includes whether devices use desktop computers, laptops, tablets, smartphones, and other devices. It can also factor in the operating system a user has, such as Android, Windows, or iOS.
Software and applications: What apps or software does your customer use? Are they a graphic designer or artist who uses desktop design software? Does their job require them to use cloud-based productivity tools or something like Microsoft Office?
Social media platforms: Specific segments of your audience might prefer different social media platforms. Consider the members of your customer base who prefer TikTok and Instagram to spaces like Facebook and LinkedIn.
Online behaviors: This segmentation includes elements such as online shopping habits, preferred payment methods, and even the frequency with which they visit websites.
Adoption of technology: Some consumers flock to new technologies and products early, while others prefer a “wait and see” approach. Which of the two audiences you want to target first can influence your marketing strategies and product development cycles.
Value-based segmentation groups customers or clients based on their perceived monetary benefits to your organization, either actual or perceived. In most cases, you can refer to this as the customer lifetime value (CLV). When you focus your marketing strategy on high-value customer segments, you can efficiently use resources and get a higher return on investment.
Some of the factors at play for value-based segmentation include the following:
Purchase history: How frequently customers purchase from you, the average amount they spend, and the total amount spent over time can indicate their value.
Customer loyalty: Repeat customers have higher lifetime values than one-time buyers. They can also refer new customers to you, which can indirectly increase their value.
Profitability: Not all products or services have the same profit margin. When your customers purchase high-margin items, they may be more valuable to you.
Cost to serve: Sometimes customers may need extra support or have higher service costs than others. Deduct these costs from revenue to determine their true value.
When you know who generates the most value for your company, you can tailor your marketing strategy to retain those customers and attract similar high-value audiences.
Needs-based segmentation groups customers based on specific needs, problems, or motivations. When you use this type of segmentation for your brand, it’s because you want to better understand what drives purchasing decisions for your customer groups. Common considerations for needs-based segmentation include:
Customer pain points, problems, or challenges: Identify common problems or challenges that customers face and create segments based on them. This lets you tailor marketing messages to address specific concerns of one audience.
Purchasing motivations: When you understand why segments of customers buy certain products or services, you can align your offerings with their intrinsic motivations.
Desired benefits: Different customers may want specific benefits from the same product or service. Consider the budget-conscious shopper who focuses on price, and compare them with the big spender who wants high-quality goods or a shopper who simply wants the most convenient buying option.
Job completion: Some needs-based profiles simply choose products or services to accomplish a specific job. Analyzing those jobs can reveal distinct segments with specific needs.
Developing a customer segmentation strategy doesn’t happen overnight. There’s a step-by-step process that makes it easier and ensures your segments work for you the first time around. As you consider how to do customer segmentation for your business, try out the following best practices.
Before you begin the process of market segmentation, you must first establish a framework that will guide you. Develop your segment hypothesis, identify variables, and validate them with thorough research. Your hypothesis should be clear, logical, and testable so you can use it as the basis for your segmentation. A claim as simple as “customers who belong to the 30-50 age group tend to be a higher value segment” can already help define segmentation variables for a cosmetics brand. Your variables can include the following:
Demographics (age, gender, education, occupation, income, marital status, etc.)
Geographic location (country, state, region, climate, market size)
Behavioral data (Do they browse our items? Do they leave products in the cart? When do they buy our products? What is their thought process? Are they price-sensitive? Do they use coupon codes?)
If you already have a customer relationship management (CRM) tool, you’re already one step ahead in the market segmentation process. Your CRM data should be full of information on demographics and customer history. You can use this data to create a comprehensive list of your customers and determine who should be part of the analysis. Check if you can filter existing records by age, location, recent purchases, estimated customer lifetime value, or whatever variables you wish to use for your groups.
If you don’t have a CRM platform, consider getting one. It can become an essential tool in growing your business.
After acquiring and measuring your customer data, analyze the buying behaviors of your consumers. Segregate them based on the parameters you have set, such as age, gender, income, marital status, education, or occupation. You should also consider each group’s thought processes and craft some buyer personas that will help to focus your messaging.
