What is Customer Segmentation? Definition and Examples

Customer Segmentation  is the process of dividing customers and prospects into sub-groups or segments based on shared characteristics.

You can then tailor your marketing strategies to specific audience types, resulting in more efficient and successful sales and marketing campaigns.

Marketing professionals know that customers are not all the same. Using a single marketing approach can be a wasteful way to reach and engage diverse customer groups effectively.

With customer segmentation, your salespeople can tailor their strategies and tactics to meet the distinctive needs of different customer groups with greater success.

Shopify.com has the following definition of customer segmentation:

“Customer segmentation is the process of dividing customers into groups based on common characteristics so companies can market to each group effectively and appropriately.”

“Common characteristics in customer segments can guide how a company markets to individual segments and what products or services it promotes to them.”

Why Customer Segmentation is Important

Customer segmentation enables you to understand your customers and *prospects better.

* A prospect is somebody who you think could turn into a paying customer. From this point forward, whenever you see the word “customer,” it also includes “prospect,” and vice-versa.

By recognizing the diverse needs and preferences within your customer base, you can create more personalized marketing messages and product offerings.

If you follow this targeted approach, you will probably achieve greater customer satisfaction, increased loyalty, and more sales.

A pie-graph with people on it - and a definition of CUSTOMER SEGMENTATION
Image created by Market Business News.

Types of Customer Segmentation

You can segment you customers in various ways. Let’s have a look at some of them:

  • Demographic Segmentation

This involves dividing customers based on demographic factors such as age, gender, income, education, and occupation.

For example, if you are selling luxury cars, you may target high-income individuals. Conversely, if you are selling affordable clothing, you may focus on younger consumers with limited budgets.

  • Geographic Segmentation

Here, you divide customers according to their locations, such as country, region, city, or neighborhood.

Geographic segmentation is particularly useful if you operate in multiple regions with varying customer needs and preferences.

For instance, a retailer may promote winter clothing in colder climates while advertising summer attire in warmer regions.

  • Psychographic Segmentation

‘Psychographic’ is the study of consumers based on their lifestyles, values, attitudes, and interests.

Psychographic segmentation can help you understand the underlying motivations driving customer behavior.

For example, a health-conscious brand may target individuals who prioritize wellness and fitness in their daily lives.

  • Behavioral Segmentation

In this case, you segment your customers according to their purchasing habits, brand loyalty, and product usage.

You can identify patterns and trends to create targeted marketing campaigns.

For example, you might offer discounts to frequent buyers or create loyalty programs to reward repeat customers.

  • Technographic Segmentation

Technographic segmentation involves dividing customers based on their technology usage and preferences.

This is particularly useful in technology-driven markets. For example, a software company might segment customers based on the types of devices they use or their preferred software solutions.

  • Value-Based Segmentation

This method segments customers based on the economic value they bring to your business.

High-value customers, who contribute significantly to your revenue, might receive exclusive offers and personalized services, whereas lower-value customers might be targeted with more general promotions.

  • Needs-Based Segmentation

Needs-based segmentation groups customers based on their specific needs and preferences related to your products or services.

For example, if you have a travel agency business, you might segment customers based on their travel preferences, such as adventure travel, luxury travel, eco-tourism, cultural tours, beach vacations, or family vacations.

Benefits of Customer Segmentation

Implementing customer segmentation offers numerous benefits for your business. Let’s take a look at some of them:

  • Enhanced Marketing Efficiency

By targeting specific segments, you can use your their marketing resources more effectively, ensuring that your messages reach the right audience.

With this targeted approach, you will probably achieve higher conversion rates and a better return on investment (ROI).

  • Improved Customer Satisfaction

Tailoring products and marketing efforts to meet the needs of different customer segments can lead to increased satisfaction and loyalty.

Your customers are more likely to engage with brands that understand and cater to their unique preferences.

If you successfully implement customer segmentation you will probably gain a competitive edge in today’s fiercely competitive marketplace.

By addressing the specific needs of different segments, you will stand out in a sea of competitors and build stronger relationships with your customers.

  • Informed Decision-Making

Customer segmentation provides valuable insights into customer behavior and preferences. This information can help guide your business decisions regarding product development, pricing strategies, and market expansion.

  • Cost Efficiency

Focusing your marketing efforts on the most relevant customer segments can reduce wasted spend on broad, ineffective campaigns. This cost efficiency can free up resources for other strategic initiatives.

Customer Segmentation vs. Marketing Segmentation

Many companies use the terms ‘customer segmentation’ and ‘marketing segmentation’ interchangeably. Although they are quite similar, marketing segmentation is broader.

Some marketing experts say that customer segmentation is part of marketing segmentation.

In Forbes article, Christiana Jolaoso said the following about the two terms:

“Sometimes, there’s confusion around customer segmentation and market segmentation since many companies use the terms interchangeably. Most businesses consider customer segmentation as a subset of market segmentation.”

“The truth is that the two overlap, and both aim to define their customers, which is the focus of segmentation; however, each has its own uses. And depending on your product or service, you may choose to do one or both.”

Final Thoughts

Customer segmentation is a vital strategy if you are aiming to maximize your marketing effectiveness and improve customer satisfaction.

By dividing your customer base and target audience into distinct segments based on various criteria, you can create more personalized and targeted marketing efforts.

Apart from enhancing market efficiency and fostering stronger customer relationships, this approach will also help you and your company become more successful.

Video – What is Customer Segmentation?

This video comes from our sister YouTube channel – Marketing Business Network. It explains what “Customer Segmentation” is using easy-to-understand language and examples.