With your buyers in mind, you can modify your range of products and services so they provide greater appeal to those customers — especially the ones in higher-value segments. Analyzing and understanding customer behaviors will enable you to innovate more easily and offer products and services that are sure to entice (translation: boost your revenue).
For more on how to create a behavioral targeting strategy:
There are plenty of tools you can use for analytics and marketing automation. For instance, there are free tools like Google Analytics and Shopify Analytics, that help to gain more demographic and behavioral information about your target market.
You can also use marketing automation tools to streamline your marketing efforts, like email campaigns, and employ more advanced customer targeting techniques. Companies like AdRoll also enable you to automate nearly every aspect of your advertising campaigns — content management, budget allocation, deployment, tracking and reporting, and optimization —saving you significant time, money, and resources.
With the right tools at your disposal, you can better understand how consumers interact with your brand online. Then, leverage that information to make critical adjustments to your marketing strategies, including special offers, personalized messaging, and proper timing of your communications. For optimal results, look for automation tools that easily integrate with your platforms and channels.
Once you segment your customers, design content that will appeal to each group, starting with those in the high-value segments. Put yourself in the shoes of the group you are creating content for, and try to see your brand from their perspective. Be creative, and use eye-catching visuals to grab their attention. Always remember that useful, quality content is defined by what is valuable to your audience. You can also include promotions or discounts that target their preferences and reflect their buying behaviors.
To explore the different types of content you can create:
Do a test run on the potentially lucrative segments you’ve identified. These segments should form a significant percentage of your customer base. Run the targeted content to your chosen segments, and wait for the campaign period to end.
After the campaign is complete, analyze the results. Check which content was read the most, which emails led to which purchases, which customers opened particular emails, and other patterns formed during the test run. This analysis will provide valuable insights into how to improve your market segmentation plan and sales funnel.
The best modern marketers master the art of iteration and refinement. Use the insights you have gained from your test run and apply them to your next test. If your campaign was successful, you might choose to apply the same variables to a different segment of customers. If you determine that there was room for improvement, identify the campaign’s weak spots, and redesign those elements. Then, test your changes. The best way to test your effectiveness is to dig into the data available, including critical KPIs such as:
Conversion rate: When you see an increase in the percentage of customers who take a desired action within a segment, it can indicate your targeted approach is effective.
Customer acquisition cost (CAC): How much you spend on acquiring new customers, including both marketing and sales expenses. A decrease here could show that your efforts are paying off.
Customer lifetime value (CLV): How much net profit you can predict from your relationship with a customer. Higher CLVs within specific segments can suggest your tailored efforts are improving loyalty.
Engagement metrics: CTR, social media likes and shares, and email open and click rates can help inform how well your campaigns are doing within segmented audiences.
Churn rate: How many customers stop doing business with you over a given period.
Market share: If you notice increases in market share with your targeted segments, it’s a good indication the strategy is effective.
Customer satisfaction scores: Net Promoter Score (NPS) or Customer Satisfaction Score (CSAT) can give you insights into how satisfied customers are with your products or services.
Perform this refinement process at regular intervals, and be sure to keep your information up to date. Regularly segmenting and testing will help you define the right marketing campaigns for your brand and audience. This will enable you to adapt to changing consumer behavior and keep your business growing.
Once you have your segmentation strategy in hand, it’s time to implement it. Your customer segmentation decisions aren’t just useful for one marketing channel. You can apply it to every avenue you use to reach your audience.
There are many great reasons to segment marketing groups, but the biggest two are to decrease marketing costs and increase sales. These two pillars represent the traditional gold standard for segmentation business objectives, but they aren’t the only ones. Some of the reasons you may want to run a segmentation campaign include:
Decrease Marketing Costs: When you know the relative value of each segment, you can do some simple math to figure out where your marketing dollars will have the most impact. This may not always be the biggest segment or the highest source of revenue. Instead, it’s the segment with the highest return on investment (ROI) — they may have exceptionally high customer lifetime value (CLTV), or they may just be very cheap to reach.
Increase Revenue: Sometimes, the goal is to increase revenue, whether it’s the most efficient way or not. Segmenting customers allows you to identify your most valuable customer groups and saturate them with marketing to increase top-line sales by focusing on those groups.
Taking Market Share From A Competitor: By understanding your customer segments, you may be able to figure out which ones your competitor is targeting, and then steal their market share.
Identifying New Marketing Opportunities: Segmenting allows brands to figure out what their customers look like now, which allows them to identify similar customer groups they aren’t yet engaging with. This approach of similar segments allows brands to expand their market by going broad rather than deep — finding new markets instead of pushing further into existing ones.
Increasing Marketing Efficiency: Different segments may respond differently to the same marketing message and approach. Segmentation allows savvy brand managers to create varied messaging that is custom-tailored to each segment’s needs. It can also allow for using different strategies and tactics to bypass each specific segment’s defenses.
Turning your customer information into useful segments requires a few extra steps beyond collecting the data. You can use some of the following methods to segment your customers into more helpful groupings:
Determine the size and value of each segment: Compare segment size with revenue generated by each segment to differentiate between loyal versus non-loyal customers. Loyal customers are those who you should focus your marketing initiatives on. Determine the average revenue and profitability by each segment by using attitudinal variables, such as the Net Promoter Score.
Cross-tabbing: Don’t be afraid to experiment with “crossing” more than one variable. For example, maybe you think there’s a relationship between gender and intent to buy. You can create a cross-tab report that filters the people interested in your product and cross-tab by gender to test your theory.
Once you’ve got that, you can design a segmentation targeting program to start using the segments in your marketing. Remember that the key to any successful marketing campaign is a solidly data-driven approach, so always test your implementations and iterate until they are running at peak efficiency.
Segmentation has been a hot topic over the last few years, and a number of tools have been developed to support marketers in their efforts. These tools fall into three broad categories:
Identifying and Segmenting Customers: These tools are usually, but not always, built into CRMs and allow you to split up your audiences into logical segments based on a variety of criteria. The best ones leverage AI to make these decisions even smarter.
Exploring Similar Segments: These tools will help you find segments and audiences that are similar to the ones you’re already engaging. Often built into ad and social platforms, they can help marketers find new opportunities.
Creating and Implementing Campaigns: These tools take in segmentation data and allow you to launch full campaigns across different segment groups without having to manually separate customer lists or deal with groups individually.
For marketers diving into segmentation, it’s critical to understand how each set of tools work, even if you don’t need to be familiar with every tool on the market. Luckily, there are plenty of resources available to help you learn how to use segmentation tools.
After you’ve segmented your customers, the next step is to get creative and personalize! The ability to create attention-grabbing content is one of the great benefits of segmenting your customers. Think of personalized ads, CTA buttons, blog posts, social media campaigns, emails, and customer service. Be sure to continually fine-tune and test to see what works best, and don’t forget — a customer who feels comfortable engaging with your brand is a customer for keeps. You can even develop advanced segmentation strategies to nail down even more customer profiles.
Ready to get started? AdRoll’s audience segmentation tool can help you create dynamic segments for personalization.
Customer segmentation offers plenty of benefits that can make your business’s marketing efforts go smoothly. When you put effort toward effective segments, you efficiently use resources to increase revenue and personalize your campaigns for the right audiences. This also helps you stand out from the competition and showcase your brand’s value to customers.
Customer segmentation doesn’t come without challenges, however. It’s not always easy to accomplish. Sometimes it’s hard to identify the right segments, either because you have customers who fall into multiple buckets or because you don’t have enough data. It’s also expensive, especially if you have a larger business.
Customer segmentation has a lot to offer for marketers who want to improve cross-channel efforts. For starters, it allows for personalized messaging across your chosen channels. It also allows for tailored offers based on past purchase behavior or display ads that match a person’s interests. Combined with segmentation, consistent messaging lets you reach customers when they’re most ready to interact with you via their preferred channels.
Measuring effectiveness of your customer segmentation process largely depends on your unique business goals and the KPIs that you view as most important. One of the best ways to measure those KPIs is to partner with AdRoll and use our dashboard to view the relevant metrics—from CTR and conversion rates for ads to open rates for emails—in one convenient place.
Last updated on August 9th, 2023.
